Manu, a local farmer, from Jabalpur has Agricultural land, and has been in the farming field for nearly 15 years now. However, when asked over a cup of tea, if there was anything he would want by way of information regarding his area of expertise – pat came the response. He wanted to understand how a rural financier’s thought process worked. It was quite obvious that the “ Rule of Thumb “ principles that every rural retail financier practiced had not been understood. Let us try to unravel this mystery today in a holistic way to be able to give Manu the “BIG” Picture.
The assessment of a proposal for Rural Finance needs that one should to be aware of the five veils that we need to unravel. The process of unraveling and gathering the information is in itself one of the best learning experiences one can get, if done diligently.
This enquiry takes a farmer’s perspective into account and tries to understand what the Banker / NBFC / Financier does, when the farmer approach them for loans. The Farmers, Dealers, Manufacturers and each stakeholder has been looking at the financier’s world from his / her point of view. However, if we have to dissect and understand what the financier is trying to do, here’s what the financier typically goes through.
1. An understanding of the interdependencies
One of the first things that a financier does is to mentally prepare an interdependency map, local geography and geology, rainfall pattern, soil type and natural crops.
Let us for a minute consider the district of Jabalpur, in Madhya Pradesh. This district is known very well for high temperatures and weathering of rocks. A prudent financier then will collect information such as this:
(a) Only about 28 percent of the total geographical area is under irrigation. Of this 28 percent, slightly more than half of the farmers do double cropping in this district.
(b) Annual rainfall is approximately 1350 mm, with peak temperatures in May ( 40 – 45 Degrees C ) and Minimum Temperatures in January ( 8 – 10 Degrees C ).
(c) Blocks of Jabalpur, Patan, Shahpura, Panagar are known to have Heavy Soil with pH values ranging between 7.2 – 8.0. This we know is not suitable for very many common horticultural tcrops as well as crops such as Wheat, Paddy, Soya etc.
Paddy, Wheat requires ideal pH range between 5.5 to 6.5 Soybean requires ideal pH range between 6.2 to 7.0 Red Lentil (Masoor Dhal) requires ideal pH range between 4.5 – 8.2 Pigeon Peas (Toor Dhal) requires ideal pH between 6.5 – 7.5 So, in the above mentioned blocks typically the mind of the financier maps "Lentils" or "Peas" and will look forward to his prospective customers / farmers in these blocks to be cultivating these crops. If not, the crop will be "acquired". So the officer will need to find out what the farmer has done to make the soil amenable in that block / locality. So if paddy is being cultivated in this block the farmer would have taken some efforts to bring the pH levels lower. These steps tmake the farmer – "change agents" if they are the first in their localities to try this.
From a farming / agricultural perspective, " change agents" are welcome propositions, yet from a financing perspective will be considered RISKY, since the farmer is digressing from the routine pattern, and against the run of natural settings.
Similar such analysis can be done for Medium (pH 6.5 – 8.1) and Light Soil types (pH 6.0 – 7.0 ). So if we were to draw a schematic diagram of what mapping runs within the financier’s mind, it is bound to look like the diagram shown in the schematic.
The Financier starts his enquiries at one point – either crops / rainfall / soil and asks questions to build the interdependencies.
Questions like: What is the irrigation mode? The inferences could be variable:
Answer 1: Drip Irrigation Inference: Investment to get basic water to crop made.
Answer 2: Rainfed Inference: Monsoon dependent. Money cycle will be monsoon dependent.
Answer 3: Canal Inference: Distance from Canal needs to be seen. Better than Monsoon Dependent Profile.
The entire interdependency map and all questions therein broadly leads the financier towards clarifying NEED and CAPABILITY of the farmer.
1.1. Assessment of Crops – Whether Natural Crop for the location (Crop that naturally grows for the given soil conditions), OR acquired Crops
1.2. What is the topography of the area in which the farmer does his farming ? How does the farmer’s personal farm land compare to the topography ?
1.3. Area of Cultivation – What is the mode of Irrigation ? Is it in line with the Irrigation adopted by other farms in the village / topography?
1.4. Cropping Pattern – Extent of Mechanization
1.5. What is the current need of the farmer and in which part of the cycle does it make an impact ?
1.6. Is it in line with the financier’s product offerings and do the profile objectives meet ?
The critical components that determines the culture of a locality is a combination of the topography, agriculture, weather and vantage locations. So the financier gets to understand all aspects and why the product offering to the particular customer, in a particular geography is advantageous or vice versa.
It gets him to understand how a particular location developed, what are the links, how does it operates, what are the control points, where he can cross check on information, who are the complementing beneficiaries of the farmer’s activities, what is the extent of earnings involved, and thereby what is the opportunity to provide services to the farmer, and to what extent.
2. Risk Mapping
One of the major fears in the minds of financiers is – on COLLECTIONS viz., their ability to collect monies that have been lent. While Agri Financing is as safe as any retail lending business, it has its own RISK factors associated Merely, a farmer repaying his loan on time therefore is not sufficient. It has to be that his eco-system in which he works enables him to profitably generate income, and around maximum of 45 – 50 % of such income, is all that he should progressively set off towards obligations.
Many of us have also heard of “Credit Underwriting” and “Credit Policy”. Many of us have been given to understand that Loans are initially taken up for processing and yet later are turned down or the applications are rejected, and that it has largely to do with the Credit Policy Approvals. This is a MYTH.
Credit Underwriting aids the process of risk mapping for a financier after a case has been sourced. The underwriter, highlights the critical pre-defined points of risk, based on historical patterns, portfolio analysis, and the risk appetite of the respective organization on what risk is desirable. It is then a call of business heads who are also responsible for portfolio performance to take a call on where they would want to peg their RISK LEVELS. What does the farmer desire and what can we offer ? To take this call better, a knowledge of the interdependency and the farmer’s ecology is a must. The underwriter parrallely feeds the entire chain of network within the financier’s office, with a performance metric to highlight the outcome of various decisions and its possible outcomes. This acts like the radar for the financier to ensure that he does not repeat mistakes made in risk taking.
3. Progressive Orientation
Any financier uses certain thumb rules which are based on actual observations in the real world. Farmers would typically start farming business by “testing the waters” – either by taking lands on lease or by farming on existing ancestral land. The methods would be mainly the traditional techniques and traditional implements. In some cases, labour would be hired to initiate farming.
Developments or progress is noted when the farmers start investing in : land, equipments, mechanization, additional lease, diversification etc. So when a financier visits a farmer’s lands, he is looking for these tell-tale signs of progress that would give him a message that the farmer is progressive and is actively involved in the farming activity. This is very important for a financier. If attention is not the fullest, farming activity does not yield the highest / best produce / productivity of crops.
A financier typically makes a historical note of how the farmer started and in what time frame has scaled operations to what higher levels. He will also make critical notings of capital infusions, purchases, chit investments, gold purchases, etc., which will give a holistic idea of an average income every year. An assessment of last 3 – 4 years income in such a manner is mandatory for a financier for him to get an idea of future incomes.
4. Market Patterns
This probably is the crux of a Rural Financing Company. Let us explain this using the context of Tractors (Farm Equipments).
Tractor Manufacturers keep upgrading technology, features and keep conducting research to see how much more of mechanization can be brought in to their models. Tractor Dealers need to have their sales consistently to keep it happening. They adopt different marketing strategies to upgrade the farmer towards mechanization. Tractor Financiers need to ensure that their offerings are available sufficiently to entyce the farmer to take a leap towards mechanization even if he doesn’t have the funds. So the manufacuturers, dealers and financiers come together to make an offering to the farmer, against the erstwhile scenario where the farmer needed to go behind them, and look at various options available.
The flipside to the trend is:
(a) Agriculture activities using tractors typically used to require only upto 35 HP earlier but in the present day scenario require upto 45 HP. However the average HP in many locations across the country has gone upto to 55 HP and gets marketed as the “ requirement of the hour “, and many a time all three – Manufacturer – Dealers – Financier – come together to drive this change, and create a new pattern.
(b) Financiers in many locations are mere puppets in the hands of the dealers, and get into deals without understanding the customer, his ability, requirement, topography etc., and later have collections issues. This becomes a pattern which is considered negative. Little is realized that the market pressure and the financiers own equations with dealers is the real cause.
This pattern is what we call the “Dealers Trap”. Yet they cannot be blamed, if you observe how our farmer brothers make their tractor purchases. Very little importance is given to understanding the capability of the machine. This is understood only practically on the field much later after the purchase. Purchases are made through “Decision Influencers”. These are people who the farmers completely trust and rely on. These could be from – Tractor Mechanics, Community Opinion Makers, Village Operators, Drivers, Agents, Relatives etc. So the window open for closing a sale is very small and number of players large. Given this scenario, the dealer fortifies his position through Unique Offerings, and Quick Closures – Both of which require that the financing partner be on the same plane to ensure booking and delivery.
This kind of pattern can be drawn for any asset – Drip Systems, Purchase of Cattle, Poultry, Coir Manufacture industry equipments, etc. For each type of requirement of the farmer, a method of marketing has evolved and is woven around involving financiers. The bane of the current system is the dilemma of having to fulfill the PSL requirements, sustain the market on one hand and also be trend setter on the other side.
5. Offering and Customization
Having understood the topography – ecology of the customer – his requirement – our product range – an offering is typically to the customer. Rural Financing is all about being able to meet the needs of the customer, making him feel special, servicing his requirement with a personal touch. “ The Face” to the “Name of the Company” is very important for the farmer. A sale does not happen over one meeting and hence the customer’s comfort over repeated meetings, with the following rules followed by financiers :
The farmer needs to understand that the financier has indeed understood all his requirements and constraints. It gives the farmer great comfort.
A Financier who patiently answers all doubts and queries of the customers stands to gain the confidence of the customer faster. Face to Face interactions help in Relationship building Many farmers often get put off by documentation because of lack of clarity. Clarity in this regard is critical.
Farmers like financiers, who are not pushy and rather help them in their process and requirement, and act more like an advisory, in the interest of the farmer. Last, but not the least, is the meet over multiple times. It helps bonding.
The financier then progresses to make a customized offering to the farmer, after helping him understand what is best for him. This way, the farmer is informed of how his assessments were made, what is the basis, and what is being worked for him. It will help the farmer understand when he needs to repay his financier, and he will value his financier better.