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In July 2020, the Union Cabinet authorised the Agriculture Infrastructure Fund, a new pan-India central sector scheme (National Agriculture Infra Financing Facility). Through interest subvention and financial support, the scheme will provide a medium-long term debt financing facility for investment in viable projects for post-harvest management infrastructure and community farming assets.
How Debt Financing Works
Debt financing can be separated into two types based on the type of loan you’re looking for: long-term and short-term debt financing.
Long-Term Debt Financing
Long-term debt financing is typically used to finance assets such as equipment, buildings, land, or machinery that your company is purchasing. Long-term loans are typically secured by the assets being purchased by a lender.
The loan repayment schedule and the projected usable life of the assets are generally extended for three to seven years using long-term debt financing. SBA-guaranteed loans can have maturities of up to ten years.
Fixed interest rates on long-term debt will most likely result in constant monthly payments and high predictability.
Short-Term Debt Financing
Short-term debt financing is typically used for money needed for day-to-day business operations, such as acquiring inventory, supplies, or paying staff compensation.
Because the payback period is less than a year, short-term financing is referred to as an operating loan or a short-term loan. Short-term debt financing is exemplified by a line of credit. Assets are frequently used to secure credit lines (or collateral). Businesses that have temporary cash flow concerns, such as when sales revenues are insufficient to pay current expenses, sometimes employ short-term financing. Cash flow management issues are particularly common in startups. For small enterprises, credit cards are a popular source of short-term funding. According to a research conducted by the National Small Business Association in the United States, 59 percent of small business owners used credit cards to finance their businesses in 2017.
Why Do Companies Use Long-Term Debt Instruments?
To gain immediate capital, a corporation goes on debt. Startup ventures, for example, necessitate a large sum of money to get off the ground. This debt might be in the form of promissory notes, and it can be used to cover expenses like payroll, development, IP legal fees, equipment, and marketing.
Debt is also used by mature organisations to pay routine capital expenditures as well as new and expansion capital projects. Most businesses require external sources of cash, and one of these sources is debt.
Long-term debt has a number of advantages versus short-term debt. Interest on all sorts of debt commitments, whether short and long term, is considered a business expense that can be deducted before taxes are paid.The interest rate on longer-term debt is usually higher than on shorter-term debt. A firm, on the other hand, has a longer period of time to repay the principal plus interest.
Interest subvention
The interest subvention scheme for farmers attempts to provide farmers with short-term credit at a low interest rate. The policy went into effect in the Kharif of 2006-07. The plan will be implemented in the years 2020-21.
On the usage of own funds, the interest subvention would be paid to Public Sector Banks (PSBs), Private Sector Banks (PSBs), Cooperative Banks (Cooperative Banks), and Regional Rural Banks (RRBs), as well as to NABARD for refinancing to RRBs and Cooperative Banks.
The Interest Subvention Scheme is being implemented by NABARD and the RBI.
Role of infrastructure
Infrastructure is critical for the country’s rapid economic growth and poverty reduction.Appropriate infrastructure in the form of roads and railroads, ports, power, and airports, as well as their efficient operation, are essential for the Indian economy to interact with other economies across the world.
Benefits
Interest subvention of 3% per annum will be applied to all loans under this financing facility, up to a limit of Rs. 2 crore. This subsidy will be available for a maximum of seven years.
Credit guarantee coverage will also be offered from this financing facility for qualifying borrowers under the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) scheme for loans up to Rs. 2 crore. The government will fund the cost of this coverage.
In the case of FPOs, credit guarantees are available through the Department of Agriculture, Cooperation, and Farmers Welfare’s FPO Promotion Scheme (DACFW).
The repayment moratorium under this financing instrument could be anything from 6 months to 2 years.
Conclusion
The scheme’s main goal is to provide financial assistance to agro entrepreneurs in order to strengthen India’s agricultural infrastructure. Improved marketing infrastructure allows farmers to sell directly to a greater base of consumers, increasing value realisation.
