Financing for FPOs
- Ashu Sikri (Unlicensed)
There are some interesting developments in the crypto / DeFi space, notably protocols like Goldfinch which are pooling capital from investors who want to invest in real-world assets. Recently, Branch, which provides unsecured consumer loans via mobile, secured $10mn to deploy in India at 17% via Goldfinch from Cauris and Almavest.
Given the amount of capital sloshing around in the crypto space, the challenges of rural / farmer group credit in India, we are curious about whether there may be an opportunity here.
Practically, the idea is to come up with a couple “financial product” ideas and gauge liquidity provider (crypto-speak for lender or donor) interest. There are also a bunch of regulatory and currency exchange issues we need to work on in parallel.
Farmer pitch and benefit
(For FPOs): Get a working capital loan for this upcoming kharif season with a turnaround time of [two weeks] between completing forms and money in the bank, super light due-diligence, [40]% cheaper vs current options
Product design: What is a standardized product offering that would benefit FPOs and could be pitched to DeFi "liquidity providers" (lenders)?
Need a simple, short duration offering that is easy for lenders to understand and also benefits farmer groups. FPO management capacity is limited and we want something that is easy for FPO staff to manage even in the absence of POPI/CBBO handholding.
Ticket size will be based on use of proceeds. I expect the needs / borrowing capacity of most individual FPOs are pretty small so having a bunch of standard loans that could be pooled and even tranched / securitized and then listed through to investors could be compelling. Some ideas:
Working capital: A single season, single commodity working capital line. The reality we see is that farmer "member" participation in FPO procurement is pretty limited as the farmers don't see a compelling reason to switch away from their existing trader relationship. One idea I am intrigued about is whether an FPO can use loan proceeds to pre-pay farmers, say 25%, of their expected yield at the time of planting and commit to clear terms on pricing and quality expectations for the full procurement. Per research like this, seems like this would engender a lot of trust/goodwill and I haven't seen anything like this in the FPOs we have come across.
Aggregation finance which is a few week stretch between delivery of product to a buyer and receipt of payment may be a relatively low risk and compelling entry point (h/t Alesha)
Loans for purchasing capital equipment: The government announced a 1 lakh crore or ~$13.5bn agri-infrastructure fund (details on eligibility and financing amounts here). My sense is that application process and funds disbursal is time consuming to maybe there is a way to top-up or do a bridge loan to accelerate time to receive the funds
etc
A couple things that would add cost / complexity but may be worth doing to de-risk
Use a portion of proceeds to cover cost of an insurance premium which ensures the FPO can payout to members even if there is an adverse weather or other event
Enter into a price hedging contract to limit variability in what lenders would expect in terms of returns
Cost of Capital: What cost of capital / terms would make a product super compelling relative to current options available to FPOs?
Some comps from a Jan 2021 w Samunnati. Need more intel on products and cost of capital
Product 1: Working capital for FPOs; proceeds used to stock input shops and purchase from farmers. 6 month duration. 14% (annualized). Need to confirm ticket size
Product 2: “Safal” loan for member farmers. INR 30-50k ticket size, farmer can use it however they see fit. 12-18 month term loan with equal installments. 20% interest, 3% goes to the FPO. They also have a paycard solution whehere farmer can buy input from the FPO on credit (closed loop)
The Goldfinch model is that borrowers put out a bid and lenders can choose to meet it so the idea would be to seek capital at a ~50% discount vs current rates.
No idea what the demand will be for this but want to have a sense for the benchmark that needs to be beat for this to benefit farmer groups.
Regulatory / Legal / Fees
The movement of cash from a crypto token to an INR stablecoin, into fiat and then retracing this back to the lenders seems complicated and fraught with issues, especially fees and currency risk
For now, we are not too fussed about this and are trying to discern if there is something worth pursuing based on based on the points above
Roles and Responsibilities
DG is not a lender but we do have good experience designing technology solutions with and for farmers and can reduce the operational costs of underwriting / monitoring / administering a loan.
In the Goldfinch model, we would play the role of a “Backer” which takes a first loss positio
While it may be necessary to work with a local NBFC or the larger players funding FPOs like Samunnati, the more we can disintermediate, the cheaper capital will be for farmer groups. We were also fortunate to receive a large unrestricted grant last year and have some flexibility to experiment on this theme
Goldfinch schematic and roles
Liquidity Providers: Provide capital; this may be retail investors or funds like Almavest, Cauris, etc. Goldfinch has a network of LPs
Borrower: FPO.
Borrower Pool: Smart contract that encodes a set of financing terms for a Borrower, including the interest rate and repayment schedule, and through which the Borrower can borrow capital and repay it with those terms.
Backer: Participants who supply junior tranche (first-loss) capital to individual Borrower Pools. This would be DG.
Auditors: Participants who receive GFI rewards for securing the protocol with
a human eye. Could this be DG? Might be a conflict of interest in which case maybe POPIs can play this role?
References
From the Guidebook on Lending to FPOs (Caspian, GIZ)
Current Players:
Market Size
Financing Needs