Understanding Financial Challenges in Farmer Producer Organisations
Farmer Producer Organizations (FPOs) have emerged as a key strategy for improving the livelihoods of small and marginal farmers in India. However, while their structural model offers collective bargaining power, FPOs often face significant challenges in accessing and managing finance. This blog explores these financial issues through the case of Sahyadri Farms, one of India’s most successful FPOs based in Nashik, Maharashtra.
Limited Access to Capital
One of the fundamental issues FPOs face is the limited ability to raise capital under current legal frameworks. According to the provisions of the Companies Act, Farmer Producer Companies (FPCs) struggle to attract external private investment, and every shareholder has only one vote, regardless of the amount of their investment.
Sahyadri encountered this challenge when it transitioned from a proprietary firm to an FPC. Financial institutions viewed the new structure as high risk. For instance, Axis Bank, which had earlier financed the proprietary firm, withdrew its support following the legal restructuring.
Role of Promoter Capital in Building Trust
To address the financing gap and demonstrate commitment, Vilas Shinde and his family personally contributed 50% of the initial capital required by Sahyadri Farms. Despite the regulatory restriction that limited voting rights to one per member, this personal investment sent a clear message to lenders and stakeholders about the seriousness and credibility of the initiative.
This move helped establish initial financial trust, enabling Sahyadri to secure working capital support from DCB Bank in 2014. This early support played a crucial role in stabilizing the organization’s operations during its transition phase.
Small-Scale Capital Contributions from Members
Beyond promoter funding, Sahyadri also mobilised capital directly from its farmer-members. A portion of the revenue, approximately ₹1–2 per kilogram of produce supplied, was deducted and pooled into a collective fund. Over five to six years, this approach generated ₹55–60 crore in capital, including share premium.
This model provided working capital while strengthening ownership and participation among members. Additionally, it also helped build a reserve base that could be used for future expansion or operational needs.
Accessing International Development Finance
As Sahyadri Farms scaled its operations and looked to invest in large-scale infrastructure, such as cold storage facilities, packhouses, processing units, and digital platforms, it needed access to long-term capital that was not readily available from domestic sources, especially under the constraints faced by FPOs in India.
To address this, Sahyadri successfully raised an External Commercial Borrowing (ECB) of €15 million (approximately ₹120 crore at the time) from the Netherlands Development Finance Company (FMO). This ECB came with a ten-year tenure and a fixed interest rate of 3.5%, which is relatively favorable compared to many domestic lending options for such organizations.
This infusion of funds enabled Sahyadri to:
- Expand and modernise its post-harvest infrastructure.
- Invest in processing units for value-added products, like ketchup, pulp, and purees.
- Strengthen its technology backbone to support traceability, logistics, and farmer advisory services.
- Improve working capital availability across its multiple entities.
Development finance institutions, such as FMO, typically invest in enterprises that create measurable social value. They are less likely to invest in FPOs due to perceived credit risk, lack of financial reporting standards, or regulatory complexity.
However, in this case, Sahyadri’s model of aggregating smallholder farmers and improving their incomes through better market access and value addition bagged them international investment
Investment in Business Diversification
Initially focused on grape exports, Sahyadri gradually expanded into processing and domestic retail. By 2021, processed products and domestic sales accounted for nearly 50% of total revenue. This diversification strategy reduced the organization’s dependence on a single commodity or export market and improved financial stability.
Diversified revenue streams also improved Sahyadri’s ability to manage seasonal fluctuations and maintain steady cash flows, some of the most important factors when accessing institutional finance.
Use of Technology for Operational Efficiency
Sahyadri Farms recognised early that improving the efficiency of its agricultural value chain would not only reduce operational costs but also enhance the financial viability of the organization. To achieve this, it partnered with and invested in agri-tech startups and in-house platforms focused on solving specific bottlenecks faced by smallholder farmers and the FPO itself.
The technology platforms that Sahyadri partnered with to streamline its value chain are:
- Vesatogo supports logistics and demand visibility for farmers.
- Emertech provides blockchain-based traceability, helping build trust with consumers and buyers.
- Sensartics offers weather and soil monitoring tools to improve crop management.
These technologies help reduce post-harvest losses, improve forecasting, and ensure traceability, all of which contribute to improved financial performance and risk management.
Conclusion:
While FPOs in India continue to face structural barriers in accessing finance, examples like Sahyadri Farms show that these can be overcome through a combination of leadership, innovation, and prudent financial management. Strengthening financial frameworks and enabling policy environments will be crucial for scaling such models and ensuring the long-term success of India’s FPO movement.
Some of the additional financing options for FPOs under government schemes-
| Function / Facility | Scheme Name | Eligible Borrowers | Credit Type | Max Guarantee Amount | Guarantee Coverage | Annual Guarantee Fee | Tenure |
|---|---|---|---|---|---|---|---|
| Institutional credit support to FPOs | Credit Guarantee Scheme for FPO Financing | Registered FPOs | Term Loan / Working Capital / Composite Loan | Rs. 1.50 crore | Up to Rs. 1 crore: 85% (Max Rs. 85 lakh) Above Rs. 1 crore: 75% (Max Rs. 1.5 crore) |
Up to Rs. 1 crore: 0.75% Above Rs. 1 crore: 0.85% (Max Rs. 1.7 lakh) |
Up to 5 years or loan tenure |
| Risk coverage for collateral-free loans | Same as above | Registered FPOs | Collateral-free loans | Rs. 1.50 crore | Same as above | Same as above | Same as above |
| Encourage ELIs to lend without security | Same as above | Registered FPOs | Fund-based only (No collateral or third-party guarantee) | Rs. 1.50 crore | Same as above | Same as above | Same as above |