What Is A Back Ended Capital Subsidy?

A back-ended capital subsidy is a kind of government-funded financial aid given to ‘qualifying’ business borrowers, with the aim of incentivising investment and economic growth in a particular sector of commerce.

Importance of back-ended capital subsidy programmes #

Agribusiness is capital heavy.

Land acquisition.

Equipment procurement.

Working capital to prime the profit-pump of your business.

All this requires often substantial amounts of money upfront, just to get started.

This can be said also for poultry farming.

Start-up and existing farmers looking to increase production capacity will often seek a loan from a commercial lender to bridge any shortfall.

However, at times, the cost of a poultry farming loan may be prohibitive.

In other words,

When the feasibility of making enough poultry farm profit to pay back the principal sum plus the interest on a loan is low,

Entrepreneurs will often walk away from the idea entirely.

If the numbers of this type of case are considerable, a sector can suffer from a lack of investor confidence.

When a sector suffers (…especially one with the socioeconomic importance of poultry farming) governments will quickly respond to its aid.

One way in which they smooth out this wrinkle of investor confidence is to incentivise investment in that particular industry.

One method of choice is the back ended capital subsidy. It’s a bit like what quantitative easing or stimulus packages do for a credit crunched global economy….

…to encourage people to start spending (by favourable lending conditions).

How a back-ended capital subsidy works #

There are some rules involved in qualifying for a back-ended capital subsidy:

• Meet the stipulation
• Already have been approved for receiving a loan
• Overall loan of a certain amount from a recognised lender
• Have a certain amount of margin money or entrepreneur contribution

For example,

The Poultry Venture Capital Fund backed by the Government of India was developed to encourage entrepreneurship within the country’s poultry sector.

The scheme offers more favourable discounts to beneficiaries from secluded tribes or castes and those deemed below the poverty line.

If a recipient is in this category they can expect to receive as much as 33.33% subsidy against credit. However, they must also stump up 10% of their own funds to qualify.

The scheme offers 25% subsidy for beneficiaries above the poverty line.

A back-ended capital subsidy, therefore, is a type of means-tested support.