More and more farmers are now approaching NBFCs and private banks for meeting their financial requirements, thus giving a go-by to their traditional financiers — PSU banks and co-operatives, analyses Dhrubashish Bhattacharya, Vice President & National Sales Head – Tractor Finance, Magma Fincorp Ltd
India’s arable land area, used for growing various crops, spans across 159.7 million hectares (394.6 million acres), which is the second largest in the world, only next to the United States. To meet the agricultural demands for such a large area, the country requires about 16 million tractors for farming and commercial purposes. But, currently there are only about 4 million tractors used for agriculture purposes in India. The situation, therefore, opens immense growth scope for companies involved in the business of tractor financing.
The process of allotting the credit to reach a farmer needs to be looked at. It begins with the farmer mortgaging his land to get loan for the tractor. A public sector bank will then processes the loan, which takes about 45-50 days for disbursal after an exhausting process of paper work and collateral securities. The situation is further pressured with the marginal farmers being offered unattractive propositions for the business after this prolonged process.
However, with the advent of private banks and Non-banking Financial Companies (NBFCs) like Magma Fincorp Limited, the loan disbursal process has become almost hassle-free and those have successfully registered shorter turnaround time (TAT) for loan disbursements. For instance, Magma Fincorp Ltd can disburse loan for six tractors by the time a public sector bank executes a single application with simplest paper work and no collateral deposits. Although banks offer a lower rate of interest, the lower turn-around time induces the dealers prefer availing loans through NBFCs.
Moreover, contrary to the practice in banks, NBFCs offer the loan as a non-mortgaged product. Thus, lower interest is not a critical factor. Doorstep service, flexibility of repayment and no land mortgage are the prime elements leading to the growth of NBFCs in the tractor loan segment. Considering the prevalent situation, the share of NBFCs is only expected to rise in the years to come.
The focus area of all NBFCs is to assist the marginal farmers in becoming owner of a tractor. This forms the very essence of financial inclusion. Magma has a corporate philosophy of financing disenfranchised customers in rural and semiurban areas. Tractors and agricultural loans befit corporate philosophy. Magma intends to grow this business in the years to come. Apart from tractor loan, Magma is also looking at opening other facets of agriculture credit, like crop loans, warehousing finance, implement finance, drip irrigation, refinance of old tractors, etc. By doing this, Magma also intends to improve customer connect in the rural space.
Nearly, 25 percent tractors are sold in cash, while the balance are financed in other ways varying from region to region. In the last five years, the share of NBFCs and private banks has doubled. This is witnessed by the growth of private players like Magma which was non-existent till five years back. Magma has garnered a market share of 7.5 percent over the years.
The faster availability of funds enables the farmer to buy the resources, deploy them immediately and start production. The situation has enabled a faster realisation of funds and a considerable reduction is achieved in the cycle of gaining financial assistance. The scenario has ultimately resulted in traditional financiers, public sector units, and co-operatives losing business on a faster scale as farmers are becoming more inclined towards NBFCs and private banks for meeting their financial needs.
Although the result is a major positive step for farmers in meeting their financial requirements and for the country as a whole in achieving the agricultural productivity, a major concern is raised about the capability of the farmers to repay the loans and achieve farm profitability. While the country’s climatic condition, especially monsoon, has been above normal this year, the situation also demands for an active approach from the government in enhancing the potential of the agriculture sector. Agriculture is a major source of livelihood for a large section of our country’s population, and therefore, the government must play a pivotal role in pushing the profitability of farmers through a slew of positive measures.
• Inputs cost: Regular price rise in various inputs materials has affected the earning capacity of the farmers. Food grains, diesel prices, labour cost and the farm equipment like tractors witnessed an upward revision of around 5 percent every year.
• Export policies: The government needs to make its export policies more farmer friendly. The step can ensure in giving a positive edge to the farmers for achieving greater profits through agriculture.
• Middlemen aplenty: A robust distribution channel needs to be adopted and implemented in the trading system, particularly focussed towards minimising the involvement of middlemen. While the net realisation of farm returns is estimated to be 62 percent, as much as 38 percent of the revenue is being gulped down by the channel of middleme