Role of financial agencies in integrating small farmers into a sustainable value chain: a synthesis-based on successful value chain financing efforts

With changing agricultural business environment, the conventional direct marketing method is becoming a less feasible option for small and marginal farmers due to emergence of supermarkets, increasing consumers' preference for value-added food products, high production and marketing cost associated with small scale of operations and increasing consumers' emphasis on quality, safety and appearance of the product. Hence farmers must enter into a value chain in order to adapt to the changing business environment. Capital investment on production and processing aspects is a prerequisite in order to achieve and authenticate the quality, safety and attractiveness standards. Small and marginal farmers are least preferred financing clientele due to lack of strong collateral security and low risk-bearing ability. But, they form the major chunk of the population dependent on agriculture, contributing more than half of total agricultural production. Hence we need alternative approaches that can either reduce the financial risks associated with production and marketing process at the farmers' level, or approaches which can shift the farmers' financial risk entirely onto the other stakeholders in the value chain. Approaches like contract-based financing and cascade financing increase the possibility of success in business and reduce farmers' business failure risk. Joint liability group financing increases the financial risk-bearing ability of the farmers with reduction of defaulter risk and increase in creditworthiness of the individual farmer. Interdependence financing increases the small farmers' access to credit services. Indirect supplier financing shifts the farmers' financial risk on the other stakeholders in the value chain.