Contract farming generally involves a pre-agreed price between the company and the farmer, where the company supplies all the inputs required for cultivation and the farmer takes care of the land and labour supply.
A senior official with a public sector bank said that contract farming would also lead to a rise in exports. Many corporates are entering contract farming to fulfil their export obligations and avail of various benefits and subsidies from the central and state governments. It is believed that contract farming will double agricultural exports from India to $20 billion by 2010.
The cash flow is protected only if the farmer has a good quality crop and the final produce is supplied to the company which has tied up with the bank. Only nationalised banks have the reach to monitor these loans closely, he added.
Indian Overseas Bank Chairman and Managing Director S A Bhatt said, "There is a great future for contract farming. This is a win-win situation for all stakeholders. For the bank, the advantage is that recovery is assured."
IOB has signed an MoU with Mission Biofuels India recently for contract farming of jatropha for oil extraction. Under the MoU, the bank will extend loans up to Rs 25,000 to farmers for cultivation of jatropha at an interest rate of 10 per cent.
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The company will select the borrowers and provide them all required inputs with buyback arrangement of the produce.
Initially, the bank has disbursed loans to 25 farmers in seven districts of Tamil Nadu, Andhra Pradesh, Orissa, and Maharashtra and is likely to take this programme to other parts of the country in the coming years, Bhatt said.
The bank is likely to extend the scheme to other parts of the country in a phased manner, and has set a loan target of 20,000 farmers in the next two years.
State Bank of Mysore Managing Director P P Pattanayak said the bank sees a huge potential for this form of financing. The bank has tied up with Coimbatore-based Suguna Poultry Farm to finance contract farming initiatives.
He added that it is also in talks with three other companies for similar projects. SMB will provide technical expertise to farmers, and finance up to 75 per cent of capital expenditure and 80-85 per cent of working capital. The bank has set a target of Rs 30 crore in loans towards this project alone.
ICICI Bank, which pioneered contract farming in India, started this module in early 2000. The bank joined hands with corporates like Hindustan Levers Ltd (HLL) and Rallis to push its agricultural lending targets.
According to sources, the bank is planning to finance contract farming across the country so that the systemic risks of being only in a particular area and a single crop are mitigated.
The bank is tapping both corporates and non-government organisations for the contract farming model. The country's largest private bank is also looking at lending to plantation, dairy and seed companies, among others, through the contract farming model.
He added that for contract farming to be successful, it should take into account the aspects of selection of crops for contracting, development of quick and effective contract enforcement and dispute resolution system, limiting fiscal risks to the state government, limiting number of parties in a contractual arrangement, and developing farmer organizations' capability to contract with sponsors with a view to reducing transaction costs, besides increasing information flow and improving the negotiation advantage of farmers.