Agri finance: cheaper access to credit isn't the panacea

Below are edited transcripts.

BR Research: How did SEDF come into being?

Mehboob ul Haq: In 2009-2010, the government of Sindh partnered with a donor agency to set up Sindh Development Fund (SDF) to address the gaps in agriculture value chain. The donor agency was supposed to match dollar for dollar and bring in technical assistance as well.

Somehow, the partnership didn't work out, but since Sindh government still believed in the sector's potential which needed to be addressed by putting in money and the technical part, it re-organised SDF into Sindh Enterprise Development Fund (SEDF) with 100 percent provincial government sponsorship.

It was originally set up under the Planning & Development Department but since it involved investments, it was handed over to the Investment Department.

BRR: Can you walk us through SEDF's work so far; how has it evolved as an organisation?

MH: Since bank financing to agriculture sector was very poor back then, and still is to a certain extent, the initial idea was to give financial assistance as matching grants to various agri-business enterprises that are investing in or are up-gradation, mechanisation, and/or modernising the farming value chain.

But then we realised that matching grants can be very tricky within the limits of a public sector organisation. We, therefore, decided not to be very creative. Instead, we decided that banks should lend money as they do in their normal lending business, whereas we will only facilitate that process by picking up the cost of the loan. This helped us get third party validation, since banks do their own due diligence before giving out a loan.

We are very cautious in terms of our approach, and that is one major reason for our success, although of course the corollary is that we had a slow start. Back in 2011-12 when banks were still reeling from the 2007-08 slowdown, banks were not giving out loans to farming sector. The way we addressed that is we set up a coordination committee in which Sindh government's investment and agriculture departments, commercial banks, insurance, the SBP and other players sat together to try connecting the dots and address the missing links.

BRR: Can you share some examples of your success?

MH: Our first project was Day Fresh, which is a leading pasteurised milk brand in Karachi. They started very small; just 500 animals with a milking parlour, but now they have more than 4,000 animals. Later we took some exposure in rice, which I think is a game changer in Sindh. It's one of the top exporting commodities of the country - about 90 percent of rice produced in Sindh is exported. And yet in terms of technologies and practices, the rice industry in the country is very primitive.

We recently inaugurated pasteurized egg business, which is first of its kind in the province. We have also concluded financial close of fruit pulp business that eyes export markets.

And in each of these, there is success to be had. For instance, there was a farmer who used to lease out his lands for Rs 20,000 a year. Two years ago, someone advised him to get in the business of maize-based sileage because of its lucrative returns.

Apparently, at an initial investment of Rs 50,000 per acre, you can get a return of Rs 200,000 per acre over its crop cycle. The farmer initially experimented with it with only six acres, next year he ended his lease agreement and planted maize on 200 acres which he harvested on rented equipment. Today, he has bought a harvesting and bailing machinery from Germany, and getting it bank financed; SEDF will provide interest rate subsidy.

BRR: What exactly did you do in rice?

MH: We had to start somewhere in the value chain, where we spotted a low hanging fruit in rice husking mills. In 2012-2013 we sat with the SBP, rice millers and developed a product for BMR financing scheme for rice husking mills, because nearly all of the 600-700 rice husking mills were obsolete, dilapidated with operational losses being 40-45 percent, high energy costs, amongst a host of other inefficiencies.

A rice mill of 5 to7 tonnes capacity can be easily upgraded with a mix of Chinese and Pakistani machinery to a decent husking mill at a cost of Rs 15-20 million. We were offering them Rs 16 million loan at the rate of 2 percent, whereas in order to encourage banks to lend, SEDF gave 30 percent credit guarantee which was to be deposited in an escrow account with the SBP before the loan is disbursed. The idea was to give confidence to banks so that they don't have to worry about delays in releases.

Despite all this, it took us two years to get the first project rolling, because cheaper access to credit alone cannot fix the mindset of quick fix and short cuts, inability to make feasibility, fear of documentation, and other perception issues.

But after handholding a few initial clients, addressing their perception issues and facilitating them in documentation and feasibility etc, that line has now started growing. Today we have helped upgrade 40 rice husking mills, at a rate of 8-10 mills per year.

BRR: But as you said, it's not just the mills; what about other areas?

MH: In that spirit, we have partnered with Pakistan Agriculture Coalition (PAC), the Lahore-based non-profit focusing on development of agriculture sector. Together, we have devised five interventions in rice value chain at the farm level, such as land preparation, and in seed research, where exporters have joined hands with the Chinese to make local seeds, which can increase your production from 40 maunds per acre to 120 maunds, if you do other things right.

BRR: Do you have the mandate to work on such projects?

MH: SEDF's mandate is to revitalize the agriculture sector by using both on-farm and off-farm interventions; picking up the cost of loans is one aspect of it.

BRR: And do you have the capacity or the technical staff to work on such projects?

MH: When we say we want to inculcate efficiencies we should be efficient ourselves. Our forte is that we don't do everything in-house. We try to create partnerships. We are a very lean organisation. We create synergetic relationships with universities, with organisations like the PAC, with consultants, with the SBP, with bilateral partners such as AusAid and USAid. We believe, we don't need a platoon of in-house experts to connect these dots when we can leverage on skills available in the market.

BRR: What fund size did you start with, and how much is it now, and what is the total size of investments that SEDF has facilitated by picking up the cost of loan?

MH: We started from Rs 800 million of initial investment by Sindh government and today its size has grown to Rs 1200 million. Over the last six years of proper operations, we have financed about Rs 4 billion plus worth of projects in Sindh's agriculture value chain. These are the projects that have either been completed or are on-going, whereas the approved projects totalled about Rs 6 billion; those Rs 2 billion worth of projects could not reach financial close. But the time and effort were put towards Rs 6 billion worth of projects. We are on-track towards meeting our 2020 target of another Rs 4 billion, and we believe we will continue to grow organically.

BRR: And what has been the trend in non-performing loans or projects that don't start even after SEDF has doled out its share of the bargain i.e. interest rate cost. How do you secure against that?

MH: There hasn't been a single NPL in the Rs 4 billion plus portfolio that we have had so far. Not a single entity has gone bad so far, save for perhaps one or two small-ticket transactions, in which case, we simply stop issuing the cheques for interest rates.

BRR: And what are you doing to expand your outreach?

MH: To enhance our outreach and increase our success rate, we are entering into agreements with banks, whereby, they will send us the cases that have been approved under the agri-SME financing portfolio for Sindh. We will then assess it on our own criteria and give the interest rate subsidy to those who meet our criteria in a matter of 7 days. Previously this process used to take three months.

In addition, we are taking another step to help entrepreneurs by reducing their time and efforts they spent towards getting a loan.

Whereas, previously entrepreneurs would make six different applications to approach six different banks for a loan, now we have developed a digital platform, where entrepreneurs will upload one single application that can be accessed by the six banks that have so far come on-board on that platform. Then it is up to the banks, whether, they want to finance the project after their own due diligence. We are planning to start this platform in less a month, and we hope that other banks would also be on-boarded soon.

BRR: How is your portfolio distributed across sectors and what new sectors are you looking at?

MH: It depends on your perspective. In terms of our assistance (in value terms) that has been materialised, about 40 percent comprises of poultry, livestock and dairy clusters, whereas about 23 percent has been in cold chain and e-beam irradiation.

Cotton ginning, animal fattening, and rice husking are some other projects that we have worked on. In terms of the number of projects, we have done about 55 projects of which 28 were from rice clusters focusing on rice husking mills mainly.

However, in terms of the total size of investments, of the total Rs 4.6 billion worth of projects that we have facilitated (by picking up their financing cost), poultry, and cold chain and e-beam irradiation has a share of about 25 percent each, whereas livestock and dairy segment has a share of 16 percent.

There are about 6 more projects in the pipeline with total investment size of about Rs 3.1 billion, which we will be facilitated by providing Rs 250 million towards interest cost to be paid over three to five years.

In addition to the sectors we have already worked in, we are now exploring high-end value addition in cotton, red chillies, dates, onions, pulping units for mango and other fruits and food processing at large. In addition, we are planning to expand to on-farm rice modernisation, where we are working with banks to come up with standardised financing products for rice farming harvest equipment, which we can then replicate, once it becomes successful.