Model Business Activity

Agricultural Machinery Custom Hiring

Centre (CHC) at Farmers Producer
Organizations (FPOs)
 1. INTRODUCTION

Indian economy is dominantly based on agriculture and allied sector. It is predominantly characterized
by a number of dispersed and fragmented small land holdings. Around 85% landholding belongs to
small and marginal farmers. Being unorganized, these farmers are unable to realize good value for their
produce. Nowadays we are realizing the fact that farming is the practice of loss, there are several reasons
to prove this. Major reasons are farmers are not getting relatively profitable returns against the
investment they made in production of crops. The cost of cultivation is high and comparatively income
from sale of produce is less. The cost of crop cultivation goes higher because of higher or unaffordable
prices of inputs such as seeds, fertilizers and insecticides, unavailability of labor, increasing cost of
upkeep of animals, increasing cost of tillage. Traditional farming results in to low production, hence
modern farming taken place and subsequently, new agricultural technologies and technics has been
adopted by farming community. But still being an unorganized, farming community facing several
problems and resultantly not getting much better returns on their investment in terms of finance and
physical efforts.

Collectivization of producers, especially small and marginal farmers, into producer organisations has
emerged as one of the most effective pathways to address the many challenges of agriculture. Farmer’s
producer organizations can undertakes multiple business activities as a source of income and may avail
necessary services to its all members. Custom hiring center is not only the facilitation or service center
for FPO members but also the source of income.

Indian agriculture is undergoing a gradual shift from dependence on human power and animal power
to mechanical power because increasing cost for upkeep of animal and growing scarcity of human labor.
Further, use of mechanical power has a direct bearing on the productivity of crops apart from reducing
the drudgery and facilitating timeliness of agricultural operations. Thus there is a strong need for taking
farm mechanization.

Mechanical power is largely consumed in big land holdings and is still beyond the reach of
small/marginal holdings which constitutes around 85% of the total land holdings. This is due to the fact
that the small/marginal farmers, by virtue of their economic condition are unable to own farm
machinery on their own or through institutional credit. Therefore in order to bring farm machinery
available within the reach of small/marginal holdings, collective ownership or Custom Hiring Centers
needs to promote in a big way. This model business activity is prepared to demonstrate the banks that
financing for establishment of Custom Hiring Centers are a financially viable unit.
2. OBJECTIVES
1) To make available various farm machinery / equipment’s to small and marginal farmers at
affordable rent.
2) To offset the adverse economies of scale due to high cost of individual ownership.
3) To improve mechanization in places with low farm power availability.
4) To provide hiring services for various agricultural machinery/implements applied for different
operations.
5) To expand mechanized activities during cropping seasons in large areas especially in small and
marginal holdings.
6) To provide hiring services for various high value crop specific machines applied for different
operations.

3. POTENTIAL OF CUSTOM HIRING CENTRES

The farm power availability for small/marginal land holdings is the lowest. As the
small/marginal holdings constitutes 85% of total land holdings, the potential for CHC which will
cater to the farm machinery requirement of such a vast area, is quite huge. Keeping in view the
emphasis of agricultural farm machinery and the need for taking the of farm machinery within
the reach of small/marginal farmers, institutional credit needs to be made available for CHCs.
Generally, FPOs have base of more than 500 members, which are readily potential customers
for the Custom Hiring Centre. Further, if possible and manageable, the services of CHC can be
made available to non-members also to increase the viability of the CHC.

4. LOCATION OF THE CHC

Ideally, the CHC shall have to be located in a place which is convenient to the members of FPO.
In other terms, one CHC is expected to cater to 4/5 villages and therefore a common place
equidistant from the villages catered is advisable. This will reduce the transport cost and time of
transport of agricultural machinery.

5. POTENTIAL BORROWERS

FPOs have base of around 500 members, which are readily potential customers for the Custom
Hiring Centre. Further, if possible and manageable, the services of CHC can be made available to
non-members also.

6. CUSTOM HIRING UNIT

CHCs are basically a unit comprising a set of farm machinery, implements and equipment meant
for custom hiring by farmers. Though certain implements and equipment are crop specific, the
traction units like tractors, power tillers etc., and self-propelled machinery like combine
harvesters etc., are used in common. Therefore, an ideal model envisaged in this project
comprise farm machinery that are commonly used for tillage operations for all crops, multi crop
equipment and a minimum of crop specific machinery.
 7. TOTAL PROJET COST
This model is essentially suited for areas where paddy/wheat/food grains etc. crops are cultivated
predominantly. The CHC may comprise the following machinery:

1. 40 HP tractor - For tillage operations, traction source and transport

2. Power tiller – For tillage operations in small farms, traction source for small equipment and
agri input transport for short distance.
3. Multi crop Power thresher: separating grain and seed crops from their chaff and straw.
4. Winnower: For Separating grain from straw
5. Self-Propelled Reaper: For harvesting wheat, paddy, soybean, barley and similar other crops.
6. Sprayers: For spraying of pesticides on the standing crops for pest management.
7. Repairing tools: For repairing of implements.
8. Mould broad plough: For primary tillage operations like ploughing, making ridges &Furrows.
9. Cultivator: For preparation of proper seedbed for the crop to be planted, to bury crop residue in the soil.
10. Cage Wheel : It is used to mix the black soil properly while preparing the land for crop plantation
11. Disc Harrow: to till the soil where crops are to be planted
12. Seed Drill: for the mechanised sowing of an agricultural crop.

The cost of the unit works out to Rs. 20.60 lakh, which includes cost of construction of a work
shed of 500 sq. Ft. The land cost which is not considered in the project as it may be made
available by FPO. The details are given in following tables No: 1.
Sr no Items of Investment Cost (Rs.)
1 Tractor-40 HP 625000
2 Trailer 125000
3 Implements
a Mould Broad Plough 35000
b Cultivator- 9 tyne 28000
c Cage Wheel-18'' 25000
d Disc Harrow 35000
e Seed Drill 50000
f Accessories 20000
Sub Total 943000
4 Transplanter 200000.00
5 Power Tiller-13 HP 175000.00
6 Multi crop power thresher with elecric motor 150000.00
7 Winnower 25000.00
8 Self prepelled reaper-3.5 HP 150000.00
9 Sprayer-Powered 1 No. 10000.00
10 Sprayer-Mannual- 1 No. 2000.00
11 servicing tools 5000.00
12 tools for repairing of machines 25000.00
Subtotal 742000
A shed for keeping the tools and machinery -500
1 375000
sq. ft. @ Rs. 450 psf
Total Cost for unit 2060000
Table No. 1: Total cost of the project
Provision of a workshop shed has been made for parking the machinery, carryout day-today
repair, maintenance and service works.
 13. LENDING TERMS AND OTHER REQUIREMENTS

8.1 Margin Money: The Farmer producer Organization should normally meet 15% of the
project cost. Here in this model 20% of working capital has been considered as margin money.
8.2 Interest rate: Interest rate will be as determined by the financing bank. For working out
model, the rate has been considered at 12 percent.
8.3 Security: As stipulated by the RBI. Further Credit Guarantee cover is available up to 85% of
the bank loan from SFAC for financing of FPOs. In view of this Bank may also sanction the proposal
without collateral security.
8.4 Insurance: The financing bank may ensure that the society takes adequate insurance cover
for the asset.
9 INCOME AND EXPENDITURE
While the major income is generated out of custom hiring, recurring cost involved are fuel/
lubricant cost for the machinery, driver charges, repair maintenance charges, labor, interest on
bank loan and insurance are the major recurring cost taken in the economics. The details of
assumptions leading to the income and expenditure are indicated in following table No.2.
Sr. Rental/ Annual Working
Item Unit
no Cost Hiring Unit Nos.
Annual usage of tractors
1 a) Agricultural operation Rs. Per Hour 950 Hrs. 900
b) Agricultural operation by hired tractor Rs. Per Hour 900 Hrs. 800
b) Rent to be paid to hired tractor- Rs. Per Hour 800 Hrs. 800
Agricultural operation
a) On transportation work Rs. Per Day* 1200 Days 100
b) On transportation work by hired tractor Rs. Per Day* 1200 Days 70
c) Rent to be paid to hired tractor- Rs. Per Day 1200 Days 70
transport work
2 Annual usage of Power Tiller Rs. Per Hour 600 Hrs. 1400
3 Annual usage of Power Sprayer Rs. Per Day* 100 Days 60
4 Annual usage of Manual Sprayer Rs. Per Day* 65 Days 60
5 Annual usage of Power Thresher Rs. Per Day* 750 Days 90
6 Annual usage of Winnover Rs. Per Day* 120 Days 45
7 Annual usage of Reaper Rs. Per Hour 250 Hrs. 400
8 Diesel Price Rs. Per litre 75
9 Lubricant Cost Rs. Per litre 400
10 Diesel Requirement of for tractor Litre per Hour 3.5
11 Diesel Requirement of for power tiller Litre per Hour 2
12 Diesel Requirement of for Reaper Litre per Hour 1
Monthly income from repair of
13 Rs. Per Month 10000
agricultural machinery
14 Lubricant requirement % of diesel 2.75
15 Interest on term loan (% Per annum) 12.00%

Since the large number of farmers are members of FPO, one tractor would not sufficient to carry out operations, so
there is need of one more tractor, which will be hired from the members at pre-fixed rate of Rs.700 per hour and will
be available on rental basis to the member @ Rs. 750 per Hour

* Fuel and labour arranged by beneficiary who hires the machinery from the CHC
Table No.2: Assumptions leading to the income and expenditure
 The statement of income and expenditure is given in following table No.3

Cost
Sr.
ITEM
No Full capacity
75% during 1st Year
Utilization
1 Tractor
Driver's Salary @7000 per month each -2 drivers 168000 126000
Fuel Cost 236250 177187.5
Hired tractor Rent (Rs.) 640000 480000
Lubricants @ 10% of fuel cost 23625 17718.75
Repairs and maintenance charges @ 10% of cost of
94300 70725
tractor and equipment
Subtotal 1162175 871631.25
2 Power Tiller
Driver's Salary @7000 per month for 6 months- 2
84000 63000
drivers
Fuel Cost 210000 157500
Lubricants @ 10% of fuel cost 21000 15750
Repairs and maintenance charges @ 10% of cost of
17500 13125
power tiller
Subtotal 332560 249375
3 Power Thresher
Repairs and maintenance charges @ 10% of cost of
15000 11250
power thresher*
Subtotal 15000 11250
4 Winnover
Repairs and maintenance charges @ 10% of cost of
2500 1875
Winnover*
Subtotal 2500 1875
5 Self-Propelled Reaper
Driver's Salary @7000 per month for 3 month 21000 15750
Fuel Cost 30000 22500
Lubricants consumption @ 10% of fuel cost 3000 2250
Repairs and maintenance charges @ 10% of cost of
11500 11250
reaper
Subtotal 69000 51750
6 Sprayer
Repairs and maintenance charges @ 10% of cost of
1300 975
power sprayer*
Subtotal 1300 975
7 Other Recurring Cost
Salary for the skilled mechanic and helper to be
employed for repairing work @ Rs. 5000 and Rs. 120000 90000
3000 per month respectively.
Insurance Premium @ 2% of machinery cost 14840 11130
Subtotal 134840 101130

TOTAL RECURRING COST 1717315 1287986.75

Recurring cost will increased by 5% every year 1803180.75
INCOME PER ANNUM FROM THE CUSTOM HIRING CENTRE

(Amount in Rs.)
ITEM Full capacity 75% during 1st
Utilization Year
Tractor 975000 731250
Power Tiller 840000 630000
Power Thresher 67500 50625
Winnover 5400 4050
Sprayer 9900 7425
Reaper 100000 75000
Repairing of Machinery 120000 90000
TOTAL INCOME 2117800 1588350
NET INCOME 400485 300363.75
Benefit will increased by hike in rent by 5% every year
2223690
* Power and labour are arranged by the beneficiary hiring the equipment.
Table No.3: The statement of income and expenditure.
 10. FINANCIAL VIABILITY OF THE PROJECT - The financial viability assessment is given in table no.4

Table No 4: CALCULATION OF NPV, IRR & BCR

Amt. in Rs.

Sr.
Particulars Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
No.
1 Capital Cost 2060000
2 Recuring Cost 1287986.25 1803180.75 1893339.79 1988006.78 2087407.12 2191777.47 2301366.35 2416434.66 2537256.40 2664119.22

3 Total Cost 3347986.25 1803180.75 1893339.79 1988006.78 2087407.12 2191777.47 2301366.35 2416434.66 2537256.40 2664119.22

4 Benefits 1588350.00 2223690.00 2334874.50 2451618.23 2574199.14 2702909.09 2838054.55 2979957.28 3128955.14 3285402.90
Salvage value
considering
5 the rate of 206000.00
depreciation
as 10%
6 Total Benefits 1588350.00 2223690 2334874.5 2451618.225 2574199.14 2702909.093 2838054.548 2979957.28 3128955.14 3491402.90
7 Net Benefits -1759636.25 420509.25 441534.71 463611.45 486792.02 511131.62 536688.20 563522.61 591698.74 827283.68
Discounting
8 15%
Factor
NPV Benefit
9 122,41,464.58
@ 15% of DV
NPV Cost
10 116,76,564.98
@15% of DF
NPV @
11 5,64,899.59
15%DF
12 BCR ₹ 1.05
13 IRR 24%
 The outcome is summarized as below: Net Present Worth @ 15 % discounting factor = Rs. 564899.59

Benefit Cost Ratio = 1.05

Internal Rate Return =24%.

REPAYMENT PERIOD

Depends upon the gross surplus generated, it may be up to 8 years without any grace period, the
schedule of loan repayment is given in following table No.5.

Table No 5: REPAYMENT SCHEDULE

Interst Rate 12%
Capital Cost 2060000.00
Bank Loan 1648000.00

Payment
Beginning Net Repayment Total Pricipal
Year of Interest
of Year Surplus of Principle Outgo Balance
@12% p.a.

1 1648000.00 300363.75 197760.00 206000.00 403760.00 1442000.00

2 1442000.00 420509.25 173040.00 206000.00 379040.00 1236000.00
3 1236000.00 441534.71 148320.00 206000.00 354320.00 1030000.00
4 1030000.00 463611.45 123600.00 206000.00 329600.00 824000.00
5 824000.00 486792.02 98880.00 206000.00 304880.00 618000.00
6 618000.00 511131.62 74160.00 206000.00 280160.00 412000.00
7 412000.00 536688.20 49440.00 206000.00 255440.00 206000.00
8 206000.00 563522.61 24720.00 206000.00 230720.00 0.00

DISCLAIMER
The views expressed in this model project are advisory in
nature. NABARD assume no financial liability for anyone using
this project report for any purpose. The actual costs and returns
will have to be taken on a case by case basis considering the
specific requirements of projects.