Low-cost, cashless loans for smallholder farmers: the case of FarMart in India

In April 2018, FarMart expanded on its original leasing model by adding a digital credit service to its app, specifically aimed at providing low-cost loans for financially underserved smallholders (with less than 2 hectares of land) that sought access to formal credit to purchase agricultural inputs. This service expansion was a direct result of the strong market potential that FarMart’s founders saw in servicing the growing demand for small-scale agricultural credit in India, in a context such as that of India where less than 20 percent of 430 million smallholders have access to formal financing, and the total annual demand for unserved credit is estimated at US$ 200 billion.

The proprietary credit underwriting algorithm developed by FarMart allows the organization to assess the creditworthiness of loan applicants on the basis of 50 alternative soft and hard data points, which strongly reduced the credit risk faced by the platform when lending to a (perceived) risky sector such as small-scale agriculture. The data points are gathered along four main categories: farmer’s personal information; supplementary income of the family; details of their agricultural profile such as extent and ownership of the land; and income diversification. Credit amounts range from US$ 130 to 670, with loan approval times ranging from 1 to 3 days. Loans provided through the FarMart app are flexible, based upon the specific agricultural cycle of the crops cultivated by the farmers, and also offer a series of flexible repayment options such as bullet repayments[1].

When a credit application is approved, no amount of physical cash is actually handed to borrowers, which basically eliminates the risk of misuse and diversion of the funds provided. Farmers receive instead a digital voucher on their mobile phone (in the form of a 10-digit number) which they can use to purchase high-quality seeds, fertilizers, and other inputs from a network of physical retail merchants. The diagram on the left provides a more detailed explanation of how the FarMart input credit service works. Merchants can use the app to better track their clients’ needs, to refine their offer and increase their sales, while reducing prices. They can also send messages to farmers in the network through the app, to alert them of inventory restocking, new products, and discounts. Farmers benefit from accessing low-cost credit that allows them to obtain high-quality inputs, from a network of verified retailers.

Results of the initial pilot of the credit service have been promising. In its first year of its operations, FarMart provided loans to over 200 farmers, for a total amount of US$ 20 000 in credit, with a non-repayment rate of less than 1 percent. FarMart has attributed this low rate of non-repayment to the elimination of two core factors of credit risk: lack of credit information on clients and misuse of funds. An initial results’ assessment saw farmers’ productivity increase by about 15-20 percent thanks to the service. FarMart’s objective is to scale up the product to a target population of 100 000 farmers, with US$ 13 million in credit disbursed. One of the goals of the platform is to leverage its network of merchants to obtain better bargaining power with input supply companies, to secure bulk purchases at reduced prices. At the end of 2020, FarMart became part of the portfolio of the Catalyst Fund, a global accelerator for fintech startups, which supported the company in refining its ICT capabilities. Although the platform is currently operational in the State of Uttar Pradesh, it seeks to expand to other Indian States such Madhya Pradesh, Rajasthan and Bihar.

[1] A bullet repayment is a lump sum payment made for the entirety of an outstanding loan amount, usually at maturity.