AgClinic – Role of AgFinTech in Driving Financial Inclusion and Growth

An AgClinic on "Role of AgFinTech in Driving Financial Inclusion & Growth" was conducted by ThinkAg & Stellapps, in collaboration with The Digital Fifth, on 24th Jan, 2023. The online event included a Fireside Chat with Ranjith Mukundan, Co-Founder & CEO, Stellapps, followed by a discussion amongst an eminent panel of speakers viz. Pawan Bakshi, India Lead, Financial Services for the Poor, Bill and Melinda Gates Foundation, Abhinav Shah, Co-Founder & CEO, Osam Dairy, Hari Rajagopal, Group Treasurer & Head- Strategic Alliances, Samunnati, Anuj Saraswat, Business Head- Financial Services & Inclusion, Hitachi Payment Services and Rahul Mallick, CEO, FinTech, Stellapps, superbly moderated by Sameer Singh Jaini, Founder & CEO, The Digital Fifth.

Watch the video recording at https://youtu.be/zV0yygxMqTU

Following are the key takeaways from the above discussion.

• Thinking tends to be in terms of cities and in terms of EMIs, which does not work in agriculture. In agriculture, cash flows are different

• While dealing with crops or milk, one cannot have EMIs. The structure must be aligned to the sector

• For example, milk production may happen in a particular cycle. In the North, there is a dry period when the quantity of milk is lower. There cannot be a structure that does not take care of that

• In agri business, there is a need to get deep into the value chain and get involved in the cash flows of the customers

• The challenge in agri business is that credit reaches the customers at a high rate. The challenge is to deliver credit to the farmers and the entire value chain at the same rate as the salaried class

• A farmer does not have access to any form of lending product seamlessly and at scale, be it receivable financing, be it term loans, be it working capital

• Farmers were not getting access to these different financial products mainly because most of them were new to credit and there are limitations in the way risk underwriting currently happens. It is a challenge for the large banks on how to underwrite the credit risk on someone who does not have any credit score and probably has a few defaults to his name

• A lot of data is generated and that data can be used to underwrite risk differently; products can be suitably designed and it can be ensured that all transactions are done digitally

• If high quality credit is given to the farmer extremely quickly, digitally the farmer takes to credit like fish to water

• There is a real need, access is the problem

• Interest rates are not a problem because when you convert those numbers over an 18-month period as an EMI, it is only ₹200 this way or that

• The difference between an 18 per cent and a 24 per cent interest rate is a ₹200 difference in the monthly EMI and when that is applied to a ticket size of ₹50,000, which is what is needed to buy a cattle, it is not substantial

• Disburse extremely quickly; from the time the KYC is done, can the disbursal happen in 5-10 minutes

• The size of the dairy market on the supply side is huge; 80-100 million households are employed in this sector

• Nearly 70 per cent of the people involved in the dairy sector are women, most of them do not have financial rights

• Research shows that benefits are huge when a woman in a rural area gets access to finance

• Ownership of a digital payment product by a woman leads to an almost six per cent increase in ownership of a bank account

• Most of the women who own fintech products and are participants in SHGs (self-help groups) are five per cent more likely to own and operate a bank account independent of the SHG

• The savings rate of a woman who has a bank account as a result of fintech goes up by about five per cent, which is huge compared with the national level

• The expenditure on assignable goods increases by about three per cent if a woman has access to and control over her account

• The expenditure on toys by girl children goes up by 13 per cent and the educational expenditure on girl children goes up by about seven per cent

• When women own and use finances, the expenditure on nutritious food increased by over 12 per cent

• If the women are empowered, it is beneficial to the family and society

• The biggest problem in financial inclusion is that the target audience has no credit history. They have never been exposed to financing or credit. They do not have any digital footprint or transaction profile

• What is happening is AgTech companies are trying to solve specific problems across the value chain

• Thanks to interventions by AgTech companies across the value chain, huge amount of data gets generated; this data is a gold mine

• This data acts as a surrogate for financial institutions, banks and fintech companies to build a profile of a particular prospect

• That is what is happening today, it is still in the infancy

• There is a lot of work that is happening in receivables discounting

• Thanks to the data that is getting generated and the insights they provide, the insights that are getting generated from the business of the farmer is better than financial statements

• Lot of the work that AgTech companies have been doing is not into providing finance per se; financial inclusion is not only about lending, it is about imparting and creating access to information, access to services

• That is where a lot of people are getting on-boarded in the ecosystem because of the interventions thanks to the efforts of AgTech firms

• Lot of people do not know about various government schemes that are available and people are eligible for them but have not availed of them

• That is where financial inclusion and literacy help; lending is only one part

• Lending in financial inclusion is a complicated process requiring deep expertise

• Banks lag a lot because of that and AgTech companies are bridging the gap to a large extent

• It is not about being a lender always, you can act as a facilitator for credit and credit enablement, which is where they are doing a wonderful job

• AgFinTech companies have helped bring down the cost of acquiring customers thanks to the digital route they have adopted. Due to this, the cost of operational expenditure, cost of risk and cost of monitoring have come down

• It is important that farmers, many of whom come from an SHG background, are aware of what financial discipline is, what it takes to borrow and the moral obligations to repay

• Aggregators standing as guarantors cannot be a way out; there must be a better way to deal with this problem

• The data from the farmer helps in building an alternate credit score

• There is now an ability to underwrite small ticket loans thanks to so much of cost being taken away

• The informal sector deals in cash because of which there is no data footprint

• One of the important things that can be done is to ensure that people are paid digitally. Once that happens there is data and a digital footprint, things will start changing

• There is need to simplify and provide a compelling value proposition for the people to get engaged; it is important for a first-time borrower to be able to this quickly and easily

• There is no incentive in the market today for MFIs to drop interest rates

• More than the rate of interest, the access is the issue

• PSU banks offer better rates but do not give money, whereas MFIs give money but at a higher rate; the latter is still preferred

• Giving appropriate credit and when it is needed is important