India | Climate Smart Agriculture

Case study: bank guarantee stimulates climate-smart agriculture in India

4 November 2022 10:41

What’s the best way to ensure both a flourishing agricultural sector and healthy forests? According to the Indian government, the answer is climate-smart agriculture. But many standard banks in the South Asian country are still hesitant to invest in it. So in 2018 Rabo Foundation introduced a unique program together with USAID/India, based on bank guarantees. And as a preliminary case-study has shown, the program works.

Background: sustainable landscape development can bring balance to forestry and agriculture

India is one of the most heavily forested countries in the world. More than 20 percent of the surface area is covered in forests. And these forests aren’t just important for the country’s biodiversity; their paper, gum and spices are also a source of income for millions of Indians.

But the forests are under pressure from the growing agriculture sector. To make room to grow crops like rice, cotton and wheat, forests are being cut down or thinned out. That presents a threat to the ecosystem, but also to the communities that rely on the forests for their livelihoods. Deforestation also releases CO2 into the atmosphere.

On the other hand; agriculture is essential to India’s food supply. And like forestry, the agricultural sector is a major source of employment; around 130 million smallholder famers are dependent on it for their livelihoods. The question is therefore: how can India keep the interests of agriculture and forestry in balance?

Many people believe that the answer lies in sustainable landscape development. In other words: the layout of a landscape, where the production of crops goes hand-in-hand with the protection of nature. In such a landscape, smallholder farmers can work and build a better life, while forests grow in size and emissions of CO2 are reduced.

“Lenders say the guarantee program has given them an opportunity to explore climate-smart agriculture”

Problem: banks hesitate to finance sustainable landscape development

The benefits of sustainable landscape development are clear, but for it to be successful farmers must be able to switch to climate-smart agriculture. They have to shift their focus to agroforestry, for example, or use farming methods that emit less CO2.

To make that transition, smallholder farmers need financing. But many standard banks still consider it too risky to provide that financing. One of the reasons is that the Return on Investment for agroforestry can run up to eight years, which is too long for many financial institutions from a credit risk perspective.

Solution: a guarantee program gives creditors extra support

To help convince financial institutions to issue the necessary loans, in 2018 Rabo Foundation set up a bank guarantee program together with USAID/India worth 15 million dollars. The idea behind this 10-year program is that we share the investment risk with the financial institutions. That lowers the threshold for the institutions to disburse loans to organizations that help smallholder farmers with climate-smart agriculture. And in the process, the financial institutions can gain experience with this form of agriculture.

In the program, we joined forces with Ananya Finance for Inclusive Growth and Samunnati Financial Intermediation and Services (Samfin). Like us, these agricultural financing organizations focus on social impact in the agricultural sector and promoting climate-smart agriculture.

“Loan providers can now finance SMEs and cooperatives who want to focus on climate-smart agriculture”

Result 1: financial institutions dare to explore new forms of agriculture

Today, four years after the program started, social impact research bureau 60 Decibels has drawn up the preliminary accounts.

The loan providers are extremely positive about the program. “Our climate-smart agriculture strategy started with our journey with Rabo Foundation”, says a respondent at Samfin. “There is greater awareness of climate-smart agriculture in the organization, and therefore greater attention. Today we have a dedicated team that focuses on generating climate-smart agriculture assets.”

The institutions have stated that they are able to take on more risk than they had been accustomed to thanks to the program. In the Samfin respondent’s words: “I would say our risk appetite has gone up.” And a respondent at Ananya states: “Certain decisions of, say going to a different geography, or looking at a larger ticket size for a longer tenure have changed because of the guarantee program.”

Result 2: businesses and cooperatives can borrow money for climate-smart agriculture

In the study, most loan recipients (SME businesses and cooperatives) indicated that they were able to gain access to loans for climate-smart agriculture for the very first time. They explained that they do not know of any similar opportunities for obtaining such loans. The organizations therefore consider the loans provided with the support of Rabo Foundation and USAID/India as a unique opportunity to switch to climate-smart agriculture together with smallholder farmers, which we were glad to learn as an outcome of the program’.

Conclusion 1: bank guarantees work

The study provides good insights in the positive effects of the bank guarantee program. The program gave the two loan providers the room to finance target groups that would not have had access to credit without it. And in turn, these target groups can get started working with new methods, like agroforestry.

Conclusion 2: agricultural financing firms play a key role

Companies like Ananya and Samfin work closely together with farmers and their organizations. Such agricultural financing firms know better than most which problems the market faces, and which solutions might work. That information is essential in the development and implementation of a successful bank guarantee program.

At Rabo Foundation, we’re therefore pleased that Ananya and Samfin chose to take that step with us. That they chose to explore new ground, and then they invested money and energy in the development of a unique loan offer. In so doing, the institutions facilitate climate-smart agriculture in India, and they can help both smallholder farmers and the climate.