Compendium Of Financing Options For The Food Processing Sector

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Compendium offinancing options for thefood processing sectorMinistry of Food Processing IndustriesGovernment of IndiaKnowledge PartnerNational Event Partner

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Compendium offinancing options for thefood processing sector2

Published for the Ministry of Food Processing Industries (MoFPI) by KPMGand Confederation of Indian Industry (CII)Without limiting the rights under the copyright reserved, this publication or any part of it maynot be translated, reproduced, stored, transmitted in any form (electronic, mechanical,photocopying, audio recording or otherwise) or circulated in any binding or cover other thanthe cover in which it is currently published, without the prior written permission of MoFPI.KPMG and CII.All information, ideas, views, opinions, estimates, advice, suggestions, recommendations(hereinafter ‘content’) in this publication should not be understood as professional advice inany manner or interpreted as policies, objectives, opinions or suggestions of KPMG andCII. Readers are advised to use their discretion and seek professional advice before takingany action or decision, based on the contents of this publication. The content in thispublication has been obtained or derived from sources believed by KPMG and CII to bereliable but MoFPI, KPMG and CII do not represent this information to be accurate orcomplete. MoFPI, KPMG and CII do not assume any responsibility and disclaim any liabilityfor any loss, damages, caused due to any reason whatsoever, towards any person (naturalor legal) who uses this publication.This publication cannot be sold for consideration, within or outside India, without expresswritten permission of MoFPI, KPMG and CII. Violation of this condition of sale will lead tocriminal and civil prosecution.MoFPI, Confederation of Indian Industry (CII) and KPMG 20173

Table of Contents1Executive Summary . 82Introduction to Financial Services in India . 1034562.1Flow of financing decision making for investors . 102.2Structure of Indian banking and allied sector . 11Credit for the Food Processing Sector . 123.1Overview of banking in India . 123.2Priority Sector Lending (PSL) . 133.3Credit flow from bank to food processing sector . 143.4Payments banks . 163.5Non – commercial bank sources of debt – NABARD . 183.6Non - commercial bank sources of debt - Rural Infrastructure Development Fund . 193.7Credit Facilities to Marketing Federations/Corporations (CFF) . 193.8Non – commercial bank sources of debt – SIDBI . 203.9Non – commercial bank sources of debt – SFAC . 21Equity in Food Processing . 224.1Equity assistance from Government through SFAC . 224.2Equity assistance from Government through NABARD . 234.3Equity assistance from Government through SIDBI . 24Financial Assistance from the Ministry of Food Processing Industries. 255.1Scheme of Mega Food Park . 255.2Cold chain . 255.3Food safety and quality assurance infrastructure . 265.4Related schemes from other agencies. 265.5Agro Processing clusters . 275.6Scheme for creation/expansion of food processing/preservation capacities . 275.7Scheme for creation of backward and forward linkages . 275.8Government schemes being implemented by NABARD . 28Accessing finance for a small business . 296.1Application for Loan . 306.2Receipt of accompanying documents. 306.3Evaluation of documents . 316.4Pre sanction visit . 316.5Title check, valuation, financial evaluation . 316.6Sanction . 316.7Documentation & disbursement . 316.8Bank loans under Pradhan Mantri Mudra Bank Loan Yojna (PMMY) . 324

6.9Approach for getting subsidy / equity from government bodies . 32A. Annexure. 34A.1 Reserve Bank of India –Sectorial Credit availability . 345

ForewordFood processing is considered as one of the fastest growing industries in India. Thegrowth of the industry is supported by the availability of a large raw materialproduction base. India is the largest producer of milk, bananas, mangoes, guavas,papaya, ginger, okra, second largest producer of wheat, rice, fruits, vegetables, tea,sugarcane and cashew nut and the third largest producer of cereals, coconut,lettuce, chicory, nutmeg, mace, cardamom and pepper globally.Given the natural supply advantage and a population of 1.3 billion people (that spenda high proportion of their disposable income on food), there is a potential to nurturemutually beneficial relationships with global food processing, food retail and relatedsupply chain organizations who could realize significant business growthopportunities in India, through new technologies, innovations and other methods ofvalue additions.Further, India's geographical location gives it a unique advantage when it comes toexports, having convenient connectivity to Europe, Middle East & Africa from thewestern coast, and Japan, Singapore, Thailand, Malaysia, Korea, Australia & NewZealand from the eastern coast.Food processing is a priority sector for the Indian Government, as well as one of thefocus sectors in the Make in India initiative. Further, the availability of affordablecredit and other fiscal incentives has also led to India being considered as one ofthe most favourable markets.In light of the above factors, and with total consumption of the food and beveragesegment in India expected to increase from US 369 billion to US 1.142 trillion by2025, output of the food processing sector (at market prices) is expected to increaseto US 958 billion for the same period. These estimates clearly evidence the vastmarket opportunity offered by the Indian food processing, food retail, transport,logistics and related infrastructure sectors to players in the food processing valuechain.We trust that this report would be a useful guide for international as well as domesticfood processing, food retail and related supply chain companies that are looking toinvest or expand their presence in India.6

PrefaceThe food processing sector is poised to grow over the next three to five years. This“Compendium of Financing Options for the Food Processing Sector” aims to discussthe most critical aspects of the business and illustrates the financing options for thefood processing sector.The first highlight of the report is an assessment of financing of the Food ProcessingSector by the commercial banks. While USD 53 billion credit limit was sanctionedby the commercial banking sector to the Food Processing Sector (as on December31, 2016), it was not sufficient in helping the food processing in achieving itspotential. Moreover the lending from commercial banks was skewed towardsprimary processing sub-sector (65% share) instead of the high value addingsecondary processing sub-sector, which is the actual profit earner for the economy.The report also brings forth some of India’s unique initiatives in financing agricultureand agri value chain by showcasing the financing options available from institutionslike the National Bank for Rural and Agricultural Development (NABARD) offeringabout UBD 2.08 billion specifically for food processing and related projects, SmallFarmers Agriculture- Business Consortium (SFAC), Small Industries DevelopmentBank of India (SIDBI), etc. It also provides detailed information on the initiatives andreforms being introduced by the Ministry of Food Processing Industries to boost thefood processing in the country through Pradhan Mantri Kisan Sampada Yojna, witha budget of INR 6000 crores (USD 900 million).The last but not the least, the report tries to capture the process flow that a smallinvestor has to follow in order to get bank finance and government subsidy, includingfinance under Pradhan Mantri Mudra Bank Yojna (PMMY). This should give thesmall investor an indicative frame work for preparations.Thus showcasing the full range of financing options available and also capturing theareas of weaknesses, the report attempts to provide a context to stakeholdersvisiting World Food India for their discussions with financial institutions at the event.7

1 Executive SummaryIndia’s food processing sector can be divided into (i) Primary Processing and (ii) SecondaryProcessing by levels of processing (a term interchangeable with value added) and they havediffering growth rates. The nature and quantum of their credit needs are also different. WhilePrimary processing sectors have been recipients of relatively easy banking lines, they alsoaccess national financial institutions and non-banking finance companies more routinely sincetheir business models are well set for years (example-sugar). This is not replicated for secondaryprocessing, which needs differentiated and more customized (or structured) products fromlenders. Juxtaposed is the relative growth rates of primary and secondary sectors (5% forPrimary versus 11% for secondary processing between 2014 and 2016 but projected to grow at6% and 15% in next 5 years) which will more developed product solutions for secondaryprocessing sectors.Based on Reserve Bank of India’s classification, total Credit Limits from banks to food processingcompanies (including beverages) as on December 2016 were USD 53 billion (CAGR of 8.2%between 2014 and 2016) but utilization was USD 31 billion (CAGR of 3.1% between 2014-2016)only. The numbers for Primary Processing companies were USD 34.5 billion and USD 21.6 billionand for secondary food processing were USD 18.6 billion and USD 9.7 billion respectively. Thegrowth rates for both Credit and Outstanding were higher for Secondary Processing.Assuming a growth rate of food processing sector at 8% in next five years, (15% for SecondaryProcessing), the credit needs will move at least at the same rate on a linear basis i.e. anincremental need of USD 4 billion per year (USD 2.8 billion for Secondary Processing). This isgoing to be a challenge for banks especially since food processing is not comprehensivelyincluded in Priority Sector Lending (PSL). While the challenge faced by the sector is lack ofstructured products for addressing special risks and demands, the challenge faced by banks isthe lack of focus (unlike agriculture).On the strategic side, the companies often struggle to get external capital and need serious handholding. Venture capital/private equity inflows to food processing are barely 2.5% of the totalinflows. There are very few dedicated venture capital/private equity funds at present but withthe resilience and sustained growth of food processing getting more apparent, these pools arebound to expand. Venture debt is another desirable source, which should be sought for thesector.Disaggregated production creates problems for processors. The Government is proactivelyaddressing it through National Bank for Agriculture and Rural Development (NABARD) andSmall Farmers’ Agribusiness Consortium (SFAC), which are developing Self Help Groups (SHG)and Farmer Producer Companies (FPO). Additionally, Small Industries Development Bank ofIndia (SIDBI) is available to address the all-important micro, small and medium enterprises, toimprove credit penetration to Small and Medium Enterprise (SME) processors.The Government has also created pools of capital for specific initiatives. For example, a pool ofINR 2000 crores for assistance to food parks is given to NABARD to manage. It also has a fundof INR 5000 Crores (USD 735 million), to support creation of infrastructure for storage ofagricultural commodities. SFAC helps farmer producer companies get loans up to INR 1 crore8

(150,000 USD) without security and food processors can utilize the scheme to strengthen theirsupply chain.In addition to these institutional sources of credit and equity, the Ministry has an umbrellascheme the Pradhan Mantri Kisan Sampada Yojna (PMKSY) under which there are a range ofsubsidy schemes to promote food processing. Under the scheme, the Ministry is providingsubsidy assistance to establishment of processing infrastructure, logistics and storageinfrastructure, backward linkages and development of farmer producer organisations, testinfrastructure, research and development and training and development. There are subsidiesavailable primarily for storage and logistic infrastructure and some components of processingon a sector specific basis from other Government departments.This report presents various existing and potential sources of financing for food processingsector and opens up discussion on more innovative financing solutions for the sector.9

2 Introduction to Financial Services in India2.1Flow of financing decision making for investorsInternational investorDomestic Investor (Non-Startup)Check with home country bankerfor correspondent bank in IndiaCheck with existing bankersfor financing optionsFunding from family andfriendsThrough correspondent bankunderstand the financingoptionsUnderstand through bankersall optionsFunding limited MSME optionsEvaluate and plan organisationstructure and financial planEvaluate and plan organisationstructure and financial planAfter reaching critical mass getaccess to commercial banksDomestic Investor (Start-up)Overall financial sector structureEquityPrimary Regulator – Securities &Exchange Board of India (SEBI)Primary Stock markets – BombayStock Exchange (BSE) & NationalStock Exchange (NSE)Private Equity / Venture Capital / AnglefinancingEquity and allied sector discussed in alater segmentDebtPrimary Regulator – Reserve Bank ofIndia (RBI)Scheduled commercial banksNon- Bank InstitutionsSpecial purpose institutionsDebt and allied sector discussed innext segment10

2.2Structure of Indian banking and allied sectorReserve Bank of India(The Central Bank)BanksNational Bank forAgriculture & RuralDevelopment(NABARD)Financial InstitutionsPrivate Non-BankingFin. Inst.All India levelInstitutionsState level institutionsSmall FarmersAgribusinessConsortium (SFAC)Scheduled CommercialBanks (SCBs)Public sector banksPrivate sector banksCooperative CreditInstitutionsUrban CooperativesRural CooperativesRural regional banksThe Indian Banking and Allied sector is divided into two parts, the Scheduled Commercial Banks(SCBs) and the Non-Banking Financial Institutions (NBFCs). As compared to SCBs, the NBFCsdo not provide accounts that are equivalent to Savings or Current accounts in a bank. Since suchdemand deposits are not allowed to the NBFCs, their access to funds is far lower than banks.Moreover, since such accounts are the lowest cost source of funds, the cost of funds for NBFCsis also higher than banks. However, since the regulations governing NBFCs are less stringent ascompared to banks, they operate in areas where the banks do not reach or in functions whichbanks do not wish to directly service.In the Indian market there two organisations which have been specifically created to help growagriculture and allied activates. These entities are –1. In the banking domain NABARD (National Bank for Agriculture & Rural Development)2. In the NBFC domain SFACIn addition, there is Small Industries Development Bank of India (SIDBI) which focusses on small,micro and medium scale enterprises. This report will first discuss the financing option for debtfunding from all types of institutions followed by a discussion on equity options and then thesubsidy options.11

3 Credit for the Food Processing Sector3.1Overview of banking in IndiaIn the last nine years, banks have seen a massive growth in credit offtake which has risen fromUSD 428 billion (FY07) to USD 1,016 billion (FY16).Credit Offtake (USD billion)120010009699949831016FY 12FY 13FY 14FY 15FY 16864800600984587602FY 08FY 096844284002000FY 07FY 10FY 11Credit OfftakeSource: Reserve Bank of IndiaThe Government is pushing to increase the penetration of banking into the rural and semiurban areas and also pushing to provide options suitable for the economically weaker sectionsto join the banking network.Deposit Growth (USD billion)16001400100060013131349FY 12FY 13FY 14117412008001342819857FY 08FY 0914791466FY 15FY 169775974002000FY 07FY 10FY 11Deposits (USD billion)Source: Reserve Bank of IndiaOverall deposits also show a strong growth.12

3.2Priority Sector Lending (PSL)The problem in India has been of uneven distribution of credit. In order to address this issue,the Government has PSL norms. As per guidelines of RBI, all banks need to lend 40% of theirportfolio to priority sectors which are – Agriculture Micro, Small and Medium Enterprises (MSME) Export Credit Education Housing Social Infrastructure Renewable EnergyOut of the 40% of total credit that has to be given to priority sectors, 18% is earmarked foragriculture. Loans to food and agro-based processing units and cold chain have beenclassified under agricultural activities for PSL as per the revised RBI guidelines issued in April2015. Under PSL following are the guidelines for lending to food processing sector –PSL other than farm credit under the 18% marked for agricultureAgriculture Infrastructure Ancillary activitiesLoans for construction of storage facilities(warehouses, market yards and silos)including cold storage units/ cold storagechains designed to store agricultureproduce/products, irrespective of theirlocation Soilconservationdevelopmentandwatershed Plant tissue culture and agri-biotechnology,seed production, production of biopestici

“Compendium of Financing Options for the Food Processing Sector” aims to discuss the most critical aspects of the business and illustrates the financing options for the food processing sector. The first highlight of the report is an assessment of financing of the Food Processing Sector by the commercial banks.

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