Structure of the Trust

‘Kisan Samruddhi’

Executive summary

Indian farmer has been eternally trapped in a vicious circle of poverty due to low productivity, non-availability of credit, low personal savings and absence of alternate sources of income. ‘Kisan Samruddhi’ aims at attacking this vicious circle with a three-pronged strategy of doorstep credit facility, good quality inputs at fair prices and alternative sources of income in the form of equity participation in diverse businesses undertaken by the company “Gramin Vikas Ltd.” Floated under this project.

Under Kisan Samruddhi, Gramin Vikas Ltd. shall tie up with companies producing agricultural inputs and with Banks/ Financial Institutions to provide good quality inputs to farmers on credit. The amount of credit delivered in the first year is expected to be Rs. 150 cr, which shall grow to over Rs. 2000 cr by the fifth year.

Farmers shall be required to make a compulsory saving of 4 % of the loan amount with Kisan Samruddhi Trust at the time of repayment of the principal. The governing body of the trust shall be Gramin Vikas Ltd. and its beneficiaries, the participating farmers. The trust, in partnership with Gramin Vikas Ltd, shall make equity investments in new businesses. Such ventures would be intrinsically linked to agriculture and would aim at unlocking value for rural India. In the initial years, Gramin Vikas Ltd. would have a high stake in the ventures and this shall gradually be brought down as the corpus of the trust increases. The corpus is expected to be around Rs. 200 crores by sixth year. The farmers would earn dividends from these businesses in proportion of their savings. As a starting point, I suggest Gramin Vikas Ltd along with the trust to venture into a Food & Grocery Retail Chain, which would draw most of its agricultural inputs from the participating farmers’ produce. The NPV of the business is estimated at Rs. 1463 cr.

I hence envisage an ever-growing trust, which shall serve as a vehicle to fuel rural growth, bring about a cultural transformation and provide farmers with a larger share of the agricultural value chain. The trust would become large enough to provide for both the investment needs of new ventures and the credit needs of farmers hence significantly reducing its dependence on external sources of funds.

Indian Agriculture

It is estimated that almost 260 mn people in India live below the poverty line (around 75 mn households). Of these 60 mn households are in the rural areas. The Tenth Five Year Plan Working Group on Agricultural Credit has estimated the requirement of rural credit for years 2002-2007 at Rs 720,000 crore, or Rs 144,000 crore per annum on an average. In spite of such a huge potential existing in rural India, the financial institutions have not been and have no proclivity towards lending to farmers. This is because of:

• High transaction costs in providing door-step credit to the poorest of the poor.
• Emphasis on collaterals and security given the unreliability on Indian agriculture.
• Operational bureaucracy

Apart from the credit requirements, non-availability of good quality inputs and lack of use of advanced farming technology also contributes to low productivity. Due to the limited cash hunger, most of the farmers still follow subsistence farming. They do not save much and hence invest whatever they have, in their farms.

The Indian farmer has thus been eternally trapped in a vicious circle of poverty due to low productivity, non-availability of credit, low personal savings and absence of alternate sources of income and investments. Kisan Samruddhi – the proposed business plan aims at attacking this vicious circle with a three-pronged strategy of doorstep credit facility, good quality inputs at fair prices and alternative sources of income and investments in the form of equity participation in diverse businesses undertaken by “Gramin Vikas Ltd.”, and hence changes the face of Rural India.

Proposed Business Plan- “Kisan Samruddhi”

Strategic Intent / Objectives:

• To link the rural poor to the final consumer, not only to unlock tremendous value but also to provide them with alternate sources of income.
• To position “Gramin Vikas Ltd.” as a dominant player in the rural economy and make Kisan Samruddhi the primary vehicle for the growth.
• To build up a good quality portfolio of diversified businesses based on industry expertise and relationship with the rural economy.
• To develop the competence and expertise that would enable “Gramin Vikas Ltd.” to grow along with the rural economy.
• To adopt a three-pronged strategy which would simultaneously provide them with door step banking, adequate inputs, investment opportunities and alternate sources of income and hence free them from the clutches of poverty.

Gramin Vikas Ltd. shall tie up with companies providing agricultural inputs on one hand and with Banks/ Financial Institutions / NBFCs etc on the other, to provide agricultural inputs to farmers on credit. In turn, the farmers shall be required to make a compulsory saving of 4 % of the loan amount at the time of repayment of the principal and interest. The savings shall be made with a trust, which shall be formed with the objective of making equity investments in new business ventures in partnership with Gramin Vikas Ltd. The farmers will hence become equity partners in the new business ventures of Gramin Vikas Ltd.

Credit Delivery Model

Sanchalaks have an access to the land holding details (plot size, soil quality, sensitivity of soil to pest attacks etc.) of every farmer so that when approached for loan, they can make an educated estimate of all the requirements and suggest the farmer for the same. Once this is done, the Sanchalak provides the farmer a catalogue containing the list of agricultural inputs from which he selects and orders his requirements. The information about the farmers’ requirements (petty cash, agricultural inputs including equipment) is thus collected and the partnering banks and agricultural input providers are intimated about the same.

The agri-input providers in turn, deliver the inputs to the Sanchalak. The partnering banks on behalf of the farmers make the payment to these companies. The farmer would in turn enter into a loan agreement with the partnering banks and shall collect his requirements from Sanchalaks once it reaches the latter. The banks pay to the agri-input providers for the agricultural inputs on receiving adequate documents. The Sanchalaks would be provided with a commission for the services rendered. Gramin Vikas Ltd. would charge a certain percentage of the loan amount as transaction & processing fees.

After every harvest, the farmers deliver their produce to Gramin Vikas Ltd., who provides them the market price after deducting the principal, interest and the mandatory savings of 4 % of the loan amount. These savings would then be transferred to a trust.

Structure of the Trust

The annual savings made by the farmers in lieu of the loans shall be routed to a trust. The beneficiaries of the trust shall be the participating farmers and the objective of the trust shall be to make equity investments in new businesses along with Gramin Vikas Ltd. The farmers shall be under an obligation to keep the savings for a period of atleast 3 years. On withdrawal of their savings they shall receive an amount, which shall be equal to their share of the value of the trust. Annual dividends received by the trust shall in turn be distributed amongst the farmers. The farmers would also be provided with the facility to withdraw up to a maximum of 50% their cumulative savings for emergency purposes.

Gramin Vikas Ltd shall also guarantee any erosion in the corpus of the trust that may occur during the initial gestation period of the new venture. Gramin Vikas Ltd. and the Board of Trust shall jointly decide the period.

Benefits to various Stakeholders

Guiding Principles for New Independent Ventures

• The Trust and Gramin Vikas Ltd. shall hold equity in the new ventures with Gramin Vikas Ltd. holding at least 26% stake.
• In the initial years Gramin Vikas Ltd. would have a very high stake in the venture, which shall gradually come down as the size of the corpus increases.
• The New Ventures would be intrinsically linked to agriculture and would aim at unlocking value for rural India.
• A very high dividend payout ratio (Greater than 75%) to provide farmers with a regular flow of income.

As a starting point, we suggest that a chain of Food & Grocery stores should be opened which draws most of its agricultural inputs from the participating farmers’ produce.

Food & Grocery Retail Chain: Opportunity unbound

Establishment of foreign firms on Indian hinterlands has brought with itself prosperity in the Indian Middle Class that is now demanding more convenience and quality in all aspects of life including food. Food Retail in India is still dominated by independent grocers (100–200 sq. ft stores). A growing concern about the quality of food and grocery and shopping as an experience can change this equation in the favor of organized retailing in F&G. This can also be gauged in the fact that organized retail chains like Haiko in Mumbai and Food World in South India have been a great success.

However absence of any National level F&G retail chain provides a huge growth opportunity yet to be tapped. As can be seen in the pie-chart the organized retail constitutes of around 53% of the total expenditure on food items by the consumers while the organized retail in India is mere 0.17% of the total food expenditure by Indian consumers (Source Consumer Outlook).

The Plan

We propose Gramin Vikas Ltd to open a chain of F&G retail stores that will draw its stock primarily from the partnering farmers while the remaining requirements would be fulfilled by utilizing other sources. We suggest opening of two types of retail outlets:

Convenience Stores:A neighborhood store that would cater to the daily needs of a person by providing higher quality products than that offered by traditional sellers (like Kirana stores, vegetable vendors etc.). The total store area would be around 150-250 sq ft and such stores will target those customers who seek convenience.

Economy Superstores:A one-stop shop, though relatively distant from home, for all the daily requirements of a person at lower price and better quality than traditional Kirana stores. The consumers will get a wide product assortment and thus an experience of “all under one roof”. The total store area would be around 4000-5000 sq feet.

Key Differentiators

• Ability to provide high quality food & grocery items at similar/lower prices than traditional format stores.
• Untapped markets and a very high penetration envisaged by the model, thus a chance to gain the first mover advantage.
• The supply chain disintermediation ensures huge savings for the remaining channel members by minimizing the non-value adding partners.
• Ability to attract consumers of different buying behavior example customers looking for convenience, low prices, wide product assortment etc

Financial Projections for Kisan Samruddhi

Credit Delivered and Savings made with the Trust

• It has been assumed that the credit delivered in the first two years shall increase by 80% after which it shall grow at 60% for the next 3 years. Savings have been taken at the rate of 4% of the loan amount.
• The amount of credit delivered after the initial years would be a function of the outreach attained.

Profits Earned By Gramin Vikas Ltd. (Pre – Tax – in crores)

• The total capital invested by Gramin Vikas Ltd. in the F&G business is Rs. 80 crores. It has been assumed that there would not be any additional investment needed for credit delivery as the existing network of sanchalak shall be used. Additional capital requirements post the 6th year has not been considered.
• For computing the continuing value it has been assumed that the difference between WACC and growth rate shall be 3%. The difference has been kept low as the growth rates are expected to very high for a very long period of time.

Stake of Gramin Vikas Ltd. and Kisan Samruddhi Trust in the F & G business

The NPV of the F&G business has been computed to be around Rs. 1463 crores.

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Key Challenges & Mitigants

• Farmers, who have just enough to make both their ends meet, may not willingly participate in the new ventures.
• Sanchalak, who enjoys a commission on farmer’s sale, will help educate farmers about the benefits of equity participation that he can enjoy by parting with only 4% of the loan amount every year.
• An easy and cheap loan without an obligation of keeping lands on security will further make this deal alluring for the farmers.

• Risk of farmers selling their produce to other traders
• Gramin Vikas Ltd. will buy the produce at market price. Hence the farmers have no added benefit in selling their produce to another trader.
• The Sanchalak will ensure that the produce is sold to Gramin Vikas Ltd to earn the commission on the sale.

However the biggest challenge for Gramin Vikias Ltd. in this initiative would be to gain social acceptability. It would be a colossal task to change the mindset of the farmers and convince them to alter the way they have saved and invested their hard earned money since childhood.

Ten years hence

• Savings made by farmers with the trust would become independent of credit provided. Farmers will gain so much confidence in the trust that savings will be done irrespective of credit taken.
• The Corpus of the trust would be large enough to provide for both the investment needs of new ventures and the credit needs of farmers. Hence Kisan Samruddhi would have significantly reduced its dependence on external sources of funds.
• Kisan Samruddhi would aim at bringing about a cultural transformation which would change the way farmers view savings and investments. This would have a trigger effect on the entire economy.

Appendix

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