Project: Nurturing Resilient Agriculture and Livelihoods through Impact-Linked Finance
State of development: Current
Stage of development: Early stage
Stage notes: Early-Stage Design
Type of instrument — Impact Bond: No; Outcomes Fund: No; Social Impact Incentives (SIINC): No; Social Impact Guarantee: No; Payment-by-results (no pre-financing): No; Technical Assistance and Market-building program: No; Other: Yes
Rationale for using outcome-based finance: This project proposes an approach to foster collaboration between the public-private and philanthropic sectors. The aim is to facilitate impact-linked loan financing on a platform level, thereby minimizing transaction costs and providing cost-effective capital to FPOs. This initiative creates a mutually beneficial scenario for all stakeholders involved. Impact investors gain access to expanded business prospects while FPOs and farmers secure affordable capital including technical assistance. Also, philanthropic contributors achieve substantial leverage on nvestments, simultaneously fostering positive systemic and cultural shifts toward the adoption of sustainable agricultural practices. Furthermore, the project's success in showcasing proof of concepts will establish a standard and instill the necessary market confidence. This could prompt various stakeholders such as banks, NBFCs, impact investors, and DFIs to integrate these methods into their lending strategies with traditional approaches. Consequently, this initiative holds the potential to enrich financing landscape for FPOs by substantially enhancing their access to affordable capital.
Key challenges to launch: "In the realm of climate-agriculture intersections in underserved markets, adoption of innovative business models faces hurdles, due to the slow-paced acceptance and economic constraints experienced by farmers. Traditional funding sources struggle due to inherent risks. This underscores the significance of blended finance structures. These can alleviate risks for commercial investors and lower interest costs for FPOs, cultivating fertile ground for FPOs and farmers to prosper.
Key challenges impeding progress include the high design costs of outcome funding tools, inadequate demand for blended finance among farmers, the dilemma of balancing commercial returns with social impact, steep interest rates, and the challenge of collateral, which is often unattainable for FPOs. Additionally, default rates pose a concern in tier 2 and below markets with limited paying capacity. To address these, we're developing a platform employing a capital-plus strategy. However, there are initial design expenses, and we must persuade partners of its efficacy"
Social/developmental challenge: The program's Implementation Model addresses critical market failures for individual farmers who struggle with limited access to resources, markets, and affordable credit, leaving them economically vulnerable and unable to integrate into agricultural value chains. In addition, climate change adds to their challenges, with erratic weather patterns and environmental degradation undermining productivity. The program's innovative approach combines renewable technology and sustainable practices to bridge these gaps. By offering training, awareness campaigns, and outcome-based incentives through impact linked loans to Farmer Producer Organizations (FPOs), the approach combines technical assistance with financial assistance. Simultaneously, it recognizes climate impact by promoting climate-resilient practices like drip irrigation and solar power. This holistic strategy not only empowers farmers economically but also enhances their climate resilience, fostering a more sustainable and adaptive agricultural sector.
Expected intervention model: The Outcomes-Based Funding project seeks to address the pressing issues confronting small and marginal farmers in India, constituting 85% of the agricultural holdings. These farmers grapple with limited access to crucial resources, viz., markets, and affordable credit, compounded by the challenges of climate change that undermines their productivity. The project proposes a comprehensive solution that combines renewable technology and sustainable agricultural practices to bridge these gaps. It introduces an innovative financing mechanism, impact-linked loans, as a core component. This mechanism operates by initially providing loans with lower interest rates that effectively function as grants. These loans are tied to the actual outcomes achieved by Farmer Producer Organizations (FPOs) in terms of sustainable agricultural practices. The approach shifts the focus to outcomes-driven support, ensuring that resources are directed where they truly make a difference. It incentivizes performance, encouraging FPOs to optimize sustainable practices and resource utilization. Importantly, it aligns risk, as FPOs are held accountable for repayment only if they achieve the expected impact. The project empowers small farmers economically and ensures FPOs sustain themselves for scalable impact. It's a holistic strategy aimed at fostering a more sustainable and adaptive agricultural sector in India.
Policy sectors — Employment and private sector development: No; Education: No; Social protection: No; Criminal justice: No; Health: No; Agriculture: Yes; Environment and climate change: Yes; Water, Sanitation and Hygiene: No; Energy: No; Humanitarian: No; Early Childhood Education: No; Other: No
Primary SDG goal: 8,13
Country income classification of beneficiaries — Low-income: No; Lower-middle-income: Yes; Upper-middle-income: No; High-income: No
Notes: Data for this pipeline project was last updated in March 2024
Delivery location: India