Pathways to enhancing access to finance for smallholder farmers through FPOs

In India, smallholder farmers make up a staggering 86 percent of the total agricultural population and face many challenges, particularly in obtaining financing from formal financial institutions for myriad reasons including their limited land holdings, lack of financial history and much more.

As a result, they have no choice but to turn to informal sources of credit. Currently, only half of smallholder farmers have access to credit from institutional sources and most are still under or underserved.

In recent years, the concept of Farmer Producer Organizations (FPOs) has emerged as a pivotal phenomenon transforming the lives of millions of smallholder farmers. Realizing its potential impact, the government initiated a scheme to promote 10,000 FPOs.

These groups aim to improve access to finance for member farmers by harnessing the power of aggregation.

While serving FPOs and addressing their challenges is crucial, it is imperative to understand that FPOs are not magic bullets as they also face similar constraints to struggling startups, including organizational capacity, financial acumen, funding sources, and strategic planning.

Diversified financing

To ensure the survival and growth of FPOs, it is critical to support them first with capacity building and training, particularly in business planning, financial management and decision-making skills for the board and CEO.

In addition, traditional sources of funding should be supplemented with alternative capital from CSR institutions, philanthropic foundations, affluent individuals, private equity, venture capital, and social impact driven investor groups with due diligence to support the independence of FPOs.

By securing diversified funding, RMOs can build equity, expand their market presence, and invest in essential infrastructure. This will enable them to meet market demands and improve the livelihood of their members.

Moreover, digital technology and fintech have the potential to revolutionize the lending landscape and enhance the efficiency of how FPOs access and utilize financing.

Credit-linked capital support schemes and subsidy programs can be channeled through FPOs and customized financial solutions for different stages of FPO growth such as crop insurance, contract farming and warehouse receipt financing, which reduces lending risk and improves affordability.

These not only enable financial organizations to access financing, but also enhance transparency, accountability, and scalability.

On the demand side, by embracing these innovative tools, credit extending organizations can streamline credit qualification processes, reduce paperwork, and improve data-driven decision-making by institutional financial sources.

Digital platforms such as the Trade Receivables Discount System (TReDS), a corporate mechanism created in order to make it easier to discount trade receivables, can be of great benefit, and many FPOs across the country are increasingly taking advantage.

newly, FPO of Tamil Nadu, backed by Samunnati, has conducted a transaction worth ₹ 3.5 crore through this platform, a first of its kind on this scale for an FPO. Organic farming organizations can make extensive use of AI-based technologies, for example, to assess crop growth and produce quality, and monitor storage conditions.

Maintain digital records in real time

Besides, farmers displaying organizations can keep real-time digital records of member farmers’ loan applications, which can help improve overall creditworthiness over time.

By analyzing factors such as weather patterns, farm and farm specific data, fintechs can work with FPOs to accurately assess risk and help them access insurance tailored to the unique needs of farmer members at fair premiums.

Having FPOs as points of sale or trade messengers selling a wide range of financial products and services will go a long way toward achieving financial inclusion.

All of this cannot be achieved without the collaboration between the public sector, government, academia and private players, which is essential to building a strong ecosystem that supports the growth of FPOs.

Symbiotic partnerships for example, joint lending arrangements between traditional banks and non-bank financial firms, can lead to the development of innovative products and solutions by leveraging mutual synergies, expertise and resources to enhance last-mile access and serviceability under Priority Sector Lending (PSL) commitments.

Besides access to funding for exhibiting organizations, partnerships can also enable knowledge sharing, mentorship, and market connectivity.

To unleash the potential of terrorist organizations in improving access to credit for farmers, comprehensive capacity building support is essential. It is essential to go beyond initial assistance and provide ongoing training and support throughout the FPOs life cycle.

This ensures that FPOs are equipped with the knowledge to effectively manage credit-related operations and promote sustainable growth.

The existence of a unified evaluation system enhances transparency and accountability in measuring the impact of capacity building efforts.

Funding literary skills

There has also been a concerted effort by FPOs to provide farmers with financial literacy skills, including understanding loan terms, managing credit responsibly, and adopting repayment best practices.

It is also time for a comprehensive review of existing policies and regulatory frameworks including Priority Sector Lending Guidelines, while recognizing the role of not-for-profit companies with a particular focus on agriculture in making the cost of capital more affordable.

Also, policies related to the promotion and regulation of FPOs should be comprehensively reconsidered to create an environment that promotes their survival and growth. Currently, the success rate for registered military organizations (FPOs) remains disappointingly low, despite all your best-intentioned efforts.

To address this issue, it is necessary to identify the factors that contribute to the success of certain FPOs and to disseminate this key knowledge among others so that other organizations can emulate by adopting best practices and understanding the elements that lead to success.

Collaboration among stakeholders is pivotal in bridging the gap between financial institutions and small farmers to improve financial stability and enhance the overall social and economic well-being of farmers.

Therefore, a more inclusive and equitable financial landscape, where smallholders have equal opportunities to thrive and contribute to the agricultural growth of the country, can be achieved through FPOs as tools.