Banks Make Supply Chain Financing Work. Michael Andrade

Transcription

1 Banks Make Supply Chain Financing Work Michael Andrade

2 Agriculture in India SUBSITINCE Top 10% FARMERS) India is one of the largest Agro Progressive Large producers in the world & Included ( 5 Acre +) 60% of population engaged in Largest group of Medium Agriculture Farmers (2 5 Acres) Low on export / high domestic Marginal farmers Subsistence Farmers consumption Low Productivity Levels 2-5 Acre Farmers the largest group of farmers approx 145MM Average loan size is Rs 180,000 ( approx USD 3000 ) Operate at 50% average global yield / productivity Limited access to markets, quality inputs and know how High Cash transaction intensity high operating cost results in Exclusion of this group

3 Background to Agri lending Agricultural Lending in India Banks are mandated by the regulator ( Priority Sector Targets ) Relaxed asset classification norms & Penalties for shortfall Lending Dominated by Govt. Banks & Co-ops Govt. Banks & co-ops enjoy interest subsidy Mainly Mortgage based lending, High on working capital / Low on Term finance Distribution Bank Portfolio s Concentrated in the Green Revolution states of North India Extensive use of Jewelry as collateral in the south due to small land holding Large central parts dominated by the co-operatives 40,000 of the 600,000 villages are currently banked Markets Govt. is the largest Buyer of Food grains Other Produce traded through APMC ( state run markets ) CASH is the dominant mode of settlement Farmers do multi cropping to hedge Risks Cereals / oil seed / cane and cotton are Dominant crops, Vegetables and dairy done along side

4 About - HDFC Bank s Agri Business POST HARVEST CREDIT Initiated Warehouse receipts in 2004, Targeted at Agro Processors & intermediaries, Agri SME s Working Capital included a year later Currently Approx 5000 Customers/ Rs 4000 cr RETAIL LENDING TO FARMERS Standalone lending to Farmers initiated in 2004 Higher Density in the North (50%) Predominantly 5 Acre + farmers Currently 100,000 farmers / 6000 Crs Delinquency below 2% Agri Business FY10 FY11 FY12 FY13 Post Harvest Pre harvest Expansion into the rest of the country Threw up new challenges - Viability of Handling smaller Farmers (3-5 Acres) - New Crops & markets - Geographically less dense Leading to the Supply Chain Solution

5 payments Supply Chain : Payments Solution Company Bank Farmer Primary Objective : Reduce Cash : Catch payment flow of any one product of the farmer into the bank account every season Increase productivity Reduce Risk Payment / loans Payment Solution benefits Faster Payments for farmers Transaction Transparency Service available closer to home Easy access to loan products Improve Existing Supply Chains Sugarcane Dairy (with some development) Seeds Entry strategy: Payments Solution Based on a BC model in existing tight supply chains

6 WHY SUPPLY CHAIN? Comparison : Supply Chain V/S Open Market Origination Open Market Supply Chain Acquisition Process Branch walk in / reach out to villages around the branch on a door to door Distribution Branch based : geographies based on branch net work Liabilities & Cross sell Net Impact Productivity Cost of Acquisition (COA) Loan Servicing Cost (churn / rotation COR ) Asset First followed by liability - liability & cross sell restricted to the top end ( > 10 acres ) Average : 4 per mth /RM COA : Rs 25000/- COR : Rs 5500 Based on Farmer lists Coordinated with the Anchor (buying ) Company BC Based : Expand in area s where supply chain exists using BC s Liability first ( Payments solution) followed by Asset Average : 10 per mth/rm COA : Rs 11000/- COR : nil

7 net Income Supply Chains : Impact on small Value loans Net income related to farm size Year 3 Acre farm loan profitable in year 2 a 3 Acre Farm loan profitable in year 4 OPEN MARKET YR1 YR2 YR3 YR4 YR5 SUPPLY CHAIN 2 acres 3 acres 4 acres 5 acres Cost of Collection of Cash in deep geographies at the end of every harvest makes lending To small farmers unviable Open market Supply Chain Net Income (annual) 6% 6% COST COA ( One time) 14% 12% COR (annual) 3% Nil Supply chain improves the viability of Small holder farms due to savings in operating cost Open market Supply Chain

8 How it was implemented Moved from Pilot to Scale in Oct 12 Corporate Response Identifying committed corporates is a key enabler Year 1 Corporates not keen to change Year 2 - Improved traction / trial and error Year 3 (2013) : Increasing prices & Sustainability & trace ability needs - creates a very favorable environment for the supply chain model Farmer Initially reluctant to switch from Govt. Banks Extensive use of BC s to keep the onboarding cost down ( achieved a cost less than 40% normal cost). a/c s increased from 70,000 (Mar 12) to 350,000 (Mar 13) Account Activation ( receiving payments) First season April 13 Company s buy a single crop, Each payment cycle is annual ( except for dairy ) 20 % Activation in Year 1 Balances after 1 st Payment cycle, Year 1 : Nil / Year 2 15,000/- ( USD 250) across crop categories

9 How it was implemented Company specific Loans under MOU Unsecured loans to cover specific inputs begin from year 1 in certain crops e.g seeds Micro Irrigation loans in sugar company s MOU covers SLA with the company on selection & monitoring farmers. 30% of the company s ( mainly seed & poultry and dairy ) feature in this space Loans Grew 4 fold from Mar 12 to Mar 13 Loans direct to farmers - ( based on payments, no MOU s ) Working capital & Term loan for total cultivation includes other crops not supplied to the company Conversion rate is currently 3% of the activated accounts ( a/c s activated in the current harvest) Productivity is 2.5 times that of open market origination Same loan process as Open market as off now

10 Case Study : Co-op Sugar Mill (Haryana) Corporate Liaison BC s Year 1 : Mill was totally hands off, Farmers not willing to shift from public sector banks. Year 3 : a/c s of 2600 farmers (10% of the Mill) 5 BC s Service centers set up Account Activation Year 3 : all 2600 accounts active. Balance retention Loan conversion (mortgaged based ) Year 3 : Average Balance per account Rs 15000/- (USD 250) 25% of the accounts converted to loans approximately 430 Farmers get their Account numbers registered with the Mill to receive payments No MOU with the sugar mill. Operation On similar lines in 75 sugar mills covering 90,000 farmers

11 LONG TERM IMPACT OF SUPPLY CHAIN BASED LENDING HDFC Bank is growing at an average 30% year on year with major expansion in Rural Area s Mandatory Targets increase in Tandem Need to expand the base to smaller farmers increases Supply chain will increase Profitability of the Business as simulated below '@10% growth growth rate YR1 YR2 YR3 YR4 YR5 YR YR1 YR2 YR3 YR4 YR5 YR Open mkt supply chain Open mkt supply chain Land holding : 3 acres Loan Size : Rs 1.8 lacs ( USD 3,000) Loan Type : Working Capital Small farmer Loans in Year 1 : 10,000 (asumed) Supply Chain targets Account activation rate of 20% Loan conversion rate of 5% BC cost covered by float ( currently to the extent of 90% )

12 SUPPLY CHAIN UPDATE Accounts activated for payments up to May 13 Growth in No of Supply chain Farmers Dairy 327% 17% 9% Sugar 422% 20% 2% Seed 875% 14% 28% Others 401% 7% 16% Key Challenges that remain Cross functional / internal challenges new to bank business Farmer account Activation and loan Conversion rates BC s Key Challenge & key success criteria. % of a/c's > 1 year converted to loans

13 Business Correspondents Key Success Criteria AGRI SUPPLY CHAINS - work better with small farmers in deep geography Making Business Correspondents a key success criteria Viability for the BC & the Bank Remuneration structure Fixed & Variable Increase product range Simplify processes Service Quality & Operational Control Liquidity Technology : to reduce cost, improve controls and deliver standard quality service Reduce training & supervision costs Liquidity and managing Cash in Transit is the single largest Cost in the entire outreach model. There is no immediate Solution Pilots towards a cash less environment initiated

14 MILK INTO MONEY BC & Technology in the Dairy Value Chain Traditional Set up Manual Data capture lacked transparency Payments delayed Company s dependent on Aggregators MILK INTO MONEY Device that captures Milk Quality and Weight without manual intervention Converts it into Rupee Value instantly and credits account Cash Dispenser Attached incase Farmer wants to Withdraw Company has access to milk data at a farmer level This Model is replicable across Value chains of other Agro Produce

15 produce Data to company A LOOK INTO THE FUTURE Integrated Village Agri Value Chain Village : Collection Point ( society / Aggregator) A Dairy Milk Chiller B C Farmer Vegetable Micro Cold Store Data Center Grain Warehouse Switch ATM / BC POS BC

16 About HDFC Bank Promoted by the Housing Development Finance Corporation incorporated in 1994, Distribution of 3062` branches, 10,743 ATM s across 1845 cities, towns and villages In India India s number one bank ( by market capitalization) Net Income USD Bn Net Income USD Bn FY7 FY8 FY9 FY10 FY11 FY12 FY Net Asset (US$ Bn) FY7 FY8 FY9 FY10 FY11 FY12 FY % 2.00% 1.50% 1.00% 0.50% 0.00% NPA'S Gross NPA Net NPA %

17 Thank You