Financial inclusion is in store for Indian smallholders

Around 126 million smallholder farmers in India operate on less than two hectares, and with limited access to credit. Traditionally, they have relied on local traders –so-called “moneylenders”-- to provide short-term credit for farm inputs. In the state of Bihar in eastern India, local traders demand annual interest rates of 40 to 60 percent. The grain producers who borrow from them have a strong incentive to sell their produce immediately after harvest, when prices are lowest. Often their only buyers are the same local traders who provided the initial credit, and with whom smallholders have minimal ability to negotiate price.

Even if they keep their produce on-farm for later sale, most smallholders have limited knowledge of the technical aspects of grain storage, exposing them to risks including product deterioration and theft. With limited access to warehouse facilities, they cannot benefit from seasonal variations in supply and demand.

Ergos Business Solutions is addressing this issue by establishing a network of small warehouses in Bihar. Those warehouses accept, store, and manage harvested grains from local smallholders and then market the aggregated commodities.

Currently Ergos operates 42 warehouses, used by more than 6,000 smallholders. Ergos manages its warehousing operations through an online platform and mobile application called ErgosLive. The technology gives farmers real-time information about storage space and prices. It allows them to book space for their own commodity, and then trigger its sale when the price is acceptable. Some farmers are achieving prices that are 25 to 30 percent higher than the harvesting season price.

Thanks to a credit guarantee from Rabo Foundation, Ergos has accessed higher levels of credit than it could otherwise. The guarantee gave Sammunati, a lender active in the agri supply chain, the confidence to develop and underwrite a microloan product for Ergos. Selected smallholders can take out microloans against their deposited grain. Kishor Jha, the founder and Chief Executive Officer of Ergos, estimates that this could allow participating smallholders to decrease their borrowing costs by up to 80 percent.

Dheeraj Mutreja, Rabo Foundation’s local staff member in India, knows that an innovative technical solution that also improves financial inclusion for marginalized farmers has many advantages. “ErgosLive gives smallholders access to finance that they could not otherwise get,” he says. “The impact of that in Bihar, where conditions are very difficult for farmers, will be significant.”

The warehousing model also offers considerable potential to reduce food loss. Farmers who sell to local traders frequently experience product loss because traders delay collection. Such delays lead to pest infestation, theft, and moisture damage, which not only reduces the price but also reduces the final saleable volume. By contrast, farmers who deposit their product in local warehouses immediately after harvest experience significantly less food loss, estimating that their saleable volume is 20 to 25 percent higher than previously.

Ergos is keen to increase the number of farmers that use the village warehouses. “We know that around 2,000 farmers can potentially access every warehouse, so we are nowhere near full servicing capacity,” Kishor Jha observes. “Each smallholder produces around five tonnes of grain per season, meaning that a single location can potentially access around 10,000 tonnes of grain. A village warehouse typically has a storage capacity of between 200 and 500 tonne, so Ergos is likely to need many more warehouses.”

Kishor is confident Ergos can achieve that. “We don’t own any infrastructure, so we can react quickly,” he explains. “As more farmers come on board we just lease more warehouse space from local landlords to meet the demand.”