ICICI Bank resumes warehouse financing

After learning a lesson from the past, ICICI Bank has resumed financing against warehouse receipts after blocking the gaps in risk management practices.

In 2006, the bank was cheated of Rs 200 crore at central and state government warehouses in Kolhapur district, where it had not engaged any third-party collateral managers.

The private sector bank has now appointed collateral managers even for government-owned warehouses as it does for warehouses owned or managed by private companies, according to ICICI Bank officials, who did not want to be identified. The fraud was orchestrated by the parties who made lesser quantities of commodities than mentioned in the warehouse receipts.

"We have tightened the collateral management. In the last four months, we did not take up any new (warehouse receipt financing) business. We have now started it after putting in place the collateral management," a senior bank official said.

In a filling to the Securities and Exchange Commission for the $2.5-billion American Depository Receipts (ADR) issue, the bank said: "During the course of a review, irregularities, including absence of the required quantities of commodities in warehouses, were observed."

ICICI Bank appoints third party management and collection agents to market warehouse receipt financing. Finance is provided to farmers and traders on the basis of receipts for stored goods issued by warehouse owners . ICICI Bank's warehouse receipts financing portfolio stands at Rs 1,600 crore.

The bank had undertaken a comprehensive review of the warehouse receipt financing product after the fraud was detected and set up dedicated groups for conducting commodity audits.

In 2006-07, ICICI Bank made a provision of Rs 93 crore ($22 million) for losses from frauds pertaining to the warehouse receipt-based financing for agricultural products. The bank sees challenges to managing frauds due to the increased geographical dispersion and use of intermediaries.

Apart from post-harvest financing against warehouse receipts, ICICI Bank's rural credit products include loans to farmers for cultivation, loans for purchase of tractors, working capital for trading and small enterprises, loans against jewellery and micro-finance loans for various purposes.