Role of supply chain finance in shaping the future of agri finance

India plays a vital role in the global agriculture sector, providing a livelihood for a large portion of its population. In 2022-23, the agriculture sector employed around 45% of the workforce and contributed 18% to India’s gross value added (GVA), according to report by PRS India.

Yet, the complexity of agricultural supply chains remains a significant challenge. This value chain starts from suppliers and extends through production, trading, processing, food logistics, and finally, the retail sector.

At each stage, the need for funding is both imperative and significantly challenging. For example, farmers need substantial capital to buy essential inputs like seeds, fertilisers, and equipment—costs that can be particularly burdensome for small and marginal farmers. During production, they must also manage ongoing expenses, including labour, water, and machinery maintenance. These financial demands often create cash flow problems as farmers struggle to meet their obligations while waiting for their crops to be harvested.

The financial challenges don't just end there. A prominent issue is the difficulty in achieving economies of scale. Large-scale agricultural innovations require extensive farming areas to be cost-effective and justify their high initial investments. This presents substantial financial hurdles for small and marginal farmers, limiting their ability to grow and improve productivity. They also face difficulties due to poor credit histories and insufficient collateral, making securing loans from traditional financial institutions hard.

In many districts, less than half of the credit comes from formal sources, with the rest—over 51.5%—coming from informal channels, according to Nabard. This often forces farmers to turn to money lenders, which can be both costly and risky. On top of that, they struggle to maintain funds for unexpected emergencies, further complicating their situation.

To tackle these financial challenges, solutions like supply chain finance (SCF) are emerging, bringing much-needed innovation. While it has already proven effective in addressing funding issues across various industries, its potential in agriculture is still being fully realised. This gives farmers the necessary funds to purchase inputs, boosting production and, ultimately, their incomes.

Additionally, SCF solutions like payable finance enable traders to pay farmers and commission agents promptly, ensuring timely transactions. Sales bill discounting allows traders to receive early payments from reputable corporations, enhancing liquidity.

Lastly, dealer finance supports retailers and distributors by providing the liquidity and extended credit they need to operate efficiently. This is how SCF not only addresses financial challenges but also inspires and motivates the sector's growth by increasing productivity and supporting the broader supply chain in India.

The government has also been actively working to increase the accessibility of funds for the agriculture sector. The Ministry of Agriculture allocated Rs 1,32,470 crore for 2024-25, representing 2.7% of the total central government budget. However, challenges like complicated procedures, regional imbalances, and high interest rates persist, making it difficult for many farmers to access these loans.

This is where fintech companies and financial service providers are stepping in. They're developing innovative business models to expand the reach of SCF and improve its efficiency. For instance, invoice discounting platforms are one such innovation that enables farmers and traders to get early payments based on invoices, improving cash flow, and reducing reliance on informal lending.

With this, Digital Kisan credit cards, integrated with SCF, offer easy, short-term credit aligned with seasonal cash flow, allowing farmers to purchase inputs and repay after harvest. Moreover, warehouse receipt financing is an option that enables farmers to use stored goods as collateral to access funds, allowing them to sell at better market prices instead of during low-demand periods.

These alternative models offer efficient solutions to the financial challenges faced by farmers. By offering customised SCF products beyond traditional banking, they address key issues in Indian agriculture, such as the cost and speed of financing, seasonal cash flow needs, and the prevention of fund misuse. These fintechs are emerging as both competitors and partners to banks, providing low-cost financing options that help bridge the trust gap and effectively manage credit risk.

Additionally, leveraging digital data and partnerships, fintechs are making SCF more accessible to smaller businesses that traditional lenders often overlook. The availability of verifiable KYC data and the ability to assess actual transaction data between buyers and sellers provide a robust mechanism for managing credit risk, both during the onboarding of borrowers and throughout the loan's lifecycle.

As a result, financial institutions are increasingly collaborating with technology platform providers to offer tailored solutions. One such approach, embedded finance, directly integrates financing options into agri-digital platforms or marketplaces that farmers use to buy inputs or sell produce.

For instance, a farmer purchasing seeds through a digital platform can receive immediate financing at the time of purchase, made possible by embedded SCF options that take into account their purchase history and creditworthiness. Ultimately, these platforms enable customised credit assessments and financing options by leveraging transaction data.

To sum up, the future of agri-finance truly lies in SCF, as it reshapes how the entire ecosystem is funded. The potential for SCF to transform India's agricultural sector is huge, with the market expected to reach $13.4 billion by 2031. This growth, if realised, can bring about a significant positive change in the sector, offering hope for a more financially stable and prosperous future for the agriculture sector.

(Arun Poojari is the CEO and Co-founder of Cashinvoice, a digital supply chain finance platform)