Anda di halaman 1dari 5

Kachi – Aadat Line of business

This was a very traditional model where in the firm connected with the farmer depending on
the credibility of the farmer, provided short term loans to the farmers on interest rates ranging
from 15% - 18% and in return sought the assurance that the farmer would bring his produce to
the firm for sale after harvesting. The firm charged 2% on net value of sale from the Farmers.

The business model worked like this:

 Farmers took loans from the commission agent firms (Aarthiyas) on interest rates
ranging from 15% - 18% on the assurance that they would bring their produce to the
firm for sale.
 After the harvest the farmers brought their produce to the firm in Agricultural Produce
Market Committee (Mandi).
 When the farmer brought his produce to the Mandi, auction of his produce took place in
which different firms who were in Pakki – Aadat line of business and stock trading took
part.
 The firm who placed highest bid got the produce.
 Now the firm who had bought the produce on auction had to pay the full price of the
commodity + 2% commission on the Net Value of the produce to the firm from which it
had bought the commodity.
 The 2% commission paid by the buying firm was the income of the Kachi – Aadat firm.

This was how the Kachi – Aadat business worked.

Pakki – Aadat
Pakki – Aadat was a business line in the field of agro business. In this line of business, firm
instead of having direct connections with the farmers purchased agricultural commodities on
auction from different firms dealing in Kachi – Aadat line of business. The firms in Pakki – Aadat
business bought commodities from firms dealing in Kachi – Aadat line of business and sold
them to big industrial firms for a commission of 1%.

Aadat is a hindi term which means commission. Pakki – Aadat meant assured commission.
It was said so because firms had to just buy commodities on behalf of industrial houses with
which they had links, check the quality of the produce and transport the produce to the
industrial houses along with ensuring regular supply of the commodities. For this they got
assured 1% commission.

The business model worked like this:

 Farmers took loans from the commission agent firms (Aarthiyas) on interest rates
ranging from 15% - 18% on the assurance that they would bring their produce to the
firm for sale.
 After the harvest the farmers brought their produce to the firm in Agricultural Produce
Market Committee (Mandi).
 When the farmer brought his produce to the Mandi, auction of his produce took place in
which different firms who were in Pakki – Aadat line of business and stock trading took
part.
 The firm who placed highest bid got the produce.
 Now the firm who had bought the produce on auction had to pay the full price of the
commodity + 2% commission on the Net Value of the produce to the firm from which it
had bought the commodity.
 The firm who bought the commodity on auction had bought the commodities to sell
them to various industrial units (oil mills, flour mills, beer factories, export houses etc.).
These industrial units bought the produce from the firms dealing in Pakki – Aadat line of
business as they needed regular supply of commodities.
 The firm then sold the commodity to these industrial houses and charged full price of
the commodity + 3% commission on Net Value of the produce.
 The difference of 1% (3% commission received - 2% commission paid) was the earning
of the firm.

This is how Pakki- Aadat line of Business worked.

The major roadblock in this line of business was high working capital requirement and 3rd party
default risk.

Take this example:

Guar was a commodity that was used to make guargum, an industrial product used in OIL & Gas
Industry. Its price was Rs 4300/quintal as on 27th Dec 2018. The minimum lot size was of 300
quintals / 30 MT per truck (1 MT = 1000kgs, 1 quintal = 100 kg). The amount of capital required
for 1 truck of guar was: Rs 4000 *300 = Rs 1.2 million

Wheat was sent to flour mills for making flour. Its price was Rs 2100/quintal as on 27th Dec
2018. The minimum lot size was of 300 quintals / 30 tones per truck (1 tone = 1000 kg, 1 quintal
= 100 kg). The amount of capital required for 1 truck of wheat was: Rs 2100 *300 = Rs .63
million
During harvest season a minimum of 8-10 trucks/commodity (Guar & Wheat) were supplied
each week to the industrial houses. The payment cycle was of 7 days, after which interest cycle
started. 8-10 trucks/ week/commodity for 7 days amounted to 32 – 40 trucks
/month/commodity. With each truck of guar valuing Rs 1.29 million and wheat valuing Rs .63
million that amounted to Rs 61.44 million – Rs 76.8 million in working capital
requirement/month. The firm needed to have 2-3 months working capital in hand to minimize
risk that may arise due to delayed payments or default. That amounted to Rs 200 million in
working capital requirement.

Stock Trading
This was an entirely new line of business that the youngest brain of the family wanted to enter.
The stock trading was a line of business in agro business in which a firm bought commodities
from the firms dealing in Kachi – Aadat business in mandi. The firm then stored the commodity
in warehouses. As and when the prices would increase the firm would sell the stock to the open
market, firms, industrial units, and export houses and earn profits.

The business model was as follows:

 Farmers took loans from the commission agent firms (Aarthiyas) on interest rates
ranging from 15% - 18% on the assurance that they would bring their produce to the
firm for sale.

 After the harvest the farmers brought their produce to the firm in Agricultural Produce
Market Committee (Mandi).

 When the farmer brought his produce to the Mandi, auction of his produce took place in
which different firms who were in Pakki – Aadat line of business and stock trading took
part.

 The firm who placed highest bid got the produce.

 Now the firm who had bought the produce on auction had to pay the full price of the
commodity + 2% commission on the Net Value of the produce to the firm from which it
had bought the commodity.
 The stock trading firms after buying the commodities stocked the commodities in their
warehouses.

 When the price of the commodity increased the firm sold the produce to the industries,
firms or export them and earned profit.

The firms could also use the commodity derivatives for hedging. This was the business model
for stock trading.

The best part of this line of business was that the money was safe with the firm and locked in
physical stock. Default risk and credit risk was eliminated. With proper understanding of the
market the firm could earn decent returns by stock trading.

Reasons for change in behavior of farmers


The reason for change in behavior of farmers was as follows:

1. Easy access to institutional credit: Various commercial banks and private sector banks
had increased their lending to farmers in the province of Sri Ganga Nagar. Earlier the
farmers majorly depended upon the moneylenders. But after 2012-13,the banks
started opening limit accounts of farmers by taking their land as collateral. The banks
valued land of the farmers and provided 60% - 70% loan on the value of land. The no.
of farmers taking loans from banks had increased substantially in the following years.

2. Spreading of consumerism: In 2012 the prices of guar, a prominent agriculture


commodity produced in Sri Ganga Nagar, increased from Rs 4000- Rs 5000 to Rs 30000
which led to enormous profits for farmers. On account of such huge profits farmers
started spending heavily instead of savings. They got new cars, got new homes
constructed, lavish marriages and other spending. In 2013, the prices of the commodity
crashed to previous levels. Such enormous profits led to increased consumerism. The
previous year profits helped farmers to sustain lavish lifestyle for a couple of years. In
2015-16 those windfall gains evaporated but the expenses of farmers have already
increased and had become stable, income not matching the expenses. In 2016-17, the
harvest was not that good due to environmental factors of low rainfall, bad weather,
dust storms etc which led to subdued income.

3. Trend For Foreign education: In the province of Sri Ganganagar farmers were taking
loans from banks as well as moneylenders for sending their children to foreign
countries mostly Canada for dual purpose of study and work. Minimum of Rs 1-1.5
million was required for the same. The farmers irrespective of their income levels were
recklessly taking loan against land from banks and loans from moneylenders without
collateral on the hope that their children would earn money in the foreign country and
they would repay the loans without being prudent. On the contrary the global trend
was not good. Due to a lot of newly placed restrictions in Canada related to work
hours, the children of farmers were not able to earn the money they expected and as
such default rates on loan taken moneylenders started increasing.

4. Direct Bank transfer: On top of all the above causes the government in May 2018 made
a policy change as per which the value of produce procured by government from
farmers through Arthiyas went directly go to farmers bank A/C. This was like final nail
on the hot stove. Now the farmers had taken credit form moneylenders as well as
banks. Earlier the value of produce came to arthiyas A/c who after settling the account
of farmers issued fresh credit to the farmers depending on his produce and the cycle
goes on. Now the money was directly transferred to the bank A/c of the farmers, the
bank automatically deducted its installment. The payment of the government came
after 1 month. So now the moneylenders had to keep a check on the government
payment release dates and then match it with farmers and then cross verify with
farmers that they had received payments or not. Now the farmers had double amount
of money. For ex. Rs 80 was loaned to the farmer by moneylender, Rs 100 by bank and
he got Rs 120 for his produce from govt. Now he had Rs 300. He had already spent Rs
100 for sending his son to foreign country, Rs 100 for producing his crops on fertilizers,
seeds and pesticides and household expenses. He was left with Rs 100 in his bank A/c
which he used to pay installments of bank loan of Rs 10. Since he had Rs 90 left in his
A/c, he tended to spend more and took Rs 10 from bank for his personal expenses. The
attitude of farmers had become casual in the way that we would return money to the
moneylender later. Now on Rs 80 loan from moneylender, @ 18% interest it amounted
to Rs 94.5. But he had only Rs 80 in his bank A/c. he paid Rs 75 to the moneylender and
carried forward the rest Rs 19.5 to a later date. In this way the cycle of money flow had
become very complex and the farmers were overspending due to direct availability of
funds in their account which was unstable.

Due to all these factors, the default rates by farmers started increasing and the
business of Kachi – Aadat became more risky.