Hyderabad: Origo Commodities India Pvt. Ltd, an agricultural marketing and warehousing company, plans to enter agricultural financing by starting a non-banking financial company (NBFC) early next year.
The Hyderabad-based company has filed an application with Reserve Bank of India (RBI) to start an NBFC to lend to farmers, and traders focused on agriculture sector, Sunoor Kaul, director of at Origo said. Origo expects to obtain a licence from RBI for its NBFC, Origo Finance Pvt. Ltd, by December.
Origo, the parent company, which expects procurement value to increase from ₹ 180 crore in 2015-16 to ₹ 450 crore in 2016-17, will pump in ₹ 35 crore into its NBFC arm in the first year.
It has a budget of ₹ 350 crore planned over five years, Kaul said in an interview. The company expects to have ₹ 2,000 crore assets under management (AUM) by 2022, within five years of its operations.
The NBFC will remain a separate subsidiary within the parent company, which, apart from running 350 warehouses across the country, has recently ventured into selling staples and spices under Origo Farms brand.
Kaul expects Origo Finance’s AUM to almost double from ₹ 650 crore in its third year to ₹ 1,200 crore by 2021 helped by an expanding branch network. “When we meet the minimum threshold of branches etc., the growth will be real fast," he said.
Origo is already setting up a branch network in Maharashtra, Karnataka and Telangana, and is hiring staff (mostly from rural bank branches) for its branch network. “We are setting up branches close to where the villages are," said Kaul. Five village branches will be overseen by one senior branch, which, in turn, will report to the district branch.
The company roped in Venkatram Reddy, who recently led investment and portfolio management for Caspian Impact Investment’s multi-sector impact debt fund, as chief executive of its NBFC business.
Kaul expects Origo Finance’s network to grow to 500-600 branches spread across 8-9 states in five years touching the lives of 750,000 farmers.
“There is a huge unmet demand for agriculture finance," Pravesh Sharma, a former bureaucrat in the agriculture ministry who is now venturing into entrepreneurship, said.
Only 40% of Indian farmers get access to institutional credit and barely 10-15% of small and marginal farmers get access to institutional finance.
“They (Origo) are producing a good which is in very short supply. If they are able to raise equity, keep borrowing rate reasonable and keep costs in control, they can do well." Apart from the riskier nature of agriculture business, policy risks such as subsidies and political interference can pose challenges to agri NBFCs.
Origo will lend as little as ₹ 35,000 to small and marginal farmers to a maximum ticket size of ₹ 2 crore for traders dealing with agricultural commodities.
Kaul declined to share the NBFC’s lending rate but said the rate would be lower for secured financing. “As asset gets riskier, lending rate will get higher."
Origo will extend asset backed financing in lieu of collateral such as farm equipment and tractors. It will also support procurement financing for buyers who will place receivables as collateral while commodities in warehouses will be the collateral in case of warehouse financing. The lending rate for warehouse financing will be lower because it is highly secured.
“They have to have a good mix to balance low and high risk areas," Sharma pointed out.
Small farmers will have access to unsecured financing at higher interest rate with Origo vesting the first right to buy the crop. “The farmer is free to sell elsewhere if he gets a higher price," said Kaul.
Origo is partnering with farmer federations, farmer producer organizations and joint liability groups to get access to credit history of farmers. “We want to find the right people who won’t default," Kaul said.
An en masse default by farmers in Andhra Pradesh and Telangana in 2010 triggered a crisis in microfinance institution (MFI) industry, putting their business in jeopardy. A subsequent debt redemption scheme proposed by the two Telugu state governments after the 2014 assembly elections led to another round of default by some farmers, which affected their credit histories.
The agriculture ecosystem has since matured and farmer debt default has come down, reasoned Kaul. Origo will extend its financing business to AP if the model proves successful in Telangana, he said.
Agri-commodity warehousing firms such as Star Agriwarehousing and Collateral Management Ltd., Shree Shubham Logistics Ltd. and Sohan Lal Commodity Management Pvt. Ltd. already operate agriculture-focused NBFCs in the country.
Sohan Lal raised ₹ 100 crore in private equity funding led by Chicago-based Creation Investments Capital Management Llc and Everstone Capital in September. Star Agriwarehousing, which raised ₹ 250 crore from Singapore-based investment firm Temasek in 2014, is in talks with private equity funds to raise $80 million (about ₹ 500 crore), Mint reported in February.
Canadian investment firm Fairfax Financial Holdings Ltd. last year bought 74% stake in National Collateral Management Services Ltd for ₹ 800 crore.
Origo, bootstrapped by Kaul and Mayank Dhanuka in 2010, is in talks with private equity firms to raise $15-20 million, its first round of equity financing, according to Kaul.