MUMBAI: Abhay Laxman Bongirwar, Executive Director of IDBI Bank, isn’t your conventional banker. During our one-hour interaction, he spoke more about farming than finance and linking the agricultural value chain than lending.“Banks have been doing their own bits and pieces, but we need concerted efforts to make farming profitable,” says Bongirwar adding, “We want to invest in farmer’s ability to generate income.”
But weren’t banks tasked to do exactly that and aren’t agri loans a priority and not a choice?
Bongriwar agrees, but says, loans are being disbursed to individual farming activities, and the model has its own flaws. For instance, a farmer may raise a good crop, but may not yield desired income. Take sugarcane, supplied to sugar mills. If the latter doesn’t pay citing demand-supply mismatch, the farmer defaults. “We need to cater to the ecosystem and this is where value-chain financing helps,” reasons Bongirwar, for who, achieving the target is both a necessity and compulsion. As part of IDBI’s turnaround strategy, it has to meet the target consistently for next three years. Else, it has to compulsorily invest in Nabard bonds, which yield 4.5-5 per cent interest, lower than the 9-12 per cent it gets from lending.
The dynamics of agri lending is also changing due to the government’s thrust on improving productivity and doubling farmer’s income. With corporate loan book drying up (intentionally freezed for some lenders), banks are also compelled to focus on non-corporate borrowers including farmers and retail customers.
Borrowing Nabard’s concept, IDBI is now lending to Farmers Producing Organisation (FPO), where a pool of farmers register a company under the Companies Act, and invest into productive assets. On one side, they do combined inputs (farmland, drip irrigation) and combined output, (processing and marketing). “The per capita size of land holdings is 1 to 2 acres. A holistic approach is helpful as, value-chain financing needs to have scale,” says Bongriwar, whose earlier roles at IDBI include corporate debt restructuring and loan recoveries.
But, as he explains, agriculture runs in his family (his father was the first Agriculture Secretary in the Government of Maharashtra) and is passionate about farming. “The entire country relies on farmers and it’s sad that we aren’t doing enough. You need to stay in that hurt and see what needs to be addressed,” he reasons. So four months ago when he tookover as ED, Bongriwar wasted no time to get down to the task.
One of the first tasks was irrigation. Water is scarce, and 40-45 per cent of the farm land gets irrigated. States like Maharashtra mandated drip irrigation and farmers can avail subsidies of 40-45 per cent with banks financing to rest. But recovering this is uncertain as crop income is dependent on monsoon and other factors. This is where, Bongriwar suggests, products, like joint liability group loans -- where a group of farmers take loan and repay as a team. The underlying logic is, everybody will not fall, but as a system, it’ll work. This concept has been in practice for dairy, and poultry under Nabard, but IDBI is now extending it to farming.
“We do tri-partite agreements, so that every six or nine months when the produce comes, farmers pay. This requires specialised efforts, including tying up farmers with suppliers,” he says, stressing the need for long-term investments. Sadly, banks are hesitant to finance farmers for over three years and 60-65 per cent of all priority sector lending is short-term in nature. The way forward is to get into high-yielding crops, believes Bongriwar, but that needs specialised inputs, marketing and scale. To make this doable, IDBI is therefore focusing on FPOs created by the government -- more than 2,000 FPOs are registered and do collective farming, borrowing and processing -- and aims at creating a parallel moment to compete with private peers.
The third area IDBI is focusing is allied activities like milk, poultry, fishery and livestock. For instance within dairy, IDBI is setting up fully-mechanised, advance cow firms and creating a new business model bringing farmers, and agencies for marketing. He’s confident the milk moment will be successful given the math behind the measure. The cost of milk production, including EMI works to `21-22. If it’s sold in bulk, it can be priced `35 or can be sold in retail at `45. Even if the farmer gets `5 as his share (with zero investment), he gets `5,000 per month. The average milk production per day per cow is 17 litres, and investment is recovered in one year, but the cow’s life is five years and the loan on asset (land) is paid in 10 years, leaving the farmer with decent income.
As for the loan book, Bongriwar says, 18 per cent needs to be kept towards agriculture as a statutory requirement. Going by IDBI’s financial position, and its growth targets, agriculture sector holds promise. “Today, we are 60-40, book - wise (corporate - non-corporate), which we want to adjust to 55-45,” he observes, but quickly add that the quality of under-writing is important, and just for the sake of priority sector lending, banks can’t compromise on quality, which is a function of good assets.
“Although I’m talking too much, PSL is an area of concern. We haven’t yet achieved results, but we are moving in that direction,” he concludes.