Draft policy proposes easier lending, new mandis for FPOs; Is it enough?

India has over 24,000 functional FPOs established under the Companies Act as of March 31, 2023, with many of them being set up in recent years under the Central scheme to promote and form 10,000 FPOs

A few weeks ago, the Ministry of Agriculture uploaded on its website a draft policy on Farmer Producer Organisations (FPOs), which, among other things, calls for a special subset within the primary sector lending norms of banks to make lending to FPOs easier, a scheme to incentivise hiring of talent in FPOs, and encouragement for farmer groups to establish agribusiness marketplaces acting as deemed mandis under state APMC laws.

Importantly, the draft suggests a three-tier institutional architecture for FPOs modelled on the lines of the highly successful “AMUL”.

It also calls for targeted development of primary-level FPOs in each of the 7,256 blocks of the country over the next five years, benefiting approximately 25 million crore farmers out of the total 126 million small and marginal peasants.

According to some reports, the country has over 24,000 functional FPOs established under the Companies Act as of March 31, 2023, with many of them set up in recent years under the Central scheme to promote and form 10,000 FPOs.

Furthermore, the draft policy recommends a comprehensive assessment of FPOs formed under any scheme, and emphasises the importance of engagement with ministries and departments concerned to streamline their incorporation process.

However, experts said that framing a policy is just the first step towards making FPOs economically viable entities, and much more needs to be done to empower them and through them the farmers.

“The draft policy in itself is in the right direction and it rightly tries to guide on several pressing issues of FPOs, but it is only a draft and we need to see what the final version will be,” says Anish Kumar, who is involved with the National Association of Farmer-Producer Organisations (NAFPO).

The big push

FPOs and the whole ecosystem surrounding them have gotten a big push in the last decade or so, with the Central scheme of forming 10,000 FPOs acting as a big catalyst.

Equity grants and special funding mechanisms have all started coming for the FPOs and most importantly, their role is being increasingly recognised as being vital to the uplift of the country’s farmers and their incomes.

Not only that, FPOs such as Sahyadri Farms have recently hit the Rs 1,000-crore-turnover mark while many others are also running profitably and ensuring good returns for their members.

Overall, the whole environment has never been so good for FPOs. But, that does not mean that all the problems and challenges for FPOs have gone away.

Challenges remain

A 2023 State of Sector report on FPOs (SoFPO, 2023) by the NAFPO highlights some of these challenges. It says although aggregating raw produce at a cluster of several hundred, or even a few thousand, farmers seems to be a necessity for FPO growth at scale, it is not a sufficient condition to deal with market players.

It adds that even though there is impressive growth in the number of FPOs across the country and there are successful case studies, many FPOs face several challenges, ranging from management of business, irregular supply, and lack of timely financial assistance.

Similarly, in another part, the report says that ownership is often quoted as a primary principle of collective action, which is conflicted in the case of FPOs, with farmers not completely comprehending their role as owners and depending on external agencies that aid in promotion and handholding.

However, farmers cannot turn entrepreneurs overnight, the report said. Technical skills, professional management skills, and business acumen can be acquired only through nurturing, it added.

Of all the issues highlighted, access to credit and financing, developing appropriate market linkages, and also professional management of the FPOs seem to have emerged as major challenges and concerns for the FPO ecosystem in the country.

“Access to capital by community-based organisations, whether agriculture-based or otherwise, is an age-old problem and the efforts to address this is a continuous process. For the FPOs, capital is needed, particularly to aggregate produce and link to large supply chains servicing agribusiness enterprises,” the SoFPO report 2023 said in one of its chapters.

It added that studies indicate that only 12 per cent of the FPOs have access to credit.

“Most of it is, however, provided through government schemes such as equity grants and lending from a few NBFCs. The capital needs of the FPOs are to be addressed continuously,” the report added.

FPOs and their performance

The performance and long term viability of many of the FPOs has been the subject of intense debate. 

A 2022 report by Annapurna Neti and Richa Govil — faculty members at the School of Development, Azim Premji University, Bangalore — titled “Farmer Producer Companies Report II: Inclusion, Capitalisation and Incubation” shows that 45 per cent of the producer companies, which are seven years or older, get struck off by the Ministry of Corporate Affairs (MCA) for multiple reasons.

The reasons include failure to commence business operations within one year of incorporation, failure of original subscribers (shareholders) to fully pay committed subscription (share capital) within 180 days of registration, not carrying on any business or operation for a period of two immediately preceding financial years without submitting any application for obtaining the status of a dormant company, and failure to maintain any of the mutual assistance principles.

“The ministry (MCA) classifies the status of remaining companies as ‘active’,” the report said.

More recently, the Economic and Political Weekly (EPW) published a special article titled “How Are Farmer Producer Organisations Functioning in India? An Empirical Evidence from a Mixed Methods Research Synthesis”, by Vinayak Nikam from the ICAR-National Institute of Agricultural Economics and Policy Research (NIAP), New Delhi, Haripriya Veesam from ICAR-Indian Agricultural Research Institute (IARI), New Delhi, along with Kiran Kumara TM and Prem Chand, both from ICAR-NIAP, New Delhi.

The authors studied the financial performance of 126 FPOs using three broad categories, namely (i) liquidity ratios indicating FPO’s ability to pay off its debt as and when it becomes due, (ii) profit ratios indicating the ability to generate earnings, and (iii) solvency ratios demonstrating the ability to pay long-term obligations.

The analysis found that in the case of liquidity ratio, the average current ratio was 1.5:1, the acid test ratio was 1.41, and absolute cash ratio was 0.30, which implied that though FPOs start with a good current ratio, within a short period of three years, it becomes unfavourable.

Not only that, almost 30 per cent of the current liabilities of the FPOs were met through cash only.

In the case of solvency ratio, the analysis showed that the average debt-equity ratio of the 126 FPOs was in the range of 1 to 1.51, and it was more than two for 36 per cent of FPOs, indicating financial distress among them. This required efforts in capacity-building of FPOs to raise and manage funds.

The analysis showed that the average gross ratio (total expenses/gross income) approached 1, which indicated that the total expenses of the FPOs were close to their gross income.

However, some experts say that the matrix in which the performance of FPOs are being measured needs to be re-looked at as no two FPOs work in the same environment.

“Also, the performance of those FPOs which are promoted by companies and those which have been promoted under some state or Central schemes will not be strictly comparable. Also, the FPOs work in different geographies with different sets of products, therefore, comparing one with another will be the same as comparing ‘apples with oranges’,” a senior government official, who has worked with FPOs for a long  time, said.

Anish Kumar of the NAFPO, meanwhile, believes that the performance of FPOs and their failure rates should ideally be compared to that of startups and not to that of cooperatives or micro-enterprises. Because the ecosystem that supports cooperatives or micro-enterprises is very different from that for FPOs.

“Also, one has to remember that globally, even in the case of big corporations, only 12 per cent do well,” Kumar said.

Vilas Shinde, chairman and managing director of Sahyadri Farms, which has emerged as one of the shining beacons of the FPO movement, says that three things are needed to make an FPO work.

First is a change in farmers' mindset and a recognition as to why collectivisation will work for them. Second is FPO directors must have clear intentions and visions about the venture, and the third is the capability to bring that vision onto the ground, Shinde adds.

He also discounts the oft-repeated complaint that banks and financial institutions are wary of extending financial assistance to FPOs.

“If the performance of the FPO is good, banks don’t mind lending to it,” Shinde tells Business Standard.

As the Centre talks of a thorough assessment of FPOs and their performance, it could consider the path shown by Shinde and others.