DIFFERENT SOURCES OF FINANCE FOR FPOs

Farmers are Incorporating Farmers Producer Companies with great passion these days. Central Government is also very keen on organizing farmers into farmer producer companies. But arranging finance for a newly incorporated Producer Company is a challenging task. In this article I have tried to list out all possible options through Producer Companies can arrange finance for their smooth operations. The details are as under:

Own Resources

The reserve and surpluses of previous years are the sources for personal financing. However, in the case of a new Producer Company, this opportunity will not be there.

Suppliers’ credit and Advance Payment from Buyers

Suppliers’ credit can be obtained from credit companies or from potential buyers and sellers. The producers who sell their products to the PO can also sell on credit. Producer Organization can get partial payment in advance from the prospective buyers. It can get agricultural inputs from the agro-dealers on the conditions of payment after-sales. But mostly this type of finance is not available for start-up businesses or new ventures.

Grant Support

The Producer Company being a small holders’ organization may seek capital support and other assistance from the Government under certain government schemes. Two major initiatives to support FPOs are:
i. support the equity base of FPOs by providing matching equity grants.

ii. setting up of a Credit Guarantee Fund to provide cover to banks which advance loans to FPOs without collateral has been announced by GoI. The Schemes are implemented by SFAC.

NABARD also provides grant support under PODF to FPOs details of which are described under its schemes. Funding is also available from the Department of Rural Development and Panchayats, Ministries of Agriculture and Cooperation or Horticulture or Food Processing, GoI, and or state Governments under various schemes like National Horticulture Mission (NHM) and State Horticulture Mission (SHM), SFAC. World Bank, bilateral/ multilateral donor agencies, and corporates under Corporate Social Responsibility (CSR) may be other possible sources of funds/grants from POs. The POs will have to develop financially viable business plans for the purpose.

Debt Financing

This is the most preferred way of financing a new business. Here, it is a direct obligation to pay the interest on the money lent by the financier. The biggest advantage is that the financier does not have control over the business as opposed to equity financing. The rate of interest charged is an important point to be noted here. However, it is not easy to raise debt financing for a producers’ company without collateral and margin.

Equity Financing

Given the limited investment capacity of the small and marginal farmers, limited contributions are made by the individual farmers to raise the FPOs’ equity which often cannot sustain the operations of the FPOs. In order to augment the equity base of the FPOs, the Union Budget, 2013-14 announced major initiatives by providing matching equity grants and INR 50 crore was sanctioned and implemented from 2013-14 onwards. The scheme is known as the Equity Grant Fund (EGF) and is managed by the SFAC. The EGF enables eligible FPCs to receive a grant, equivalent in amount to the equity contribution of their shareholder members in the FPC. Thus, enhancing the overall capital base of the FPC. The scheme supports the nascent and emerging FPCs, which have paid-up capital not exceeding INR 30 lakh as of the date of application.

Working Capital

To meet the credit requirement of the FPOs, there are very few players who are active in this space. This poses a critical challenge for the FPOs. As the FPO progresses from being a start-up entity to a more mature organization, they build themselves as trade-ready and have a track record to attract finance from formal financial institutions and commercial banks. Financial Institutions like NABARD Financial Services Limited (NABFINS), Friends of Women’s World Banking (FWWB), Ananya Finance, etc. provide support to the FPOs. Some commercial banks that offer similar financial assistance to FPOs are ICICI Bank, SBI, UCO Bank, Union Bank of India, Canara Bank, Vijaya Bank, Ratnakar Bank, etc.

Term Loan

The Reserve Bank of India (RBI), included financing to FPOs up to INR 2 crore under Direct Agriculture Finance under the Priority Sector Lending (PSL) and loans amounting to INR 5 crore to FPCs were considered to be included under Indirect Agriculture Finance. The Credit Guarantee Funds (set up as per the 2013-14 Union Budget) provides Credit Guarantee Cover to eligible lending institutions to enable them to provide collateral-free credit to FPCs by minimizing their lending risks in respect of loans not exceeding INR 1 crore.

To promote agro-processing, NABARD has set up a fund of INR 2000 crore to make credit available to designated food parks. Among other entities, the FPOs are also entitled to avail loans from this fund for establishing designated food parks and setting up individual food/agro-processing units in the designated food park.

The FPOs can also avail of warehouse receipt finance. As part of the revised PSL guidelines, loans to farmers up to INR 50 lakh against pledge/hypothecation of agricultural produce (including warehouse receipts) for a period not exceeding 12 months is included as direct lending under the PSL. However, not many FPOs are able to benefit from the scheme due to varied reasons

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