Loans to farmers are at a record high. But can fintech firms keep risk in check?

Temasek-backed StarAgri, a full-stack agritech platform that typically offers loans to farmers against their agricultural stocks or receivables, is now providing smaller-ticket loans to marginal farmers through agents for purchasing raw material such as seeds, fertilizers, and pesticides.

Such input financing is risky as it does not involve any collateral that can be adjusted against the loan in case of default and is typically offered based on guarantees from other farmers or agents.

StarAgri, which has built a ₹300-crore portfolio of input financing by privately testing the offering over the last 2 years, plans to digitally map farms to analyse cash flows and predict crop outcomes.

“It (data mapping) allows us to analyse their cash flow, predict the type, quantity, and quality of crops they will have in the next 90 days, and estimate their cash position after 90 days," said Amith Agarwal, founder and chief executive of Star Agriwarehousing and Collateral Management Ltd, or StarAgri.

For this, the IPO-bound StarAgri is registering farmers on its platform to provide advisory and financing services to them. While it currently has registered around 80,000 farmers, StarAgri plans to double this number by 2025.

The company last month formally rolled out input financing as a product under its non-banking financial company, Agriwise Finserv, to provide loans to small farmers. It is also preparing to file a draft red herring prospectus for a public market listing in about two months, Agarwal said.

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Agri loans soar

Loans to farmers from the traditional banking ecosystem have hit record highs. Citing data from the National Bank for Agriculture and Rural Development (Nabard), Reserve Bank of India deputy governor Swaminathan J. recently said in a statement that institutional credit to agriculture had reached an all-time high of ₹25.1 trillion.

But he also pointed out that traditional lending practices have limitations in meeting the needs of the agriculture sector. “Agriculture is inherently seasonal, and returns are often delayed or reduced. Innovative financial solutions are necessary—ones that are flexible and tailored to the specific needs of farmers," Swaminathan said.

In recent years, agri-fintech startups have stepped in to address this gap.

Ergos Business Solutions Pvt. Ltd, which is backed by Aavishkaar Capital, Chiratae Ventures, and Trifecta Venture Debt Fund, lends to small farmers by converting their grains into tradable assets. It offers credit against their stored produce.

Arya.ag, Samunnati Financial, and FarMart Service lend across the value chain, providing credit to processor firms, traders, and mandis (agriculture marketplaces such as the Agriculture Produce and Livestock Market Committee) against collateral such as farm stocks and receivables.

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Samunnati’s loan disbursements increased to ₹3,525.6 crore in 2023-24 from ₹2,775.8 crore in the previous financial year. Arya’s loan disbursals in FY23 grew to ₹1,015.76 crore through its fintech platform, Aryadhan, as per the latest data available.

StarAgri’s loan portfolio comprises ₹16,000 crore in commodity-based financing (loans against stocks), and about ₹1,000 crore in procurement-based financing (loans against receivables). It has added ₹300 crore in loans through its new input-based financing product.

While StarAgri lends as little as ₹1 lakh to small farmers, banks prefer lending a minimum of ₹1 crore.

“Even within their agri portfolio, traditional banks have an unstated preference to fund agri (small and medium enterprises) and processors over farmers," said Satya Sagar, principal at agritech-focused venture capital firm Omnivore. “Even those that have decent credit history and income streams are pushed to then borrow from informal sources."

One reason for the increasing farm loans is RBI’s priority sector lending mandate that requires banks to extend a certain percentage of their loans to critical sectors such as agriculture. But recovering the loans continues to be a risky proposition.

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Can fintechs solve for credit risk?

For decades, the Indian farming sector has struggled with mounting bad debt. As of March, non-performing farm loans, or farm loans not repaid, accounted for 6.5% of total bad loans, according to recent RBI data.

Government loan waiver schemes have compounded the issue, as farmers halt repayments in anticipation of such policies, adding pressure on banks already burdened by bad debt. Most recently, in June, the Telangana government announced a loan waiver of up to ₹2 lakh per farmer, benefiting nearly 4 million farmers at a cost of around ₹31,000 crore to the state treasury.

Meanwhile, many agritech firms that attracted significant capital during the 2021-2022 funding boom are now struggling to scale their initial models.

“The purchasing power of the average farmer is quite limited, which has created challenges related to scaling," said Anand Chandra, co-founder and executive director of Arya. “Mechanization, which we expected to grow, hasn’t been widely adopted as it comes at significant cost, and there’s a minimum scale at which it becomes profitable or yields dividends."

As a result, most agritech companies in India are yet to turn a profit. Apart from StarAgri and Arya, many highly valued venture capital-backed players—such as DeHaat, WayCool, Ninjacart, Agrostar, and Absolute Foods—continue to operate at a loss.

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Arya saw a 49.48% year-on-year revenue increase to ₹290 crore in FY23, while its profit surged 11-fold to ₹7.58 crore. StarAgri’s revenue rose 81% to ₹709.5 crore as profit increased 96% to ₹37.6 crore in FY23.

To scale up, many agritech startups have ventured into lending to farmers.

“When agritechs began offering new products, one of the challenges we foresaw was adoption, particularly the availability of finance to pilot these initiatives," said Chandra.

Arya established an NBFC in 2023 to extend loans of ₹5-10 lakh to small farmers.

In August, Jai Kisan, a rural-focused fintech startup, also obtained an NBFC licence after acquiring a majority stake in Kushal Finnovation Capital, an NBFC specializing in supply chain financing for rural micro, small, and medium enterprises.

Jai Kisan has facilitated disbursals of over ₹6,000 crore since inception in 2017, with ₹3,000 crore in FY24 alone.

But the challenges in lending to small farmers, particularly in loan recovery, is also true for fintech lenders.

Farm income often suffers from factors such as heat waves, unseasonal rains, and rising raw material cost. Experts warn that startups offering loans to small farmers may struggle with loan recovery.

“Initially, the percentage of defaults doesn’t seem significant, which may appear promising. But once you scale and review your portfolio, you will notice that the percentage of defaults starts swelling," Chandra said.

Data mapping, a revolutionary technology in this space, could help mitigate such challenges. However, the technology is still in its nascent stage, with limited satellite data available to startups.

“While satellite data is starting to gain attention, its real impact will likely be seen in the next 3-4 years," said Vikram Gupta, founder and managing partner of IvyCap Ventures. “With more satellites focusing on specific crop data, we will begin receiving highly accurate information, which could mark a turning point and potentially cause a significant increase in agri-lending."