Sweet fix for loan worries

JAMMU AND KASHMIR'S small farmers often have to wait up to four months for payment of one crop before they can move on to the next. Easy credit could take care of this issue, but there is hardly anything they can show for collateral because the plots of land they work on are tiny and scattered.

Yes Bank spotted an opportunity in this situation but the challenge was to minimise the risk on the loans it would disburse. When it found that these farmers also engage in bee-keeping to add to their income, the bank hit upon an innovative solution.

“We decided to use the farmers’ stocks of honey as collateral,” says Saurabh Bhat, president and managing director, corporate finance and development banking, Yes Bank.

To take the idea forward, Yes Bank had to find a buyer for the honey, and a warehouse to collect and store it. So it tied up with Kashmir Apiaries, one of the country’s largest honey processors and exporters.
The bank also appointed the National Collateral Management Services as the agency that would collect the honey, weigh it, and store it.

Now, the farmers bring their stocks to one of the agency’s two warehouses in Jammu and Srinagar. The agency assesses the quality of the honey, and issues storage receipts as proof of the stock deposited by each farmer. However, the ownership remains with the farmers.

When the farmers present their storage receipts to Kashmir Apiaries, the company commits to purchase a specified quantity of honey at a certain price. “This commitment [which acts as collateral] enables the bank to provide loans,” says Bhat.

The farmers are entitled to loans up to 70% of the value of this purchase commitment. While the bank is unwilling to disclose the rate of interest, it is learnt to be close to 10%.

The farmers have to repay the loan within six months by selling the honey to either Kashmir Apiaries at the price decided earlier, or to any other buyer who is willing to pay more. While this mechanism allows Kashmir Apiaries a chance to increase its turnover by bringing more suppliers in its fold, the farmers have an option to get a better price for their produce.

Three years ago, when Yes Bank launched the scheme, it disbursed loans worth Rs 5 crore. By 2009-10, the figure had risen to Rs 18 crore. To date, the bank has disbursed loans to 2,500 farmers.

“The transaction is small, but we are proud to have made an impact on the lives of marginal farmers,” says Somak Ghosh, president, corporate finance and development banking, Yes Bank. “We have proved that such complex solutions are not meant only for investment banking, but can be used as a tool for financial inclusion as well.”