The government has asked public sector banks (PSBs) and the Indian Banks’ Association (IBA) to develop a standard loan product and uniform documentation for contract farming, including financing for farm machinery, within 6-12 months, according to two people close to the discussions and a document reviewed by Mint.
“The proposed contract-farming framework envisages an anchor buyer or processor tie-up, with buyer payments routed through an escrow account with a defined waterfall. It would include sub-limits for input finance, procurement advances, warehouse receipt finance and processing capex,” said one of the persons.
The second person said lending decisions would be based on the reliability of the buyer’s purchase agreement, rather than collateral.
At present, these exposures are documented differently by banks, increasing legal costs, slowing sanctions and making the asset class difficult to compare or aggregate.
The proposed framework would include a model tripartite agreement among the farmer, sponsor, and bank, a uniform set of loan terms, and standard rules for handling quality rejections and price changes.
Dispute resolution could be referenced to applicable state contract-farming legislation, reducing the need for a case-by-case legal exercise.
Mint's queries emailed to the IBA, 12 PSBs, National Bank for Agriculture and Rural Development (NABARD) and ministries of agriculture and farmers welfare and rural development on 18 August evening remained unanswered.
Other proposals
The government has also proposed that the IBA and NABARD explore Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), National Credit Guarantee Trustee Co. Ltd (NCGTC) and other guarantee mechanisms for the agricultural value chain.
The focus is on aggregators and first-stage processors—businesses that collect and carry out basic processing of farm produce and may have regular cash flows but little fixed collateral.
Without such cover, banks may either decline these proposals or seek security that borrowers cannot provide, which is identified as a key reason why many value-chain financing proposals currently stall.
Another proposal is to support entrepreneurs in setting up district-level custom hiring centres (CHCs) for various types of farm equipment.
The document noted that machinery is unaffordable at the level of individual smallholdings, while much of the equipment is required only for a few weeks per season.
Financing for such centres is proposed as a micro, small, and medium enterprise term loan, appraised on projected utilization across the crop calendar rather than a single crop cycle, with available farm machinery subsidies built into the funding.
The proposals form part of a broader effort to strengthen the farm-to-fork value chain through three areas: farm production and aggregation, bridging infrastructure gaps, and value addition.
Strengthening the value chain
India's agricultural sector contributes approximately 18% of gross domestic product (GDP) and provides employment to around 240 million workers, or 43% of the total national labour force.
While the country's agricultural production is valued at around ₹50 trillion, it exported farm produce worth around ₹4.5 trillion in 2025-26.
But despite the scale of production, the document flagged gaps across the agri-value chain. Only 7% of perishables are processed in India, compared with 23% in China and 65% in the US. About 86% of operational landholdings are small and marginal, below two hectares, which limits the economics of individual investment in machinery, quality inputs, and market linkages.
The country loses food worth approximately ₹1.53 trillion annually, with horticultural produce accounting for nearly 50 million tonnes of post-harvest losses due to inadequate climate-controlled storage and transport logistics.
At the pre-harvest stage, fragmented holdings, limited mechanization and inadequate access to quality inputs, technology and finance affect productivity and resilience. At the post-harvest stage, gaps in aggregation, storage, logistics and market linkages lead to losses and weak price realization.
Limited processing and value-addition capacity further restricts product differentiation, branding and participation in higher-value domestic and international markets.
“Currently, contract farmers find it difficult to access bank credit, as there is no legal guarantee from buyers. In such a scenario, this move could be a game-changer for boosting contract farming,” said Harsh Wardhan, fellow at Indian Council for Research on International Economic Relations (ICRIER).
However, he said the product should be designed keeping the specific characteristics of different commodities in mind, as each has a distinct production and marketing cycle. For example, livestock has a different production cycle compared to cereals.
“The scheme can be common, but there should be different products tailored to individual commodities, given their varying production cycles,” he said.