Commodity-backed financing for Tasar silk producers

In association with Pradan (Professional Assistance for Development Action), a reputed NGO working in eight Indian states, IFMR Trust has piloted a novel financing mechanism for collectives of tribal women engaged in Tasar silk yarn production as a supplementary source of income. 

The pilot project covers 13 mutual benefit trusts (MBTs) of yarn producers in Jharkhand’s interior villages, in the backward Godda, Dumka, Koderma and Petarbar districts. 

Set up by Pradan, each MBT is a village-level collective of 20 to 30 women yarn producers. Pradan has formed 90 MBTs, with a total of 2,500 women producers, in Bihar, Jharkhand and Chhattisgarh. Most of the women are from tribal groups.  

The 90 MBTs are united under the banner ‘Masuta Producers’ Company Limited (MPCL)’.  

MPCL helps MBTs acquire assets like reeling machines to make yarn, supplies raw material and other inputs, provides troubleshooting support, and, finally, markets their produce.  

MPCL has a micro finance branch that borrows from banks and lends to MBTs at the same rate of interest. MBTs use the money to buy cocoons; the purchase is done for them by MPCL.     

The pilot financing project initiated by IFMR Trust enables 13 MBTs to meet their working capital requirements at a reasonable cost, using their raw material as collateral. The loan also helps MPCL meet its working capital requirements.   

The funding is expected to spur MBTs to increase production. This will, in turn, reduce the cost of funding for MPCL, whose financial position is extremely debt-oriented. Read a detailed note on the funding here. 

Tribal woman spinning coarse Tasar yarn from cocoons

Good source of income for forest-dependent  

As Pradan has established, Tasar silk yarn production is a good source of income for communities living in and around forests. 

The process involves rearing a wild species of silkworm called Tasar or Tussar (Antheraea mylitta) in forests to produce cocoons that are processed to make yarn, and then fabric. The worm can be reared in 6 to 10 weeks; round-the-clock supervision is required.   

Cocoon production involves simple technologies and can be done by members of the family. Yarn production also does not require much capital investment. As such, Tasar silk production is an ideal supplementary source of income for forest-dependent communities, especially as there is great unmet demand for the product.  

According to Pradan’s estimates, annual demand for raw Tasar silk fibre in India -- both for domestic consumption and exports -- is 1,500 metric tonnes (MT). Annual domestic production in 2006-07 was only 350 MT. Jharkhand had the highest production (96 MT), followed by Chhattsigarh (90 MT). 

Overall, production of all varieties of raw silk in India is much in demand. While the demand is for 26,000 MT per annum, domestic production stands at around 17,300 MT.  

Pradan initiative 

Identifying Tasar silk yarn production as an activity that can generate a large number of livelihoods among rural households in the eastern and central Indian states of Bihar, Jharkhand and Chhattisgarh, Pradan sought to separate Tasar yarn production from weaving, promoting it as an independent and viable enterprise for women. 

Before Pradan came into the picture, Tasar yarn production was a low-paying activity carried out by rural women in their spare time. Though it plays a critical role in the Tasar fabric industry, by supplying raw material, Tasar yarn production did not flourish as an independent enterprise.  

Pradan changed the paradigm by equipping women producers with skills and providing them infrastructure, inputs, and marketing support. The women producers were organised into groups and provided technology developed by the Central Silk Board (CSB) to produce reeled (fine) and spun (coarse) yarn.  

CSB also provides training in improved rearing techniques, which reduces risks and increases productivity. Pradan markets the yarn as an intermediate product as well as a final woven product. 

MPCL 

As Tasar silk producers are small, fragmented and distributed over remote areas, they were not in a position to meet the bulk demand for yarn. Nor were they able to avail of credit facilities because of their low net worth.

These disadvantages were overcome by the formation of MBTs, leading to the incorporation of MPCL in 2005.  

MPCL aggregates yarn produced by MBTs, sorts and grades it, and supplies it to the market. Due to such aggregation by MPCL, producers can access formal banking facilities through MBTs to buy cocoons and other materials in bulk. 

Through unit committees formed by block-level committees, MBTs elect the board members of MPCL. The company’s head office is in Deoghar (Jharkhand) and it has marketing units at Delhi and Bhagalpur.  

The management committee of the company comprises the managing director, manager (marketing) and executive (finance), all of them professionals, assisted by a total staff of 30.  

Marketing is done either by MPCL directly or through Eco-Tasar Silk Pvt Ltd, a joint venture with a private entrepreneur. MPCL has a 76% stake in this company which was formed in 2007.  

MPCL started with paid-up capital of INR 100,000; over three years its equity base increased to INR 9.3 million, through a non-withdrawable capital fund and by ploughing back surpluses generated from the company’s business.  

In 2007-08, the company had a sales turnover of INR 9.7 million, and a post-tax profit of close to INR 1 million. Apart from operating costs, sales and other expenses, the company incurred an interest expense of INR 2.2 million, as a result of debt raised from various financial institutions for expanding assets. As on March 31, 2008, the company’s outstanding debt was INR 40.3 million. 

Financial challenges 

Within a short period, MPCL has set itself up strongly in the yarn market despite competition from cheap Tasar yarn imports. However, the company faces some fundamental challenges.  

Firstly, cocoon is available only once a year; producers need to procure and store stock for the whole year. Hence the business cycle is long.   

Secondly, the company has problems raising capital. As a collective of women it cannot raise enough equity internally. It has to rely on borrowings, which are short term and carry a high cost.  

IFMR Trust’s solution 

Working with MPCL, IFMR Trust designed a solution that meets the finance needs of MBTs to buy cocoons and the working capital needs of MPCL, at a reasonable cost.  

For one year, the finance needs of 13 MBTs covered under the pilot initiative were estimated at INR 4 million and MPCL’s working capital needs at INR 3.5 million. A total of INR 7.5 million was given to MBTs as a loan; they lent INR 3.5 million to MPCL. 

The IFMR Trust loan to MBTs was structured as a ‘commodity-backed financing product’. Under the arrangement, MBTs outsource the procurement of cocoons to MPCL. MPCL buys and stores the cocoons and issues receipts that certify the quantity and quality of the commodity being stored.  

Specific storage house receipts and the commodity underlying such receipts are the collateral against which loans are to be extended to each woman producer.  

Apart from storing raw material and work in progress, and providing a guarantee on the quality and quantity of the collateral, MPCL also offers administrative services related to the loan, such as disbursement, documentation, data collection, information systems, collection and collateral management.  

The commodity-backed loan will be repaid via the sale of silk yarn by MBTs to MPCL. The rest of the loan amount -- INR 3.5 million lent to MPCL for its working capital requirements -- will be repaid by MPCL via the sale of silk yarn to the end buyers. 

Executed on January 15, 2009, for a period of 12 months, the loan of INR 7.5 million carries an interest of 14% on the outstanding amount, with monthly repayments. 

Benefits 

The loan meets the liquidity needs of the 13 MBTs and MPCL, at an affordable cost.  

Women producers purchase cocoon from MPCL on credit and, in 22 days, they return with the finished yarn and hanks. MPCL pays them for the finished goods in around four days. The cocoon purchase price is deducted from the cash payable for production.  

MPCL was assured steady availability of working capital financing to scale up its operations and increase its reach. This, in turn, will lead to regular cash inflows to yarn producers. 

Looking ahead 

IFMR Trust team members who were involved in formulating this scheme believe that the cost of funding can be reduced by streamlining processes and operations to cut variable costs and operational risks.  

“This will, in turn, attract mainstream capital market investors,” explains Kshama Fernandes of IFMR Capital. The commodity-backed loans may be pooled into a portfolio (‘storage house receipt loan portfolio’) and purchased by IFMR Capital at a mutually agreed price if underwriting guidelines are met, she adds. 

After successful completion of the pilot project, MPCL may consider providing the equity contribution for construction and operation of more storage houses so that the overall business expands and more women are able to avail of commodity-backed financing.

“Commodity-backed financing is a viable tool for bringing large numbers of producers into mainstream markets,” says Bindu Ananth, President, IFMR Trust.

Commodity-producer companies in India have traditionally raised financing via equity, which is scarce. The IFMR Trust initiative opens the possibility of connecting these companies to domestic capital markets and investors such as banks, insurance companies and mutual funds. Producer-companies of people from disadvantaged groups, like the Tasar silk MBTs, would be able to access low-cost finance under priority sector guidelines of banks.

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