1. Collateral Management
Balancing Growth and Regulation
Date: 22nd March 2012
Anil K. Choudhary
Managing Director & CEO, NBHC
Session: Indian Commodity Markets

2. Indian Commodity Markets Realizing its potential
1 April 2017
Indian Commodity Markets Realizing its potential
Value of annual farm produce - about USD160+ billion
One of the large producers of Rice, Wheat, Sugar, Cotton, top producer of milk, largest in fruits and second largest in vegetables, jute, etc. and also one of the large consumers of these commodities
Advance estimates ( ) of food grain production pegged at 250 million MTs of food-grains
Largest government system for food grain procurement & distribution, market intervention for food prices and minimum support prices to the farmer, thus ensuring optimal returns to him
CHARACTERISED BY
RECENT INITIATIVES
Fragmented markets
Post-harvest supply chain infrastructure deficient in quality and capacity
Price Information opacity and asymmetry
Access to affordable credit lines cumbersome
Weak / inadequate support institutions
Long commodity value-chains
Commodity Futures – one of the world’s largest and state-of-the-art, e-Spot and Futures Markets
Regulatory Impetus – APMC Act, WDRA, Food Safety Act, tax regime review - GST, etc.
Renewed focus on Agriculture development
Congenial policy and market environment for investment in commodity markets
PPP enablement and facilitation for Private sector investments and participation
Indian Farm produce – farm gate level value is about
-India produce about 10% of worlds food grain production

3. Agri-Commodity Management Attracting positive traction
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Agri-Commodity Management Attracting positive traction
Year 2011 – watershed year for the Warehousing sector, expected to spur investments with the sector’s traction becoming positive
Key Developments
INFRASTRUCTURE STATUS
Granting of infrastructure status to PPP in this sub-sector - expected to attract large scale investments in cold-chains and storage infrastructure
Congenial policy environment coupled with strong business logic and growth prospects fuels the recent surge in sectorial investment plan
-THE WAY AHEAD-
Consistent and Viable Policy Support which promotes Private Investment will simultaneously help achieve Govt. Objectives & Commercial Sustainability
FUNDING FROM RIDF
Recognizing warehousing as a critical rural infrastructure the allocation of about USD 400 million made ( ) from RIDF for the first time, enabling low cost funding
PRIVATE EQUITY INVESTMENT IN CM & WAREHOUSING COMPANIES
Renewed and increasing interest in agri-warehousing and logistics by PE funds looking to favorable policy environment
Private Entrepreneur Guarantee Scheme
CONSTRUCTION OF GODOWNS UNDER PRIVATE ENTREPRENEURS GUARANTEE (PEG) SCHEME OF FCI
Due to the increased procurement of foodgrains and to reduce the storage in Cover and Plinth (CAP) the Government formulateda Scheme for construction of storage godowns through private entrepreneurs, Central Warehousing Corporation (CWC) and State Warehousing Corporations (SWCs). Assessment of additional storage needs under the scheme is based on the overall procurement/consumption and the storage space already available. For the consuming areas, storage capacity is to be created to meet four month’s requirement of PDS and other Welfare Schemes in a State. For the procurement areas, the highest stock levels in the last three years are considered to decide the storage capacity required. Later this scheme was extended to Decentralised Procuring (DCP ) states in 2009.
The Warehousing (Development And Regulation) Act,2007 Salient Features
Regulation of warehousing activities through registration of warehouses and accreditation
WDRA registered warehouses to issue Negotiable warehouse receipts
Liabilities, duties and responsibilities of warehouses laid down
Uniform format for Negotiable Warehouse Receipts with terms and condition on NWRs. Conditions for negotiability of warehouse receipt by delivery and endorsement
Legal provisions for offences, penalties and appeals
Powers of the Central Government
SUBSIDY AND RELEVANT SCHEME ENABLERS
Reconsideration of rate of capital cost for subsidy under capital cost / subsidy from NABARD revised
PEG for the Government’s Central Pool made attractive
ADVENT OF WDRA
One of the most significant steps in recent times: To impart negotiability to warehouse receipts and enable orderly development of the sector

4. Collateral Managers’ Role in Commodity Financing
Collateral Management Facilitating efficient & economical Risk Management
For success of various initiatives to bring efficiency and economy to agriculture marketing and commodity management, CM services facilitating WRF can ease the transition and ensure success of these initiatives
Collateral Manager : An Entity that ensures the integrity of warehouses the quality of commodities held therein, so that these can be offered as loan collateral.
Source : UNCTAD
Collateral Managers’ Role in Commodity Financing
VALUE APPRAISAL
Accurate Assessment
Advising lender about any deficiency in commodity provided by borrower as collateral
Accurate assessment of quality, volume and value of collateral along with requisite time-line ( validity ) inherent for perishable commodities
VALUE PROTECTION
End-to-end management
Process driven
Ensuring complete custody of collateral; legal as well as physical
Periodic and timely quality audit & assessment and advising bank & borrower for requisite preemptory actions
Ensuring appropriate checks, verification and systems to monitor bank-borrower transactions on the underlying of collateral
Marked-to-market valuation for preemptory mitigation of risks arising out of market volatility
VALUE REALIZATION Successful closure
Mitigating any other risks with appropriate guarantees and insurance
Facilitates timely disposal of collateral in case of defaults
Collateral Management in context of Agriculture commodity financing
Current Status of Agro-Commodities Collateral Management in India
Local commission agents who act as facilitators as well as Collateral Managers
Very few CM service providers with end-to-end commodity management capabilities
Limited awareness about the role as well as responsibility of a Collateral Manager among borrowers and lenders
Lack of transparent benchmarks to rate Collateral Managers
Paucity of technically proficient manpower

5. 1 April 2017
Agri-Commodities & Banks WRF – Reliable instrument for Secure & Viable Credit to Agriculture
Banking
Commodity Finance
Disintermediation from Corporate lending & hitting a plateau in other asset segments
Evolving marketing & information infrastructure presenting opportunities of over USD Bn
A CM can address operational limitations thus increasing the banks asset base with wider borrower with fewer risks
Ever-increasing Priority Sector Lending targets
Commodity finance - short-term & self liquidating
Asset - Liability mismatch
Commodities in storage act as collateral, effectively easing credit monitoring for large pool of borrowers
Increasing focus on direct agriculture / farm lending
A more secure way to fund priority sector (agriculture)
Better control and convenience in management of collateral
Enhanced credit delivery and recovery mechanisms
Efficient / adept management of contingency situations
Marketable instrument for developing Indian economy
Easier exit being a pledgee , thus much lower chances of NPA
Short term and self liquidating - Effectively addresses the issue of asset – liability mismatch in the changed scenario
Achieving financial inclusion in a sustainable and profitable manner
Developing marketing infra providing improved liquidity
Prevents farmers from distress sales and also provides post-harvest cash-flow
Asset under custody is pledged, hence recourse to liquidation of Collateral in case of default is unhindered
Improving performance & reduction of NPA vis- à-vis the regulatory aspects

6. Farm Produce / Inventory Financing Risk Matrix
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Farm Produce / Inventory Financing Risk Matrix
Current state of commodity marketing and post harvest infrastructure makes commodity financing a complex proposition for banks, but a collaboration with a competent collateral manager not only creates an efficient and economical system, but also enables banks to meet regulatory compliances
CREDIT RISK
Price Risk
Market Risk
Legal Risk
Regulatory Risk
Reputation Risk
Operational Risk (Quantity & Quality Risk)
Commodity Characteristics
Shelf life
Specific handling requirements
Numerous grades and varieties
Market / Price Sensitivity
Market size, spread and depth (liquidity)
Price information transparency
Market volatility
Market intelligence – participants, transparency in transactions etc.
Operational Factors
Location of the storage facilities
Facility management and man-power involved
Collateral Manager expertise and experience
Policy factors
Social & Borrower related Factors
Distinct characters of commodity collateral makes it unique for managing apart from credit risk there are major risks affecting the commodity collateral
Social factors – like undesirable geography based on historical experience of other lenders – like west bengal – more propensity to NPA
Borrower factors - A group of businesses or people found to be undesirable for credit
Banks need to have an established selection criteria for collateral manager as that is the factor will actually ensure performance guarantee of borrower or collateral
Good track record and reputation
Ability to measure the quality and quantity of commodities
Competence in enforcing precise and enforceable - legal arrangement
Good MIS system to assist in mark-to-market and regular tracking
Strong insurance
qualified and well trained man-power
Frequent and standard audit mechanism
Satisfactory reporting mechanism
Commodity
Market
Infrastructure
Others

7. Wheels for successful WRF System
1 April 2017
Enablers & Facilitators
Wheels for successful WRF System
Principles of lending against stored commodities date back to ancient times (the first written records come from ancient Mesopotamia)
In India, warehouse receipt based financing is one of the oldest lending products for PSBs
Regulatory and Policy enablers provide acceptability for commodity based funding, and also reduces the cost to the recipients of credit
Facilitators are connectors between the lender and borrower, enabling the lender to fund the commodities under storage thus also creating accessibility for the borrower
Policy & Legal Framework
Financial Performance Guarantee
Regulatory & Supervisory Agency
Value Protection
Value Realization
Value Appraisal
BORROWERS
STORAGE & SUPPORT INFRASTRUCTURE
FINANCIAL INSTITUTION
Affordability
Accessibility
Acceptance
Ability
During , financing through WRF was estimated in the range of Rs Crs.
Currently WRF portfolio for all SCB estimated at about Rs.15,000 Crs. against the estimated potential of Rs.100,000 – Rs.125,000 Crs.
WRF forms <3% of the total agriculture credit
FACILITATORS
ENABLERS
Source: In-house , various sources including USAID, UNCTAD, WORLD BANK studies

8. Key Initiatives and Support
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Key Initiatives and Support 8
Policy development, Investments and Regulation
Allowing Banks to participate on Commodity Futures platform :
Facility to hedge price-risk on commodity exchange platform will help banks to fund producers at lower margins ultimately providing higher liquidity at farmers’ level and across the value chain
Code of Conduct for Collateral Management Service Providers :
A realistic proposition considering the size or the investments made in these projects
Infrastructure Development Support :
In order to encourage larger entities / corporate participation, assistance should be provided to acquire or to give land on long-term lease from government
System of MSP Procurement with NWR and WRF:
Linking WDRA accredited facilities for MSP procurement
Others:
Development of network of facilities using WRF linked accounts, e.g. Input retailing
National-level database of Warehouse / Storage receipts financed to enable tradability of the WR
Incentivize lenders financing small & marginal farmers via WRF 8

9. National Bulk Handling Corporation Ltd. (NBHC)
INDIA’S LEADING INTEGRATED AGRI-COMMODITY & COLLATERAL MANAGEMENT COMPANY
Facilitating complete operational and economic efficiencies in supply chain. Adding value to commodities.
1st and only Warehousing & Commodity Management Solutions Provider in India to obtain ISO 22000:2005 certification and category ‘F’ membership of Grain and Feed Trade Association (GAFTA)
Sole agri-commodity futures Delivery Manager for India’s No.1 Commodity Futures Exchange
Facilitated post-harvest credit, as never before
NBHC – Quick Facts:
Commodities Managed
16+ mn MT
WRF Funding
USD 4.5+
billion
QA Labs 50
Banks 37
CCPM Licenses 25
Human Resources
3,500#+
Number of commodities
125+
# also includes contractual staff

10. THANK YOU
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