Financing Smallholder Agriculture: An Experiment with Agent-Intermediated Microloans in India Pushkar Maitra, Sandip Mitra, Dilip Mookherjee, Alberto Motta and Sujata Visaria 2nd ATE Symposium, UNSW, Sydney 15 Dec 2014 MMMMV (Dec 2014) Financing Smallholder Agriculture Dec 2014 1 / 32
Motivation How can we provide finance to poor farmers? Institutional finance does not reach smallholder agriculturalists MMMMV (Dec 2014) Financing Smallholder Agriculture Dec 2014 2 / 32
Motivation How can we provide finance to poor farmers? Institutional finance does not reach smallholder agriculturalists lack of collateral poor information and enforcement capacity high transaction costs MMMMV (Dec 2014) Financing Smallholder Agriculture Dec 2014 2 / 32
Motivation How can we provide finance to poor farmers? Institutional finance does not reach smallholder agriculturalists lack of collateral poor information and enforcement capacity high transaction costs Poor farmers forced to rely on credit from informal lenders at high cost Prevents poor farmers from diversifying into high-value cash crops Restricts agricultural growth MMMMV (Dec 2014) Financing Smallholder Agriculture Dec 2014 2 / 32
Motivation How can we provide finance to poor farmers? Institutional finance does not reach smallholder agriculturalists lack of collateral poor information and enforcement capacity high transaction costs Poor farmers forced to rely on credit from informal lenders at high cost Prevents poor farmers from diversifying into high-value cash crops Restricts agricultural growth Major development challenge: can financial institutions lend profitably to productive small farmers? MMMMV (Dec 2014) Financing Smallholder Agriculture Dec 2014 2 / 32
Motivation “Traditional” microcredit does not solve the problem. Microcredit has expanded credit access for the poor... MMMMV (Dec 2014) Financing Smallholder Agriculture Dec 2014 3 / 32
Motivation “Traditional” microcredit does not solve the problem. Microcredit has expanded credit access for the poor... generated high repayment rates MMMMV (Dec 2014) Financing Smallholder Agriculture Dec 2014 3 / 32
Motivation “Traditional” microcredit does not solve the problem. Microcredit has expanded credit access for the poor... generated high repayment rates ...but has not successfully promoted entrepreneurship, risk-taking and borrower incomes (Banerjee et al 2013, Fischer 2013, Karlan & Zinman 2011) MMMMV (Dec 2014) Financing Smallholder Agriculture Dec 2014 3 / 32
Motivation “Traditional” microcredit does not solve the problem. Microcredit has expanded credit access for the poor... generated high repayment rates ...but has not successfully promoted entrepreneurship, risk-taking and borrower incomes (Banerjee et al 2013, Fischer 2013, Karlan & Zinman 2011) It has not financed agricultural working capital in developing countries. MMMMV (Dec 2014) Financing Smallholder Agriculture Dec 2014 3 / 32
Motivation Why Not? Traditional microcredit motivated by need to ensure high repayment rates high frequency (weekly/bi-weekly/monthly) repayment intensive peer monitoring and MFI monitoring to limit risk-taking MMMMV (Dec 2014) Financing Smallholder Agriculture Dec 2014 4 / 32
Motivation Why Not? Traditional microcredit motivated by need to ensure high repayment rates high frequency (weekly/bi-weekly/monthly) repayment intensive peer monitoring and MFI monitoring to limit risk-taking But these rule out scope for financing agriculture long crop cycles high-risk MMMMV (Dec 2014) Financing Smallholder Agriculture Dec 2014 4 / 32
Motivation Our Question Is there an inevitable trade-o ff between selection/repayment incentives and financing productive and risky activities? MMMMV (Dec 2014) Financing Smallholder Agriculture Dec 2014 5 / 32
Motivation Our Question Is there an inevitable trade-o ff between selection/repayment incentives and financing productive and risky activities? OR MMMMV (Dec 2014) Financing Smallholder Agriculture Dec 2014 5 / 32
Motivation Our Question Is there an inevitable trade-o ff between selection/repayment incentives and financing productive and risky activities? OR Can one design an alternative lending mechanism that ensures appropriate borrower selection and repayment incentives? can be cost-e ff ective for lending institutions? MMMMV (Dec 2014) Financing Smallholder Agriculture Dec 2014 5 / 32
Motivation Our Approach: TRAIL We design and implement a new approach to financing smallholder agriculture MMMMV (Dec 2014) Financing Smallholder Agriculture Dec 2014 6 / 32
Motivation Our Approach: TRAIL We design and implement a new approach to financing smallholder agriculture Loans have certain features that encourage their use in agriculture MMMMV (Dec 2014) Financing Smallholder Agriculture Dec 2014 6 / 32
Motivation Our Approach: TRAIL We design and implement a new approach to financing smallholder agriculture Loans have certain features that encourage their use in agriculture 4-month durations (to match crop cycles) lumpsum repayments built-in crop insurance minimal monitoring by lender ‘low’ (18% p.a.) interest rate dynamic repayment incentives MMMMV (Dec 2014) Financing Smallholder Agriculture Dec 2014 6 / 32
Motivation Our Approach: TRAIL We design and implement a new approach to financing smallholder agriculture Loans have certain features that encourage their use in agriculture 4-month durations (to match crop cycles) lumpsum repayments built-in crop insurance minimal monitoring by lender ‘low’ (18% p.a.) interest rate dynamic repayment incentives borrower selection: a local intermediary recommends borrowers MMMMV (Dec 2014) Financing Smallholder Agriculture Dec 2014 6 / 32
Motivation Our Approach: TRAIL We design and implement a new approach to financing smallholder agriculture Loans have certain features that encourage their use in agriculture 4-month durations (to match crop cycles) lumpsum repayments built-in crop insurance minimal monitoring by lender ‘low’ (18% p.a.) interest rate dynamic repayment incentives borrower selection: a local intermediary recommends borrowers individual liability loans MMMMV (Dec 2014) Financing Smallholder Agriculture Dec 2014 6 / 32
Motivation Our Approach: TRAIL We design and implement a new approach to financing smallholder agriculture Loans have certain features that encourage their use in agriculture 4-month durations (to match crop cycles) lumpsum repayments built-in crop insurance minimal monitoring by lender ‘low’ (18% p.a.) interest rate dynamic repayment incentives borrower selection: a local intermediary recommends borrowers individual liability loans We call this the Trader Agent Intermediated Lending (TRAIL) scheme MMMMV (Dec 2014) Financing Smallholder Agriculture Dec 2014 6 / 32
Motivation Comparing TRAIL with GBL We conduct a field experiment to evaluate the TRAIL scheme... MMMMV (Dec 2014) Financing Smallholder Agriculture Dec 2014 7 / 32
Motivation Comparing TRAIL with GBL We conduct a field experiment to evaluate the TRAIL scheme... ...in comparison to a group-based lending (GBL) scheme MMMMV (Dec 2014) Financing Smallholder Agriculture Dec 2014 7 / 32
Motivation Comparing TRAIL with GBL We conduct a field experiment to evaluate the TRAIL scheme... ...in comparison to a group-based lending (GBL) scheme The GBL scheme has the same features to encourage loan use in agriculture MMMMV (Dec 2014) Financing Smallholder Agriculture Dec 2014 7 / 32
Motivation Comparing TRAIL with GBL We conduct a field experiment to evaluate the TRAIL scheme... ...in comparison to a group-based lending (GBL) scheme The GBL scheme has the same features to encourage loan use in agriculture and also the “traditional” group-lending features MMMMV (Dec 2014) Financing Smallholder Agriculture Dec 2014 7 / 32
Motivation Comparing TRAIL with GBL We conduct a field experiment to evaluate the TRAIL scheme... ...in comparison to a group-based lending (GBL) scheme The GBL scheme has the same features to encourage loan use in agriculture and also the “traditional” group-lending features self-forming 5-member groups monthly group meetings savings targets joint liability loans MMMMV (Dec 2014) Financing Smallholder Agriculture Dec 2014 7 / 32
Experiment The Field Experiment We collaborated with a Kolkata-based micro-lender in two potato-growing districts in eastern India, to introduce MMMMV (Dec 2014) Financing Smallholder Agriculture Dec 2014 8 / 32
Experiment The Field Experiment We collaborated with a Kolkata-based micro-lender in two potato-growing districts in eastern India, to introduce TRAIL scheme in 24 randomly chosen villages GBL scheme in 24 randomly chosen villages MMMMV (Dec 2014) Financing Smallholder Agriculture Dec 2014 8 / 32
Experiment The Field Experiment We collaborated with a Kolkata-based micro-lender in two potato-growing districts in eastern India, to introduce TRAIL scheme in 24 randomly chosen villages GBL scheme in 24 randomly chosen villages We evaluate the impact of the loans on borrowers’ total borrowing, cultivation choices, output and value-added MMMMV (Dec 2014) Financing Smallholder Agriculture Dec 2014 8 / 32
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