Module 14. ISO/HACCP Certification

Lesson 31

SOURCES OF FINANCE FOR SETTING OF DAIRY FARMS & PROCESSING UNITS

31.1 Introduction

Dairy farming provides triple benefit of income, employment and nutritional security (milk) to the society and is an important source of subsidiary income to small/marginal farmers and agricultural labourers. Milk being a perishable product requires immediately processing and through maintaining a cold chain the raw milk is sent to the milk processing plants. Therefore, the existence of milk processing plants is also important.

For setting up of any enterprise whether dairy farming unit for milk production or dairy processing units/plants for manufacturing milk and milk products, finance is a prerequisite and of paramount importance. Among different factors of production, finance which pools together the other resources like man, machine, material and method to start and run the enterprise. According to R. Cameron and H.T.Patric, making an arrangement of cheap finance at a reasonable interest rate is the most important function of an entrepreneur.

31.2 Sources of Funds

Generally there are two methods of raising the funds as following.

· In-house sources

· Out side sources

31.2.1 In-house sources

These sources are owner’s own funds which can be invested as equity. For small scale industry, owner’s contribution is not enough. Therefore, major part of money is to be raised from out side sources.

31.2.2 Out side sources

These funds are raised from different financial institutions like Micro finance through self help groups, development banks, commercial banks, and financial corporations, cooperative banks etc. by the entrepreneur. However, funds required by an enterprise for running the enterprise are primarily known as fixed capital and working capital.

Keeping in view the utilization of funds as per the time period, funds raised can be classified into the following three  types on the basis of time period.

· Short – term loan: The repayment period of money within periods of one year   or less is called short-term capital. Such borrowing from institutional source is known as short term loans.

· Medium- term loan:  When the money borrowed ranges from one year to five year is called the medium-term-capital.  This type of finance is usually required for small expansion, replacements/renovation and modification of industrial units.

· Long-term loan: The repayment period of loan when exceeds than a period of five years is called long-term capital and this type of finance is required usually when  the size of the plant/unit is to be enlarged in the long run for increase in production which requires installation of big plant and machinery.

31.3  Sources of Finance to Entrepreneurs

31.3.1 Internal sources of financing

Entrepreneur can raise finance from the following internal sources:

· Owner’s own investment such as saving and equity.

· Deposits and loans given by the owner.

·  Drawing personal loan from provident fund, life Insurance policy etc.

· In case of running enterprise, funds can be raised through retention of profits.

· Using back the profits earned by one’s own enterprise.

30.3.2 External sources of financing

Entrepreneurs can raise funds externally from the following sources:

· Borrowings from non institutional sources like relatives and friends but this amount may not be large enough to set up a unit.

· Borrowings from the commercial banks for working capital.

· Term loans from development financing institutions like, ICICI (Industrial Credit and Investment Corporation of India) Bank Ltd, Industrial Development Bank of India (IDBI) Bank Ltd, Small Industry Development Bank of India (SIDBI), Infrastructural Finance Corporation of India (IFCI venture funds limited) etc.

· Hire-purchase or leasing facilities from national small industries corporations, state small industries development corporations, etc.

· Credit facilities provided by different financial institutions as well as commercial banks.

31.4  Micro Finance

The terms microfinance and micro-credit are often used interchangeably and treated as synonymous but microfinance is much broader in scope that includes deposits, loans, payment services and insurances to poor . A number of microfinance services are operating in different states of India. Through at the bottom, their ideologies are same, i.e, to provide quick and easy credit to the poor without any collateral , but structurally, there are certain differences in organizational and legal set up that separate them. Broadly, they can be categorized as:

1. SHG Model,

2. Grameen Model

3. Co-operative Model, and

4. For-profit Model.

SHG Model is most popular model in India amongst the four models mentioned. Hence, the following section will deal with the SHG Model in brief.

31.4.1  Self-help group model (SHG)

The rural poor who do not have any security to pledge with or a guarantor end up going to the village moneylenders who in turn exploit them by charging a very high rate of interest. Not only the absence of formal credit to the poor but also skepticism and ignorance, may be due to illiteracy, to approach a formal bank makes them vulnerable to external shocks. SHG is an effort to free the poor from this vicious circle of complexity. It is considered a better platform for the poor and vulnerable section of the society to organize themselves around regular savings and lending behavior as well as well as get engaged in some income generating activities. The poor are now able to generate their own savings at reasonable rate of interest by initiating a self saving mechanism within the group. A sense of responsibility grows amongst the members, especially women, as they handle their own incomes and take decision on expenditures. The homogeneous nature of the group members allow to develop solidarity amongst them in case of urgency and come out strong in the event of any community crisis.

31.4.2  What is a self-help group?

According to National Bank of Agriculture and Rural Development (NABARD),

Self-help group means a group of about 10-20 poor homogeneous people who come together for addressing their common problems. They voluntarily save on regular basis to a common fund, mobilize their savings and invest on micro-enterprices.

According to the Planning Commission of India, SHG is a self-governed, peer controlled small and informal association of the poor , usually from socio-economically homogeneous families who are organized around savings and credit activities. Members of SHGs meet weekly or monthly and discuss common problems and share information to come at a solutions. Group members make effort to change their economic and social problem through mutual assistance.

31.4.3  Objectives of SHGs

1. To act as the forum for the members who are very poor and do not have the access to formal financial institutions.

2. To enable the members to learn to co-operate and work in a group environment.

3. To provide the savings mechanism that suits the needs of the members.

4. To provide cost effective delivery mechanism for small credit to its members.

31.4.4  Functioning of SHGs

1. Size of SHG

Minimum ten m are informal groups. Legally, a group of more than 20 members are registered.

2. Membership

According to NABARD guidelines:

· Only one person from a particular family can join the group as in this way more family can be included in the movement.

· Members are generally from the same locality or village as it helps in easy communication.

· They are from same social and economic background. It helps in good interaction among the members.

31.5 Financial Assistance Available from Banks/NABARD for Dairy Farming

Loan from banks with refinance facility from NABARD is available for starting dairy farming. For obtaining bank loan, the farmers should apply to the nearest branch of a commercial bank, regional rural bank or co-operative bank in their area in the prescribed application form which is available in the branches of financing banks.

For dairy schemes with very large outlays, detailed project reports will have to be prepared. The items of finance would include capital asset items such as purchase of milch animals, construction of sheds, purchase of equipments etc. The feeding cost during the initial period of one/two months is capitalized and given as term loan. Cost towards land development, fencing, digging of well, commissioning of diesel engine/pumpset, electricity connections, essential servants' quarters, godown, transport vehicle, milk processing facilities etc. can be considered for loan. Cost of land is not considered for loan.

Conclusions

In order to set up dairy farm or milk  processing  small scale Unit, the entrepreneur mostly depends upon institutional finance for initial capital investment.  But the loan offered by the relatives and friends is some time not enough to start he business particularly in case of milk processing plant.  Further, in our country, institutional finances especially from commercial banks and development banks are attractive because of low rate of interest being charged by them in comparison to other forms of loans raised by the entrepreneur. The above financial sources can be used  for raising funds for setting up of any enterprise.

 Selected references

Mohanty, S.K. 2005. Fundamentals of entrepreneurship, Prentice Hall of India Private Limited publishers, New Delhi.

Feroze S.M. 2009. Economic analysis of dairy self help groups in western zone of Haryana, Ph.D Thesis, NDRI, Deemed University, Karnal (Haryana).

http//www. NABARD.org.