WAREHOUSE RECEIPT FINANCING

INDEX o FOREWORD o Warehousing – A Historical Background o India’s Warehousing Industry o What are Warehouse Receipts? o WRF’s with Commodity Futures Trading o Loan against WR and Work Flow of Loan Scheme o Benefits

o FOREWORD

Foreword Indian rural indebtedness could not be eradicated due to lack of appropriate credit. Warehouse receipts are an important and effective tool for creating and easing access to credit. Under Warehouse Receipts System Instead of directly selling their produce in Mandis, deposit it with licensed warehouses Farmers/TradersLicensed Warehouses Warehouse Receipts Farmer either retain these receipts to reclaim the underlying commodities later in anticipation of better price or can use them as collateral for obtaining bank finance.

o Warehousing – A Historical Background

Warehousing –A historical background A need for development of warehousing to deal with the burning issue on rural indebtedness and to give price support to the farmers was felt way back in Resulted in the setting up of Warehousing infrastructure under a Public Sector. CWC came into being on 2 nd of March 1957 and 17 State Warehousing Corporations thereafter with 50% equity from CWC and 50% from respective State Governments. Almost at the same time, states formulated legal framework for regulation of warehousing activities in the state for securitization and standardization of activities. Cont…

o India’s Warehousing Industry

India’s Warehousing Industry Three prime objectives behind establishing these corporations  Creation of a negotiable paper (Warehouse Receipt) to provide credit facility to farmers against its pledge in the bank. To enable the farmers to avoid distress sale during harvest and fetch them better prices at a subsequent date in lean season. To provide scientific storage facilities for agricultural produce to reduce post harvest losses which were to the tune of 9.6%. Cont…

India’s Warehousing Industry Warehouse Receipts gained popularity till the creation of Food Corporation of India (FCI). The farmers changed their mindset and started selling their produce directly to FCI at MSP rather than storing the same at the Warehouse to get the Warehouse Receipt financed through a bank. The farmers started facing lot of hassle in this procedure and gradually stopped to use this facility. They found the warehousing and pledging a cumbersome process in comparison to direct sale to FCI at MSP. Cont…

India’s Warehousing Industry The government also imposed trade related restrictions like storage limits on commodities, inter state movement control, credit access limits and interstate taxation on commodities which became major hurdles in Warehouse Receipt financing. But the new UPA government at the centre has again given thrust on agricultural credit to be doubled in next three years. Hence the significance of Warehouse Receipts has increased manifold.

India’s Warehousing Industry Warehousing is a well established activity in India today. At present storage capacity by Government owned warehouses are mentioned hereby : Government-owned Warehouses InstitutionCapacity (Million tonne) Food Corporation of India (FCI) Central Warehousing Corporation (CWC) State Warehousing Corporations (SWC) Total Source: Central Warehousing Corporation

o What are Warehouse Receipts?

WarehouseReceipts Financing Warehouse Receipts Financing What are Warehouse Receipts? Warehouse Receipts (WR) are documents issued by warehouse operators as evidence that specified commodities, of stated quantity and quality, have been deposited at particular licensed warehouses by named depositors. The depositor may be a producer, farmer, trader, exporter, importer, processor etc. When these depositors deposit their agricultural commodities in a warehouse, in lieu of this they receive a receipt certifying deposit of the goods. The receipt can then be used as collateral. In simple word, Warehouse Receipt is the basic document of title for commodity trade finance.Cont…

WarehouseReceipts Financing Asset Conversion Cycle through Structured Finance Warehouse Receipts Financing Asset Conversion Cycle through Structured Finance To turn commodities into money, they need to pass through a financial transformation - they need to be replaced by “paper” which represents the commodities. Money Commodities “Paper” (e.g. Warehouse Receipts)

WarehouseReceipts Financing Warehouse Receipts Financing Three parties involved in this transaction The Owner, who deposits his goods in the warehouses or transferee of Warehouse Receipts. The Warehouse Operators, who certify the quality grade and quantity of the goods and issues the warehouse receipt. The Banker, who issues a loan based on the receipt issued by the warehouse operator Cont…

o WRF’s with Commodity Futures Trading

Warehouse Receipts Financing-With Commodity Futures Trading : Phase - 1 Farmer /Trader (Seller) CWC Broker Deposit Goods 1. Deposit Goods Issue WRs 2. Issue WRs Buy/sell contract 3. Buy/sell contract NMCE Enters buy/sell order 4. Enters buy/sell order Allots separate Client ID Code 5. Allots separate Client ID Code Issue FSC Note 6. Issue FSC Note Local Bank Pledges WRs & FSC Note 7. Pledges WRs & FSC Note Bank seeks confirmation about client code 8. Bank seeks confirmation about client code Client code confirmed by Fax 9. Client code confirmed by Fax Sanctions loan 10. Sanctions loan

Warehouse Receipts Financing - With Commodity Futures Trading : Phase 2 NMCE Local Bank Nodal Branch Buyer Pay-in by Buyers 11. Pay-in by Buyers WRs released to Buyers 15. WRs released to Buyers Remits payment of loan amount 12. Remits payment of loan amount Dispatches original WRs & FSC Note 13. Dispatches original WRs & FSC Note Give back WRs 14. Give back WRs

o Loan against WR and Work Flow of Loan Scheme

Loan Finance Against WR Parties involved 1.Farmers/Producer/Trader/Exporter 2.Institutional Banker 3.Clearing Member/Broker 4.Exchange 5.CWC

Work Flow of Loan Scheme Farmer / Trader deposits commodities with CWC and obtains Warehouse Receipts Trader / Farmer enter into Forward Sale Contract with NMCE’s Members /Brokers Broker places the Client order in NMCE computer system from his terminal Member/Broker requests NMCE with details of his client for allowing a separate client identification No. for the purpose of availing finance from institutional bank

Work Flow of Loan Scheme N.B: In case the seller has already entered into a Forward Sale Contract with normal client code (assigned by broker) and later decides to avail loan from the bank  He/She shall request NMCE through the Member/Broker to square off his sale position so as to change the normal Client Code to Client Identification No. for Institutional bank.  Based upon confirmation from NMCE, the broker will issue a confirmation for the same, which will become part of the Forward Sale Contract for getting loan from Institutional bank.

Loans Availability Loan Amount: –Minimum – 50,000/- –Maximum – 2,00,00,000/- Rate of Interest – –Up to 2 Lac – BPLR* –Exceed 2 Lac – BPLR + 1% Margin : 20% Processing Fees – Rs 90/W.R. * (Bank Prime Lending Rate)

Quantity of WRs Financed PNBFederal BankTotal Qty Total Sum of Amount Commodity QtyAmount QtyAmount Cardamom 30210,600, ,600,590 Pepper 2,874260,322, ,397,5803, ,720,290 Rubber 10,6881,019,287,040 1,410136,742,83012,098 1,156,029,870 Grand Total 13,8641,290,210,340 2,138239,140,41016,002 1,529,350,750 (Till Aug 2010)

o Benefits

Benefit to Farmers/Producer/Trader/Exporter Producer gets better return Minimize price risk Price discovery Liquidity of Funds Bank Finance at better interest rate & longer terms More opportunity to invest and more flexibility in trade

Benefits to Institutional Banker Secured Finance No Risk for Quality, Quantity & Price fall Interest Revenue/Processing fees Increase in client base of other services Minimum procedural work

Benefits to Exchange/ Broker Turnover/liquidity of the Exchange/ broker will increase. Transaction charges/Brokerage will increase due to increase in turnover. Increase in member/ client base

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