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Credit Guarantee Scheme for e-NWR based pledge Financing

Introduction

The Credit Guarantee Scheme for e-NWR based pledge financing is designed to provide easier access to credit for farmers who may not have conventional forms of collateral like land or other assets. The scheme facilitates the creation of an electronic warehouse receipt, making it possible to pledge agricultural produce stored in warehouses as security for loans. This initiative is a part of India’s broader goal to reform agricultural financing and improve the overall efficiency and transparency of the agricultural value chain.

What is e-NWR?

e-NWR (Electronic Negotiable Warehouse Receipt)

An e-NWR is a digital document issued by a licensed warehouse acknowledging the receipt of agricultural commodities. It serves as a proof of ownership and can be used as a negotiable instrument. This electronic system allows farmers to pledge their produce stored in warehouses to secure financing without needing to physically transport their crops to banks or other financial institutions.

Key Features of e-NWR:

  • Digitalization: The process is entirely electronic, reducing the chances of fraud or theft.

  • Negotability: It can be traded, used for collateral, or transferred to others, similar to physical receipts.

  • Transparency: It provides a transparent and standardized method of proving ownership and the quality of agricultural produce.

  • Security: Reduces the risks associated with handling and transporting physical goods.

Objectives of the Credit Guarantee Scheme for e-NWR Based Pledge Financing

The scheme was introduced to address several challenges faced by farmers in accessing timely and adequate credit. The key objectives are:

  1. Facilitate Credit Access:

    • The primary goal is to provide easy access to finance for farmers by allowing them to use their agricultural produce as collateral. This helps overcome the lack of physical collateral in rural areas.

  2. Increase Financial Inclusion:

    • By enabling farmers and FPOs to access credit against their produce, the scheme aims to bring more rural farmers into the formal financial system.

  3. Boost Agricultural Financing:

    • The scheme encourages the use of warehouse receipts as collateral, leading to the formalization of agricultural financing, which helps strengthen the overall agriculture sector.

  4. Improve Liquidity:

    • Farmers often face liquidity issues due to delayed payments for their produce. This scheme helps them access working capital by pledging their stored produce.

  5. Promote Agricultural Storage and Warehousing:

    • The scheme encourages the creation and use of certified and licensed warehouses, ensuring better storage conditions for agricultural commodities and reducing post-harvest losses.

Key Components of the Scheme

  1. Eligibility:

    • Farmers: Individual farmers who produce agricultural commodities.
    • Farmer Producer Organizations (FPOs): Groups of farmers working together to enhance their bargaining power and access to markets.
    • Cooperatives: Registered cooperatives that deal in agricultural goods.
    • Banks and Financial Institutions: These entities provide loans based on e-NWRs, with a guarantee against defaults.

  2. Pledge Financing:

    • The e-NWR can be used as collateral for loans, and financial institutions can provide funds to the farmers or FPOs based on the value of the pledged goods. The amount of credit extended depends on the quality, quantity, and market value of the pledged produce.

  3. Credit Guarantee Mechanism:

    • A Credit Guarantee Fund is set up by the government to cover a portion of the risk to financial institutions providing loans against e-NWRs. This provides assurance to lenders, thus encouraging them to offer credit to farmers.
    • The National Bank for Agriculture and Rural Development (NABARD) and the Small Farmers’ Agribusiness Consortium (SFAC) oversee the implementation of this scheme.

  4. Warehouse Certification:

    • The warehouse must be licensed under the Warehousing Development and Regulatory Authority (WDRA). This ensures that the goods stored are of a certain quality and can be used as acceptable collateral.

  5. Repayment Terms:

    • The loan repayment is typically linked to the sale of pledged agricultural produce or other mutually agreed terms, allowing farmers to repay loans once their produce is sold.

Process of Using e-NWR for Pledge Financing

The process of using an e-NWR for pledge financing is as follows:

  1. Storage of Produce:

    • Farmers store their agricultural produce in a licensed warehouse, which issues an e-NWR for the stored goods.

  2. Loan Application:

    • The farmer or FPO approaches a bank or financial institution with the e-NWR to apply for a loan. The e-NWR acts as a proof of ownership and the value of the stored goods.

  3. Loan Sanctioning:

    • The bank or financial institution verifies the e-NWR and provides a loan based on the value of the pledged produce. The loan amount is generally up to 75-90% of the market value of the stored goods.

  4. Loan Disbursement:

    • Once the loan is approved, the funds are disbursed to the borrower, and the e-NWR is retained by the lender until the loan is repaid.

  5. Repayment:

    • After the produce is sold, the farmer repays the loan, and the e-NWR is released, allowing the borrower to retrieve their goods.

Benefits of the Credit Guarantee Scheme

  1. Improved Credit Accessibility:

    • The scheme provides a straightforward way for farmers to access credit, especially those who do not have land or other assets to offer as collateral.

  2. Reduced Risk for Lenders:

    • The credit guarantee provided by the government reduces the risk for financial institutions, making them more likely to lend to farmers.

  3. Encouragement for Modern Warehousing:

    • The requirement for warehouses to be certified by the WDRA encourages better storage facilities, which can reduce losses and improve post-harvest management.

  4. Increased Liquidity for Farmers:

    • The scheme addresses the liquidity issues faced by farmers, especially during off-seasons when they might need funds for daily expenses or to purchase inputs for the next cycle.

  5. Market Linkages:

    • Farmers can leverage the scheme to sell their produce at better prices and access markets through FPOs, which are often better equipped to handle marketing and distribution.

Challenges in Implementation

  1. Awareness Issues:

    • Many farmers, especially in remote areas, are not aware of the scheme and its benefits. Increased outreach and education are needed.

  2. Limited Availability of Warehouses:

    • While the scheme requires certified warehouses, there is still a shortage of such facilities in many rural regions, limiting the scheme’s reach.

  3. Infrastructure Constraints:

    • Lack of basic infrastructure like roads and transportation in rural areas can hinder the effective implementation of the scheme.

  4. Financial Literacy:

    • Many farmers lack the financial literacy required to understand the loan process, interest rates, and repayment terms, which can lead to defaults.

Relevance for UPSC Aspirants

The Credit Guarantee Scheme for e-NWR based pledge financing is highly relevant for UPSC aspirants, especially in the context of:

  • General Studies Paper II: Government policies and interventions for development in various sectors, including agriculture.
  • General Studies Paper III: Economic development, with a focus on agricultural finance, rural development, and financial inclusion.
  • Essay Writing: Topics related to agricultural reforms, financial inclusion, and rural development.
  • Geography and Agriculture: Understanding the logistics of agriculture, warehousing, and credit mechanisms in India.

Conclusion

The Credit Guarantee Scheme for e-NWR based pledge financing is a vital step toward transforming agricultural financing in India. By facilitating easier access to credit and encouraging better storage practices, it helps improve the financial stability of farmers and agricultural institutions. For UPSC aspirants, understanding this scheme provides valuable insights into agricultural policies, financial inclusion, and rural development, making it an essential topic for examination preparation.

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