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| Negotiability of warehouse receipts to change banks' perception | |
| Q&A: Anil Choudhary | | Dilip Kumar Jha / Mumbai January 01, 2009, 22:26 IST | |
The Warehousing Act will ensure liquidity to farmers against their produce, says Anil Choudhary, managing director of the National Bulk Handling Corporation (NBHC), the warehousing, assaying, grading and certifying arm of the country’ largest commodity exchange the Multi Commodity Exchange of India (MCX) in an interview with Dilip Kumar Jha. Excerpts:
How do you think Warehousing Act will revolutionalise the dynamics of agricultural commodities in India?
The Warehousing (Development & Regulation) Act, 2007 (WDRA) is expected to bring a paradigm shift in the way banks look at post-harvest credit. More significantly, it will address one of the major woes of an average Indian farmer, that is, getting liquidity against his produce. Various micro and macro level studies indicate that small farmers contribute over 50 per cent of marketable surplus and ironically, more than half of it comes through distress sale.
One of the major contributing factors has been the lack of viable alternatives to bring in liquidity against commodities by selling it immediately after harvesting when the prices are virtually the lowest.
Any price advantage is cornered by the trade which has the requisite measures to buy, store and most importantly, look for an opportune time to sell. The negotiability of warehouse receipts coupled with credibility in warehouses that the regulator is expected to bring, will create a base for trading in warehouse receipts, thus creating a vibrant secondary market.
Will Negotiable Warehouse Receipts (NWR) be an investment-friendly asset class?
Unlike developed economies, agro commodities have never been looked at as an investment friendly asset class in India because of ambiguities in quality, maintenance, price transparency etc. Most importantly, the positive regulation of these warehouses by the Authority will bring the much needed credibility to the commodity being stored therein and hence, the liquidity. Warehouse receipts as financial instruments have many advantages over the traditional and non-institutional financing avenues.
Why are banks still uncomfortable with Warehouse Receipts Financing (WRF)?
Despite WRF being one of the oldest lending products in public sector banks (PSBs), it could not take off well due to several infirmities and the resultant perception of high risk. The risk that banks perceived were quite high. Important among them being, very low credibility of warehouse management, lack of credible quality assaying capabilities with required geographic reach and hence, commodity value appraising skills and above all, the concern regarding quality and quantity maintenance of agri commodities, which are inherently perishable in nature, during the loan tenure. Another critical factor that kept banks away was the lack of price information on an on-going basis in a credible manner to keep themselves marked to market. Resultantly, commensurate to risks perceived, the pricing of loans is inordinately high, making the product unviable for a farmer/borrower.
NBHC has, however, been able to create the requisite operational expertise complimented by robust quality assaying capabilities and reach as also commodity care expertise. Resultantly, the quality and quantity guarantee provided by NBHC has encouraged banks to lend against this asset class.
What are the constraints?
The critical issue is the availability of proper warehouses- even by the government’s own estimates, the shortfall is to the tune of 35 million tonnes.
Credible quality assaying and grading facilities, commodity care and protection facilities etc. would be critical co-functions. Other various initiatives are also required like creating technically competent man-power, establishing Good Warehousing Practices Code and educating the existing operators, R&D in warehousing and commodity handling domain, and importantly creating awareness among banks and farmers.
How do you see this sector shaping up in the next 5-6 years ?
Post 1991, we have seen that all the sectors of Indian economy have prospered as never before. We take pride in being one of the largest economies of the world (both purchasing power parity or PPP and absolute size wise). Agriculture and allied sectors, have, however not benefited as much notwithstanding the fact that over 60 per cent of the population is subsisting in one form or another on agriculture and allied activities. Now, many banks have started lending against agri commodities, over and above, being looked at by banks to get the much needed PSL credits, will indeed become a commercial opportunity. Post dis-intermediation from several traditional sectors, lending against agro commodities is expected to become the biggest draw for banks in the years to come.
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