Climate finance in agriculture: RBL Bank’s innovative clean energy solution for Indian farmers
RBL Bank is one of India’s fastest growing private sector banks and services over 3.98 million customers through a network of 248 branches and 388 ATMs spread across 20 Indian states and Union Territories. Having started out with a strong focus on agriculture, the bank today offers specialized services under six business verticals. RBL Bank introduced GCPF-financed climate loans for the agricultural segment in 2013 and has since disbursed USD 21 m in the area. In this interview, Manoj Rawat, who headed RBL’s Agriculture & Rural Banking for RBL Bank from 2012 until 2017, explains how RBL Bank brought energy efficiency loans to rural clients.
Manoj, can you explain what RBL Bank does?
RBL Bank a full-service commercial bank and does corporate banking, SME banking, but also a lot of agricultural banking. In India, the rural area is a big part of the country but difficult to access for banks. You have so many languages, people don’t have a credit history. They don’t fit typically in the normal banking framework which an otherwise commercial bank would see. In the beginning, working in rural areas you have to make sure you are not going to make losses.
RBL Bank started out from Kolhapur in Southern Maharashtra – the Kolhapur branch today.
How did you approach rural farming in the beginning?
Our approach was to go through big retailers. They sell vegetables, fruits, all types of crops. Where do they get them from? Farmers! We went with an approach we call “Value Chain Linkage”, bringing together the corporate houses and farmers. These companies need the farmers – they don’t grow food for themselves. By linking them, companies get a guaranteed supply of crop, farmers obtain access to a buyer for their produce and we are assured they will be able to sell and repay their loans. Farmers get favorable prices and with the favorable prices we also get the repayments.
Founder & CEO, ValueFin India
Manoj Rawat is a Senior Level Banker & Development Finance Professional with 21+ years hands-on experience in Agriculture, Rural and Priority Sector Banking in India. Manoj is a Bachelor in Technology with Honours, Master in Engineering (Water Resources), MBA in Financial Management & CAIIB (Certified Associate of Indian Institute of Banking and Finance)
‘For rural lending, we went with an approach we call Value Chain Linkage, bringing together the corporate houses and farmers.’
Is this still the approach today?
Today, we do individual loans, crop loans, dairy loans. We also offer post-harvest commodity finance, allowing farmers to store produce for a few months until the price is right. We also offer loans for processing and the dairy sector. Our philosophy in rural India is that you have to give each farmer what he needs. Obviously, every kind of business requires a specific skill set. What we did, though, was to develop very simplified products that anybody can sell.
Why is it so important to tackle the agricultural sector for climate financing?
One of the biggest challenges the world will face is food security. While there are constantly more mouths to feed, natural resources are being depleted and production itself suffers from the effects of climate change. Especially in developing countries this is a big challenge. In India some 70% of the people depend on agriculture. If you have to choose one sector which will make a change to climate issues it is agriculture.
In India, some 70% of the population depend on agriculture as their livelihood.
Apart from this impact angle, what is the incentive from a commercial bank’s point of view?
In India, agriculture is not only an important source of livelihood, it is also a massive market – bigger than the entire economy of many countries. The requirement of credit to grow food amounts to close to USD 200 bn annually. Out of this, USD 100 bn come from organized sectors like banks etc. This means that agriculture financing is commercially sustainable because somebody is paying for it.
‘In India, agriculture is a massive market – bigger than the entire economy of many countries.’
How did RBL Bank set out to take energy loans to the rural segment?
We started out looking at the problems our clients were facing on a daily basis. The objective was to offer them a solution that was related to their livelihoods as well as mitigating climate change. We found that irrigation was the biggest challenge, consuming both water and energy. While in India water and electricity for farmers are almost free, the problem is availability. This was our starting point.
How does ‘normal’ irrigation work today?
Pumps run either on fossil fuel, which is quite costly, or on electricity. While electricity is free for farmers, it is only available for one or two hours a day – usually at night when other industries shut down. As soon as electricity becomes available, farmers try to get out as much as possible of their pumps, inundating the fields in what we call flood irrigation.
‘Flood irrigation uses a lot of water while actually not doing much for the plant.’
What is the problem with this approach?
Flood irrigation uses a lot of water while actually not doing much for the plant. Farmers tend to think that the more water they put onto the field the better their crops will grow. In fact, the opposite is true. The plant doesn’t need water, the soil must be moist. If I’m thirsty I need half a bottle of water but if you pour a bucket of water on me, does it help me? And the bucket of water can be used for weeks if used well.
What is the solution?
One way to solve the problem is through micro irrigation. We engaged a consultant from a renowned agricultural technology industry. He came out with the finding that the micro irrigation system, if implemented well with the proper pumping system, will lead to a 25 to 30% increase in yield while reducing water consumption by 40%.
‘Micro irrigation will lead to 25 to 30% increase in yield while reducing water consumption by 40%.’
How does micro irrigation work?
Water is being pumped through pipes and released drop by drop to the soil surrounding each stem of sugarcane. Unused water remains in the well. For the farmer, this means if he can either grow more crop at the same time or he can conserve water for the summer season when wells typically dry up.
In most of India, water is a scarce resource and irrigation key for agriculture.
How did you develop the business proposition?
We identified sugarcane as one area where water is being misused. Sugarcane is a water-guzzling crop. There is a saying that one sugarcane takes water to the equivalent of one baby in a year. While many of these sugarcane farmers have been banking with RBL Bank for ages, in order to reach out to them cost-effectively, we talked to sugarcane companies that work with thousands of farmers at a time and are interested in getting a reliable supply of crop. At the same time, we teamed up with an irrigation company that was prepared to provide operational maintenance and technical services.
Water is pumped through pipes and released drop by drop, keeping the soil moist.
How did you tie up the three parties in lending model?
The sugarcane company and the irrigation company help us identify the farmers. Thanks to this, the cost of delivery of the credit is drastically reduced. As for repayment, we have a deal with the sugarcane company: after the harvest, they repay RBL Bank before paying their farmers. With this model, everybody wins: farmers’ income increases, the irrigation company’s equipment gets sold, the sugarcane company can rely on a better harvest and the bank can address large numbers of customers in one go which reduces costs while relying on the two companies to help with a lot of due diligence with the farmers. This also improves the bank’s portfolio quality.
‘By teaming up with sugarcane and irrigation companies, the cost of delivery of the credit is drastically reduced.’
What is the most important consideration when creating such partnerships?
To successfully scale up the business these partnerships have to be well built and you need to identify two to three key stakeholders who are prepared to contribute their part. We as a bank give the credit, the irrigation company is prepared to guarantee quality and replace equipment if it doesn’t work and the sugarcane company ensures everybody gets paid. Together, this is a value chain in which the farmers benefit: They receive technical advice, timely credit and they know that the money is rooted through the proper channels.
What is your narrative to the farmers?
We put the focus on making agriculture more productive and, thereby, more income-generating. Basically we told farmers: ‘Use water efficiently, and you’ll get more income.’ One part of the equation is costs as in what farmers spend; the other is opportunity costs, missing out on additional income because water isn’t available. Combined, they impact farmers’ incomes.
Sugarcane, up to 6 metres long: micro irrigation increases yield for farmers by up to 30%.
What are these opportunity costs?
In many cases, farmers don’t actually cultivate all of their land because they don’t have enough water. Similarly, they stop growing vegetables towards the end of the dry season because wells have run dry. By reducing water consumption more water is left to either cultivate bigger areas or grow vegetables all through the year, thereby generating additional income. With drip irrigation, water usage went down by 40% and that water is being used far more efficiently, Earlier they were only irrigating for two months now they are irrigating for six months with the same quantity of water.
‘While before, farmers were irrigating for two months, now they are irrigating for six months using the same amount of water.’
You started out with micro irrigation. How did solar systems get into the equation?
In a first step, we looked to replace old pumps through more energy-efficient ones. Thanks to solar systems becoming affordable, we are now promoting solar pumps. They run independently of the unreliable electricity grid and increase the availability of pumps to 6 to 8 hours a day – during the daytime, which is a great benefit to the farmers.
Thanks to solar systems, pumps become available for 6 to 8 hours a day.
How did you pitch this business opportunity within the RBL Bank?
As I mentioned earlier, many of these farmers have been clients of the bank for a long time. With this new long-term investment, return will be coming in after five years or so. While we could probably justify credit just on the increase of productivity, for the bank that’s usually not enough. However, by teaming up with sugarcane and irrigation companies, these companies usually decide to bank with us, too, which means that we bring in interesting new clients. Together, the three make a strong commercial proposition.
So this is a strong value proposition to put in front of the Bank’s management?
It is better than what we were doing before: it gives higher value and we are doing something new. Within RBL Bank there is a general agreement that we should do something that is good for agriculture. At the same time, the proposal has to be commercially viable, sustainable and involve relatively low risks. Good programs lower the risk of the portfolio, increase the net interest margin and create a significant value proposition for the company. Innovating means you are de-risking yourself, trying new things and thinking in a way which many others don’t. It may be complicated at first but when it gets going it works fantastically and the value proposition is significant.
‘The proposal has to be commercially viable, sustainable and involve relatively low risks.’
What is innovative about this approach?
In India, 70% to 75% of agricultural credit goes to the growing of the crops while there is very little long-term credit for capital formation in agriculture. Bankers tend to say, I give money for crops, I give money for poultry, I get my money in 90 days or one year. An irrigation system will take three to four years to repay and therefore becomes a long-term credit, which is generally avoided in agriculture.
Agriculture is one big ecosystem requiring different types of financing.
Why is it important to expand the range of credit in agriculture?
Agriculture is one big ecosystem with many different players who require different types of financing. Access to credit therefore has many components. Crop loans are for one year whereas credit for irrigation could range from three to seven or even ten years. In India we have a legislation that 18% of a bank’s credit has to go to agriculture, which enables thousands of industries. To feed the population, we have to grow crops, produce fertilizer, provide seeds, drive the harvesting and processing industry and make good use of water and pumping systems.
‘In India there is very little long-term credit for capital formation in agriculture.’
What is the future potential of this system?
Today, some 45% of Indian agriculture uses irrigation. Out of these 45%, only 5-7% is water-efficient micro irrigation. The potential is enormous. In general, we start out approaching farmers who already use irrigation and try to make it more efficient. Water saved can be used by other farmers. In some areas where water isn’t available even in the ground, it needs to be transported through a lift irrigation mechanism or through a canal system. There again I see micro irrigation and solar systems can play a very important role.
What type of investments will be required?
The irrigation mechanism we are talking about here is roughly USD 1000 per system. To replace the pump sets we need approximately USD 120 bn. And while mitigating climate change, at the same time we improve the livelihood of the people – so that whatever we are doing is sustainable.
‘Today, 45% of Indian agriculture uses irrigation. Out of these 45%, only 5-7% is water-efficient. The potential is enormous.’
What is the role funds like GCPF should play in the area?
Dedicated climate funds need to provide long-term credit, thereby enabling banks to provide this sort of financing to farmers. Also, both tenure and availability of credit for new technologies needs to be augmented, which is somethings these funds could easily do. Take efficient irrigation systems, for instance. Banks don’t do it, because they are not technology specialists. By providing an optimal combination of credit and technological intervention which is also supported – like in the case of GCPF Technical Assistance – it would be possible to address many more solutions.
Do you see a global role for climate finance?
Absolutely. Climate funds could team up to create a credit guarantee fund, for instance. This could enable innovative players to create new models which other institutions can then follow, thereby increasing the outreach. Climate funds should address the biggest human-made contributor to climate change besides manufacturing: agriculture. That should be the focus. We all need to eat. Every input is energy. The output is energy. If we are working in this energy field, the biggest area where energy efficiency can be brought is agriculture.