Banks to finance crop hedging

Hedging of crops on the commodity exchanges is helping farmers to get finance at easier terms from banks. Since banks cannot participate in commodity futures market directly, The Forward Market Commission (FMC) is motivating banks to finance farmers on easier terms if the commodity against which they are seeking loans is hedged.

Federal Bank and Union Bank have already started giving loans against hedged stocks. Banks are generally keeping 30-40 per cent margins to factor in damage to the commodities, fall in prices etc.

"When a farmer is hedging the risk for commodity on the futures market, price risk is covered. There won't be quality issues either as an exchange will accept goods only after checking the quality standards," said FMC chairman B C Khatua.

Gradually, banks are realising the importance of their involvement directly or indirectly in the booming commodity markets, which, experts believe, will help meet the agri-financing target set by the government.

FMC is in the process of incentivising aggregators. When farmers hedge on the exchange, they are not really hedging directly. Their co-operatives collectively hedge on their behalf. In this case, the co-operative is known as aggregator.

If the banks are allowed to participate directly on the exchanges, they can also act as aggregators. They can also provide finance against warehouse receipt, which will not only attract wider farmers' participation but also increase liquidity in the futures trading.

Farmers have gained a lot through efficient collateral management as banks have reduced lending rates but assured credit risk. Banks currently offer loans at about 2-3 per cent below the prime landing rate (PLR) against 2-3 per cent above the PLR three years ago, because their margins remained intact when they lent to farmers through a collateral manager.

According to an estimate, the post-harvest credit is currently minuscule compared with the total lending of around Rs 250,000 crore. The scenario is set to change once warehouse receipts become a negotiable instrument, enabling farmers to avail of loans against the instrument.