More caution on commodity financing

MID-TERM MONETARY POLICY 2008-09/ Policy & The Individual

The Reserve Bank of India's decision to ask banks to review advances given to traders of agricultural commodities is likely to reduce the overall lending to commodity traders.

Banks, particularly, would move away from warehouse receipt finance (lending against commodities), which is the mechanism for traders to get loans from banks.

However, agri-finance that is a part of priority sector lending may not be adversely impacted, according to Madan Sabanavis, chief economist and head of knowledge management, National Commodity and Derivatives Exchange.

At present, banks' total exposure to traders in agricultural commodities and advances against warehouse receipts is less than 1 per cent of their gross advances. This is because warehouse receipt is classified as lending to a sensitive sector.

 

Currently, warehouse receipt financing is not popular simply because of the lack of authenticity of the receipt often and the inability to verify the existence of goods. Once the warehouse receipt is made a negotiable instrument, it will definitely make financing much more attractive.

Alternatively, commodity experts said that banks should be allowed to invest in the commodity futures market. In case of default, the bank could actually realise the full value of the goods, which are kept in the warehouse.