How can we design a financial product for a farmer that is exactly suited to his requirement? The answer lies in understanding the utilisation of the product. So, it became clear to us that if we were to design a crop loan for a farmer, we had to understand the exact utilisation of the loan. This also meant we had to understand everything about the crop for which the loan would be utilised for. Which is exactly what we did.
Instead of designing a generic crop loan that any farmer could avail, we designed a very specific loan that only paddy farmers could avail. Here’s what we did:
First we studied the paddy farming cycles in Tamil Nadu, which included the seasonality, varieties and duration of the cropping cycle. Then we mapped the entire supply chain for the paddy farming activity, keeping the farmer as the focal point. This included:
- Identifying the inputs and sources (Seeds, fertilisers, pesticides)
- Costs associated with each of them
- Costs associated with infrastructure such as electricity and water
We then mapped out the different activities of paddy farming over a timeline. Here’s what a typical paddy farming cycle looks like:
Based on a combination of our own primary research and various secondary data, we developed our own template to calculate the financing requirement to cultivate paddy. The inputs for the template are:
- Size of land holding
- Nature of electricity (free or paid)
- Source of water (Borewell/bought/free)
- Extent of mechanisation (Partial/complete)
Based on the combination of inputs, the template recommends an approximate cost of cultivation and a recommended loan amount. The template also recommends the disbursement to be made in multiple tranches (ideally 2).
The first tranche (60% of the sanctioned loan) is disbursed on Day 15 and the second tranche (remaining 40%) is disbursed on Day 45. The days were decided based on our interaction with farmers. The farmer could use the first disbursement to pay wage labourers for transplantation, purchase of fertiliser for first round application.
The second disbursement will help the farmer to meet the expenses he will incur during purchase of fertiliser for subsequent applications, pesticides, and will also take care of harvesting expenses (manual or mechanised).
As is usual in loans, the farmer is expected to bring in equity. This equity is deployed in the first few days of the cycle to meet the sowing expenses (seeds + labour).
The farmer will repay the loan (principal + interest) post harvest and sales.
We believe it is important to offer a credit product that is structured around the cash flows of the customer, making credit available exactly when needed and repayment when cash is available at the household. The exact timing helps in reducing the interest cost and also eliminates the uncertainty surrounding the credit availability.
This pilot is a step in that direction. Our pilot is underway in four branches of Pudhuaaru KGFS. We also aim to roll out customised loans for farmers growing other crops.