ASSOCHAM calls for a Food Devp Bank to help FPI

New Delhi, June 2: The Associated Chambers of Commerce and Industry (ASSOCHAM) today asked the government to set up a Food Development Bank of India (FDBI) which will help the Food Processing Industry (FPI) in overcoming its on-going tight liquidity problems.

An ASSOCHAM paper on Indian FPI pointed out that the industry's access to institutional finance for term loans and working capital requirement have been limited in the past and continues to be restricted even now.

The Chamber has asked the government to evolve a farmer-friendly credit system by opening up a FDBI that can lend to small farmers at concessional rates with timely processing their loan applications expeditiously.

ASSOCHAM President Anil K Agarwal said that the FDBI should be urgently created due to the increasing importance of the FPI which alone accounts for 6 per cent of the GDP.

''India's fast growing consumer market are slated to include 500 million consumers by 2010, with the FPI expected to treble from 6 per cent to 20 per cent with its share in the global agro trade is expected to rise 3 per cent,'' Mr Agarwal said.

The Chamber believes with the creation of FDBI, development of food processing will spur agricultural diversification for which the investment climate needs to be made more conducive.

So far, between August 1991 and January 2006 cumulative FDI in food processing has been of the order of 1,177 million dollars, representing only 3.6 per cent of the total FDI inflow.

In terms of sector contribution to FDI, it ranks seventh, one place above the drugs and pharmaceuticals, the paper said.

The Chamber is of the view that an important contributing factor to inadequate development of food processing in India has been industry's inability to access institutional finance for term loans and working capital.

Within the priority sector lending target of 40 per cent, the banks are mandated to lend 18 per cent to direct and indirect agricultural activities. Food Processing finds place within a further subcategory of indirect lending of 4.5 per cent.

Banks oversubscribe this sub-category as even agriculture inputs are a part of this sub-category.

It further feels that inherent reasons for the reluctance of financial institutions to extend credit to food processing industry are, large number of small and medium sized companies, a majority having stand-alone operations and no control on raw material base/ reliant on others for marketing/processing.

Other reasons include uncertainties in availability of raw materials, seasonal nature of food processing, relatively low market demand for processed food products, perishable nature of the raw material, forcing processing in a short period or incurring huge storage costs and machinery and equipment lying idle for a good part of the year, as also inventory maintenance beyond peak season is expensive.

All these factors add to increasing the risk perception of banks and lead to hesitation in extending credit to this sector.

It also suggested that to further strengthen backward linkages between the processing industry and the farmer, existing institutions local bodies, cooperatives and self-help groups should work in unison.

There is an equally urgent need to develop forward linkages of farmers and processors with consumers to remove intermediaries and reduce high cost to the consumer and low returns to the farmer/ processor.

Creating market-driven linkages across the entire supply chain, integration through partnerships and effective linkages, rather than do-it-alone or by building infrastructure alone, is a principal necessity, the paper added.

UNI