Project on Pledge_financing Dec 2010 (1)

8/3/2019 Project on Pledge_financing Dec 2010 (1)

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A Study On Present Scenario of

Pledge Financing in India andrecommendations to make it

Successful in India

Submitted byGayatri Ranaware

PRN No: QP0901764

Study Center: B.M.C.C., Pune.

Yashwantrao Chavan Maharashtra Open

University Nashik

Maharashtra.



ACKNOWLEDGEMENT

This acknowledgement is not merely a catalogue of names but of a

deep sense of gratitude to all those who helped me in undertaking thisproject.

I owe a great deal to YCMOU for laying the building blocks of logic and

pragmatism in my life. This report, in a way is a reflection of these

values.

I would like to express my earnest gratitude and thanks to Mrs.

Kalpana Chordiya for her support and kind blessings. I am also

thankful to Mr. Vikramsinh Deshmukh for his encouragement and

guidance throughout the project.

I sincerely thank Mr. Barbade Sir for his co-operation and

generosity and providing a very challenging and satisfying project.

The report is the result of contributions of numerous people - too many

to mention individually, I thank all those numerous who have

contributed in their own way in driving this project to success.

I also thank all the respondents who have given their valuable time,

views and authentic information for this project.

Last but not the least; I would like to thank my family and colleagues

for their continuous support.

Gayatri Ranaware.

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EXECUTIVE SUMMARY

I. Title: Study of present status of pledge financing in India andrecommendations to make it a successful venture in India.II. Project Guide: Mr. Barbade

III. Student’s Name: Gayatri Ranaware

Project Brief: This project deals with the present scenario of pledge financing in Indiawith the Evolution of Rural Credit Delivery System. It also deals withthe need of Promotion of pledge financing & marketing credit. WRF isexplained with respect to the participants involved in this. The benefitsand limitations of this system are explained along with thePreconditions for Viability of WRF System. And finally therecommendations are given to make it a viable and successful venturein India.

Benefits of pledge finance:i) Increases the retention capacity of the small farmers to avoiddistress sale.ii) Minimizes the farmers’ dependence on the commission agents asthe pledge finance provides financial support to them immediatelyafter harvest period.iii) Participation of the farmers, irrespective of their land holding,increases the arrivals in market yards.iv) Gives a sense of security to the farmers even if their produce is notsold out in the market yard immediately.

Recommendations:i) A scheme of rural godowns should be formulated by this Ministry topromote pledge financing in farm sector.ii) It is recommended that in respect of high value crops, RBI shouldenhance the ceiling of advances from existing Rs.1.00 lakh to uptoRs.5.00 lakhs to farmers against pledge/ hypothecation of agriculturalproduce.iii) NABARD should provide 100% refinance to RRBs, on similar lines asthat of Cooperative Banks.iv) Creating a secure system, where warehouse operators are

accredited by the banks and where investors can build warehouses inthe knowledge that they can gain accreditation provided they meetprescribed standards.v) This is also necessary to encourage private sector to specialize inthe storage of commodities and perishable storage, marketing credit,standardization and in building the warehousing infrastructure in thecountry.

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TABLE OF CONTENTS

ACKNOWLEDGEMENT

i EXECUTIVE SUMMARY ii1. OVERVIEW (1 –

10)1.1 Pledge Financing ……………………………………………… 11.2 Participants involved in warehouse receipt financing.

……… 8

2. INTRODUCTION(11 – 24)

2.1 What is pledge financing ………………………………………...11

2.2. Present Status of pledge financing in India…………………18

2.3 Financing against WHRs in India ……………23

3. Warehouse Receipt as an Instrument for FinancingAgriculture (25 – 30)

3.1 WHRs..………………………25

3.2 Preconditions for Viability of Warehouse ReceiptSystem … 27

3.3 Limitations of WHRs…………………………...29

3.4 Role of banks…………………………………………………… 29

4. Benefits of warehouse receipt financing

(31 – 40)

4.1 Benefits of pledge financing……………………………………31

4.2 Prospects of Warehouse Receipt based lending in India… 34

4.3 Way Forward …………………………………………………... 37

5. RECOMMENDATION(42 – 43)

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6. REFERENCES44

CHAPTER 1:OVERVIEW

When a farmer harvests his crop, he stores it only to sell it in the near

future. Typically he sells it to the arthias (intermediary), as he requires

liquid cash to fun his household. The economic laws ensure that the

price is low at this time. The intermediary buys the produce at a low

price and exercises his holding power to sell the same at a time when

the prices move up in the market. This holding power needs to be

transferred to the farmer. Presently, the farmer does not have an

alternative as the arthias provides an integrated package to the farmer

right from the time of sowing to harvest. Selling the crop in the market

will always be subject to better price realisation and cash flow

requirements. Considering all the possible constraints of accessing a

market, realizing a better price in the market and ultimately ability to

offload his entire saleable produce, it becomes extremely difficult for

him to manage his immediate cash requirement. Then he looks for a

loan for which he is ready to pledge his produce. But the lack of access

to credit is a severe constraint for many farmers. In many developing

countries, past efforts to enhance farmers’ access to credit through

administrative means (special rural credit institutions, credit

allocations etc.) has never been a success.

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1.1 Pledge Financing:

The farmers are often compelled to sell their produce immediately

after harvest when the prices are low, in the absence of assured

market finance at reasonable rate of interest. To avoid such distress

sale, Government of India, promoted Pledge Finance Scheme through a

network of rural godowns and negotiable warehouse receipt system.

Through this scheme, small and marginal farmers can get immediate

financial support to meet their requirements and retain the produce till

they get remunerative price. According to the RBI guidelines,

loan/advances upto 75 percent of the value of the produce stored in

the godown can be advanced to the farmers against

pledge/hypothecation of agricultural produce (including warehouse

receipts) subject to a ceiling of Rs. 5.00 lakh per borrower. Such loan is

given for a period of 6 months, which can be extended upto 12 months

based on financing banks’ commercial judgement. The commercial

banks/cooperative banks/RRBs provide credit to the farmers for the

produce stored in the godown under this scheme. The banking

institutions accept the godown receipt on its being duly endorsed and

delivered to bank for pledge loan against hypothecation of produce as

per RBI guidelines. Farmers are given freedom to take back their

produce once the pledge loan is repaid. Facility of pledge finance is

extended to all farmers, whether they are the borrowing members of

Primary Agricultural Credit Societies (PACS) or not. The District Central

Cooperative Banks (DCCBs) directly finance individual farmers on the

strength of the pledge.

Benefits:

i) Increases the retention capacity of the small farmers to avoid

distress sale.

ii) Minimizes the farmers’ dependence on the commission agents as

the pledge finance provides financial support to them immediately

after harvest period.

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iii) Participation of the farmers, irrespective of their land holding,

increases the arrivals in market yards.

iv) Gives a sense of security to the farmers even if their produce is not

sold out in the market yard immediately.

1.1.1 Credit for agriculture and rural development

Institutional credit has enabled Indian farming community to access

capital and technology and thereby increase agricultural production.

Short-term credit for purchase of inputs and other services and the

long-term credit for investment purposes are the major facets of agri-

finance initiatives. The rural financial access survey (2007) conducted

by World Bank and NCAER in Andhra Pradesh and Uttar Pradesh

revealed that 44% rural households had informal borrowings in the

preceding 12 months on interest rates of up to 48% per annum. Only

21% rural households had access to formal credit and majority of bank

loans were collateralized.

The credit strategy for agricultural development in the country has

been founded on the philosophy of “growth with equity” and includes

measures like directed targets of lending to the agriculture sector,

coupled with availability of refinance to the banks at softer terms e.g.,

lower down-payment, longer maturity period and lower rates of

interest have helped in facilitating easier access and affordable credit

to marginal and small farmers. Further expansion of credit to

agriculture has to be on strictly commercially viable terms, which in

turn would enable the farmers to adopt new technologies of production

and supply chain management. In this context, credit support to

marketing and post harvest storage are to be strengthened further.

Futures market and warehouse receipt

financing could play a key role in this respect.

1.1.3 The Future Direction and Challenges:

The future directions of Indian agriculture will largely depend on the

domestic agriculture policy as well as the changing directions of

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globalization. According to the national agriculture policy document

(nap, 2006) the policy seeks to actualize the vast untapped growth

potential of Indian agriculture, strengthen rural infrastructure to

support faster agricultural development, promote value addition,

accelerate the growth of agro business, create employment in rural

areas, secure a fair standard of living for the farmers and agriculture

workers, discourage migration to urban areas and face the challenges

arising out of economic liberalization and globalisation. Over the next

two decades, it envisages to attain:

A growth rate exceeding 4 per cent per annum in the agriculture

sector.

Growth that is based on efficient use of resources and at the

same time conserves soil, water and bio-diversity.

Growth, which is equitably spread across regions and covers all

farmers.

Growth that is demand driven and caters to domestic markets as

well as maximises benefits from exports of agricultural products

in the face of the challenges arising from economic liberalisation

and globalisation.

Growth that is sustainable technologically, environmentally and

commercially.

In terms of globalisation, three important provisions in WTO

agreements i.e., reduction in trade barriers, increased market access,

and reduction in Aggregate Measure of Support (AMS), are likely to

have substantial implications for the agriculture sector. In the

emerging global situation India could increase its market share in

world exports by diversifying the agricultural production towards high

value and hi-tech agriculture. Therefore, the acceleration in agriculture

exports hinges critically on identifying those agricultural products in

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which India has a comparative advantage. Institutional credit will play

an important role in this respect.

1.1.4 The Evolution of Rural Credit Delivery System

Credit has been considered not only as one of the critical inputs in

agriculture, but also an effective means of economic transformation. A

large number of agencies, including cooperatives, regional rural banks,

commercial banks, non-banking financial institutions, self-help groups

and a well spread informal credit outlets together represent Indian

rural credit delivery system. These networks apart from working as

financial intermediaries also play a key developmental role in the

economy. The key milestone of rural credit system are Rural Credit

Survey Committee Report (1954) and acceptance of its

recommendations, nationalisation of major commercial banks (1969

and 1980), establishment of RRBs (1975), establishment of NABARD

(1982) and the ongoing financial sector reforms since 1991. Further,

several initiatives like Kisan Credit Card Scheme, Special Agricultural

Credit Plans, RIDF Scheme etc, are put in place to increase the flow of

credit to agriculture sector. An important development in this regard is

the phenomenal growth of Self-Help Groups since 1990s.

1.1.5 Present Status

As per the Tenth Plan projection, the flow of credit to agriculture and

allied activities is expected to be of the order of Rs.7, 36,570 crores.

However, despite the extensive outreach of rural and semi-urban

branch network of commercial banks (about 33,000), cooperative

banks (about 1 lakh) and RRBs (about 14,000), the estimated actual

flow of credit to agriculture from formal rural financial institutions (RFI)

during the first year of the Tenth Five Year Plan, i.e. 2008-09, stood at

Rs. 866625 crores against the projected amount of Rs 10,073 crores,

i.e. 86 per cent (Table-1.1). Therefore, there is an urgent need to

double the flow of credit to agriculture. This is a formidable challenge.

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Table 1.1: Agency-wise Ground Level Credit

Flow for Agriculture and Allied Activities

Agency 2005-06 2006-07 2007-08 2008-09

Co-operative Banks 37252 44376 52149 61754

Regional Rural Banks 14076 14076 14076 14076

Commercial Banks 106152 106152 106152 106152

Other Agencies NA NA NA NA

Total 157480 157480 157480 157480

Source: NABARD Annual Report

1.1.6 Warehouses

Warehouses are scientific storage structures especially constructed for

the protection of the quantity and quality of stored products. The

product is protected against quantitative and qualitative losses by the

use of such methods of preservation as are necessary. Warehouses

meet the financial needs of the person who stores the product.

Nationalized banks advance credit on the security of the warehouse

receipt issued for the stored products to the extent of 75 to 80% of

their value. They help in price stabilization of agricultural commodities

by checking the tendency to making post-harvest sales among the

farmers. Warehouses also offer the facility of market information to

persons who hold their produce in them.

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Presently the operational capabilities of warehouses in India are as

follows:

• The warehouses (CWCs and SWCs) work under the respective

Warehousing Acts passed by the Central or State Govt.

• Any person may store notified commodities in a warehouse on

agreeing to pay the specified charges.

• A receipt/warrant is issued by the warehouse manager/owner to

the person storing his produce with them. This receipt mentions

the name and location of the warehouse, the date of issue, a

description of the commodities, including the grade, weight and

approximate value of the produce based on the present prices.

• The produce accepted at the warehouse is preserved

scientifically and protected against rodents, insects and pests

and other infestations. Periodical dusting and fumigation are

done at the cost of the warehouse in order to preserve the

goods.

• The warehouse receipt serves as a collateral security for the

purpose of getting credit.

• The warehouse receipt has to be surrendered to the warehouse

owner before the withdrawal of the goods. The holder may take

delivery of a part of the total produce stored after paying the

storage charges.

A number of attributes will get incorporated into the presently existing

warehousing system during the implementation of the project. Since

the entire transaction is electronic, the physical receipt can be done

away with, and merely the details of the deposit made are noted

irrefutably into the farmer’s database.

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1.2 Participants involved in warehouse receipt financing:1) National Agricultural Cooperative Marketing Federation of

India Ltd. (NAFED) Central nodal agency of Government of India for

procurement of pulses, millets and oilseeds under price support

scheme.

• It undertakes sale of pulses and oilseeds procured under PSS and

import.

• Provide storage facilities.

• Consumer Marketing Division of NAFED serves the consumers in Delhi

through the network of its retail outlets (NAFED BAZAR) by providing

consumer items of daily need.

• Processing of pulses, fruits, etc for internal trade.

2) Central Warehousing Corporation (CWC)

Provides scientific storage and handling facilities.

• Offers consultancy services/ training for the construction of

warehousing infrastructure to different agencies.

• Import and export warehousing facilities.

• Provides disinfestations services.

3) State Warehousing Corporation (SWC)

To acquire and build go-downs and warehouses within the state.

• To run warehouses, in the State for storage of agricultural

produce and notified commodities.

• To arrange facilities for the transport of agricultural produce and

notified commodities to and from warehouses;

• To act as agent of the CWC or the Government for the purpose of

the purchase, sale, storage and distribution of agricultural

produce and notified commodities.

4) Banks like ICICI, SBI, HDFC, AXIS and IDBI etc.

ICICI Bank has initiated talks with the National Multi Commodity

Exchange to enhance its presence in WHRs finance, a new business

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avenue identified by the bank last year. Commercial Banks is eyeing

the 2,000 WHRs of the NMCE, which are likely to bring huge business

volumes to the commercial banks. WHRs financing is a commodities-

based financial instrument that can bring more interest revenue to the

financiers. This instrument will give farmers the option of holding back

their produce if the prices are low. They can also get up to 80 per cent

funding of the value of their produce from the banks. A warehouse

receipt is guaranteeing the existence and availability of a given

quantity and quality of a commodity in storage for safekeeping, which

is often, used in cash and futures transactions.

The interest rates the banks charge vary between 8 per cent and 10

per cent, lower than bank prime lending rates. For loans up to Rs

50,000, the interest rates are at least two percentage points below the

PLR. For loans up to Rs 200,000, the rates are either marginally below

the prime rate, or equal to it.

It seems NMCE's strong network with the warehouses under the

Central Warehousing Corporation (CWC) is the reason behind

commercial Bank's move. The exchange has an access to all the 491

CWC warehouses in India. In last two years, the CWC has employed

and trained people to check quality norms and standard storage

practices for a range of commodities, apart from food grains.

The CWC also has a 50 per cent partnership with the state warehouses,

which access NMCE services. The warehouseman assesses the quality

of goods tendered and checks its specifications. He certifies this on the

warehouse receipt.

New generation banks such as HDFC Bank, AXIS Bank and IDBI Bank

have started granting loans to farmers based on the quality of their

produce and warehouse receipts, with the crop (wheat, potatoes,

cotton or sugarcane) as collateral.

The futures exchanges are increasingly looking towards farmers'

participation for their success and to drive the volume turnover. The

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Coffee Futures Exchange of India Ltd was the first to introduce WHRs

financing to certify actual stocks surrendered to the certified

warehouse by traders.

5) National Bulk Holding Corporation (NBHC):

NBHC has been set up with the primary objective of providing the

above solutions by emphasizing on public and private sector

participation, quality warehousing and commodity management with

storage, preservation and protection techniques through upgradation

of available infrastructure, creation of infrastructure of global

standards, supported by associated business partners and

simultaneously establishing standards and mechanisms for

commodities trading

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CHAPTER 2:INTRODUCTION

2.1 What is pledge financing

On the recommendations made by the All India Rural Credit Survey

Report of Reserve Bank of India, in 1954, pledge concept was

developed to help the producers to come out of the clutches of the

village money lenders and to avoid distress sale and situation of glut in

the market .In lieu of the produce stored with the different agencies,

finance was made available to the extent of 70 to 80 per cent of the

value of the produce on a very low rate of interest. Pledge loan facility

is being provided by CWC /SWC, Agricultural Produce MarketCommittees in many states and Rural godown Scheme or Gramin

Bhandaran Yojana of Directorate of Marketing and Inspection, govt. of

India.

Recently, NAFED has also launched anew scheme to extend

pledge loan facility to small and marginal farmers against the stock

stored in NAFED’s societies’ godown. Under this scheme, small and

marginal farmers will be immediately advanced an amount of up to 80

per cent of the assessed value of the stock on the given day for non-

perishable stock and up to 60 per cent for perishable stock, against

hypothecation or pledge of stock to NAFED. An interest rate of one per

cent per month will be charged by NAFED for this service. (Economic

Times-10-04-06).

Under this scheme the produce must be of defined quality or

graded before taken into possession in the warehouses. Quality of the

stored produce is maintained on scientific lines to prevent the storage

loses and delivers the same to the depositor on his request.

Pledge Financing & Marketing Credit:

1. The Indian farming community consists mostly of small and marginal

farmers. Micro level studies indicate that small farm holdings

15



contribute about 54% of marketable surplus and distress sale by these

small farmers account for about 50% of the marketable surplus. The

farmers often sell their produce to square off their debts soon after

harvesting. The solution for this problem lies in providing to them

access to safe and scientific storage and easy marketing credit.

Promotion of pledge financing through a network of rural godowns and

negotiable WHR system.

2. Limited credit for marketing of crops (pledge financing) is available

at present to the farmers from the formal banking channels. The

quantum of financing done both by Commercial banks and Cooperative

banks for pledge financing is very little as compared to the crop

production loans. The loans given for pledge financing also do not get

captured in the existing MIS separately because the quantum is small

and they get clubbed along with short- term direct agricultural loans

for agriculture. NABARD has assessed the quantum of pledge financing

which is taking place in the country now to be around Rs.1200 crores

per year. With private sector participating in rural godowns, the

quantum had rapidly grown to a level of at least Rs. 7000 crores by the

end of (Xith 5 yr plan 2011) X Five Year Plan period in 2007

3. According to the RBI Guidelines, advances upto Rs.1 lakh can be

given to farmers against pledge/ hypothecation of agricultural produce

(including warehouse receipts) for a period not exceeding 6 months

subject to the condition that farmers have been given loan for raising

the produce and provided the borrower draws credit from the same

bank. Such advances are included as direct finance to farmers for

agricultural purposes under priority sector lending. There is no bar on

banks extending pledge loans for periods upto 12 months. However,

this would not be an automatic extension but will depend on the nature

of crops stored in the godown and the appropriate time to sell the

produce and would be left to the financing banks’ commercial

16



judgment. While no margin is levied for loans up to Rs.10, 000/-, for

loans above Rs.10, 000/- the prescription of margin is left to the

individual bank’s discretion. For loans up to and inclusive of Rs.2 lakhs,

the rate of interest levied is “Not exceeding PLR”. In respect of loans

above Rs.2 lakhs, banks are free to decide their own interest rates.

However, the banks have the discretion to offer loans at below PLR

rates, to creditworthy borrowers based on a transparent and objective

credit policy approved by their Boards. After the deregulation of

interest rates, the banks have been given the freedom to decide the

interest rates keeping in view that cost of funds, transaction cost, etc.

4. To promote pledge loans for agri commodities, it is recommendedthat in respect of high value crops, RBI should enhance the ceiling of

advances from existing Rs.1.00 lakh to upto Rs.5.00 lakhs to farmers

against pledge/ hypothecation of agricultural produce (including WHR)

where the farmers were given crop loans for raising produce, provided

the borrowers draw credit from the same bank. Such advances should

be categorized as direct finance to farmers for agricultural purpose,

under priority sector advances. The repayment of these loans may also

be extended from the existing 6 months to upto one year depending

on the nature of crops stored in the godowns and the appropriate time

to sell the produce. Crops which are subject to wide fluctuations (in

prices) need to be identified and marketing credit policies specifically

be designed for them. Banks should be encouraged to augment the

resources of state marketing cooperatives, which provide Pledge

financing facilities to farmers. Regional Rural Banks have an extensive

reach through their 14,500 branches all over the country. At present

NABARD refinance does not support Regional Rural Banks through its

refinance for Pledge Financing Loans. NABARD should provide 100%

refinance to RRBs, on similar lines as that of Cooperative Banks.

Arrangements should be developed so that the WHRs of private sector

17



are acceptable to the banks for providing credit to farmers. Since

pledge financing is considered to be crucial to farmers to enhance their

holding capacity to obtain remunerative price for their produce, it is

recommended that RBI should monitor pledge financing to farmers

within the overall target of 18% of NBC to agriculture, fixed for

commercial banks.

Negotiable Warehousing Receipt System:

1. There is a need to introduce a negotiable WHRs system in the

country, with large benefits such as increased liquidity in rural areas,

lower costs of financing, shorter and more efficient supply chains,

enhanced rewards for grading and quality, development of other

productivity-enhancing agricultural services and better price-risk

management. All these developments will result in higher returns to

farmers, better service to consumers (involving lower prices, better

quality and greater variety) and macro-economic benefits through a

more healthy trade balance in agricultural commodities. Introduction of

the system for agricultural commodities will also enhance

competitiveness of Indian agriculture in the domestic and global

markets. The aim is to greatly expand the availability of warehousing

services, while making WHR a prime tool of trade and trade financing

throughout the country. It will also enable the banks to improve the

quality of their lending portfolio to the agricultural sector.

2. The banking institutions are at present hesitant in making advances

against the CWCs’ WHR when the holder thereof is not a person in

whose favour the receipt was originally issued. Transferability of the

WHR by endorsement is presently further limited by the fact that the

original holder of the WHR cannot transfer it to another person without

clearing the bank loans. This inhibits the negotiability of the WHR and

reduces its usefulness to the depositor who cannot sell his goods

18



before settling his loan with the banks. The State Warehouses Acts

provide that a receipt issued by a warehouseman is transferable by

endorsement and shall entitle its lawful holder to receive the goods

specified in it on the same terms and conditions on which the person

who originally deposited the goods would have been entitled to receive

them. Further, the present Warehouse Receipt is a document of title

to the goods as per the Sale of Goods Act, 1930. Nevertheless,

because of the imperfections in the present structure of Warehouse

Receipts, the usage of the present WHRs remained restricted to be

accepted by the commercial banks as a collateral security for grant of

loans against the goods stored in the warehouses and the present

WHRs has not yet gained its acceptability as a negotiable instrument

that could be freely transferred from one persons to another.

3. Negotiable WHRs can be accomplished by creating a secure system,

where warehouse operators are accredited by the banks and where

investors can build warehouses in the knowledge that they can gain

accreditation provided they meet prescribed standards. A system of

quality certification and grading of commodities will have to be

established, with a view to minimizing disputes and permitting cost

savings through the combining of stocks of different owners. The

status of WHRs has to be enhanced through legal changes for creating

an effective system of regulatory oversight and by instituting a

secured central electronic register allowing for the tracking of all

changes in ownership and liens on WHRs.

a) Short Term Measures:

i) The CWCs and the SWCs should evolve commercially acceptable

quality standards in respect of various commodities in order to ensure

quality maintenance of the stored goods over a sufficiently longer

period of time.

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ii) The warehousing corporations should enforce standards both for

quality and quantity at the warehouses, for which required

infrastructure as to the measurement of grades and standards need

also to be put in place, so as to reduce disputes on account of quality

and quantity standards, and to improve the credibility of the WHR.

iii) The warehousing corporations are also required to gear up

appropriate market intelligence on the prices of various commodities

linked with the grades/ standards.

iv) To begin with, selected commodities, and a few selected varieties,

should be taken into the net of such rigorous quality standards for

issue of WHRs which could be easily traded as more and more

infrastructure is added in order to ensure foolproof assessment of such

standards.

v) Adequate publicity measures should be adopted so that the WHRs

issued against the deposit of goods through the process of proper

grading and standardization as per the rigorous standards with

reasonable period of storage and the right price depicted on them so

as to facilitate the general acceptance of WHR as a negotiable

instrument and to be traded easily from one person to another.

vi) The government of India is already considering value added tax all

over the country. The other barriers particularly, the high level of

public intervention in the market need to be completely stopped or

greatly liberalized in order to allow free flow of trade in agri commodity

all over the country.

b) Long term measures:

i) A Central legislation on the pattern of The Multimodal Transportation

of Goods Act, 1993, needs to be enacted for the WHRs to be made fully

negotiable instrument. Law should be framed in such a way that it

gives full enforceability and transparency of the WHRs.

20



ii) The CWC being the premier warehousing agency at the national

level, it should be the ideal institution to be classified as the

Accreditation Agency. In the long run some new institution has to be

established for the purpose of regulation as the players cannot be the

monitors and if the CWC becomes the regulatory body, it has to go out

of the warehousing field itself.

iii) The legislation should also take care of securing a system of central

electronic register like in the Stock Exchanges, for allowing the

tracking of all changes in the ownership and liens in respect of the

WHRs. As the fluctuations of the prices in the market varying from

place to place play a great role, necessary safeguards have to beprovided to prevent any political interventions.

2.2 Present Status of agri credit/pledge financing in India:

The Government keeps on introducing new schemes to help farmers toget credit. Some of them are following:

• Agriculture Credit

Emphasis has been laid on progressive institutionalisation

for providing timely and adequate credit to farmers for

21



increasing agriculture production and productivity. The

flow of institutional credit for agriculture and allied

activities has increased from Rs.66, 771 crores in 2001-02

to Rs 1,50,890 crores 2008-09 in The total credit flow from

all agencies during the 9th Plan is estimated to be Rs.2,

33,700 crores marking an increase of Rs.4, 000 crores over

the target. The total credit flow during the 11 th Plan had

been projected at Rs.15, 36,570 crores.

• Kisan Credit Cards

The scheme has been launched to provide adequate and

timely support from the banking system to the farmers for

their cultivation needs, including purchase of all inputs in a

flexible and cost effective manner. Since its launch in

1999-2000, the scheme has made rapid progress. Till the

end of October 2008, 5.89 crores Kisan Credit Cards have

been issued.

• Enhancement in Storage

National Horticulture Board (NHB) is implementing major

schemes for construction/expansion/modernization of cold

storages and storages for horticultural produce,

development of commercial horticulture through

production and post-harvest management, technology

development and its transfer for promotion of horticulture.

• Grameen Bhandaran Yojna

It is well known that the small farmers do not have the economic

strength to retain the produce with them till the market prices

22



are favorable. There is a felt need in the country to provide to

the farmers the facility of rural godowns for scientific storage so

that wastage and produce deterioration are avoided and also to

enable it to meet its credit requirement without being compelled

to sell the produce at a time when prices are low. This Ministry

has already formulated and launched a new scheme for the

construction of rural godowns involving an outlay of Rs.400

crores, with a subsidy element of 25 (1/3rd in North East States,

Hilly and Tribal areas) from the central government budget. The

scheme envisages creation of 25 million tonnes of storage with

the facility of pledge financing to the farmers within two years

i.e. by March 2006. During Xth plan period, it is proposed to

continue the scheme to create an additional of 75 lakh tonnes of

rural godown capacity in the country on the same terms and

conditions already formulated to the scheme, involving a total

capital outlay of Rs.1510 crores entailing a central subsidy of

Rs.410 crores inclusive of a general awareness and training

programmes for the farmers and entrepreneurs to ensure that

these godowns are managed by trained personnel. It is also

expected that a national system of warehouse receipt will be

introduced in the country and all the rural godowns will be

networked into a National Grid of warehouses to facilitate e-

trading in standardized graded agricultural commodities.

It is proposed that the State has created 12.25 million tonnes of

storage capacity in the State upto 2011 and accordingly be

increased in subsequent years as per Govt. of India allocations. It

should ensure a subsidy of Rs. 100 crores in this period. The

scheme of construction, renovation and expansion of rural

godowns, called Grameen Bhandaran Yojna, was launched during

2001-2002. The main objectives of the scheme are: creation of

scientific storage facility for agricultural produce; promotion of

23



grading, standardisation and quality control of agricultural

produce; and prevention of distress sale by farmers immediately

after harvest. The scheme provides facility of pledge-financing

and marketing credit. Under the scheme, target of creation of

56.3 lakh MT and renovation of 14.6 lakh tonnes of rural storage

capacity has been achieved in 2010-2011. The Government has

provided financial assistance of Rs. 90 crores by way of subsidy.

The scheme will immensely benefit farmers, especially the small

and marginal ones, and will improve the marketing infrastructure

in rural areas.

The main objectives of the scheme include creation of scientific

storage capacity with allied facilities in rural areas to meet the

requirements of farmers for storing farm produce, processed

farm produce, consumer articles and agricultural inputs;

promotion of grading, standardization and quality control of

agricultural produce to improve their marketability; prevention of

distress sale immediately after harvest by providing the facility

of pledge financing and marketing credit; to strengthen

agricultural marketing infrastructure in the country by paving

way for the introduction of a national system of WHRs in respect

of agricultural commodities stored in such go-downs and to

reverse the declining trend of investment in agriculture sector by

encouraging private and cooperative sector to invest in the

creation of storage infrastructure in the country.

To effectively implement the Scheme, the assistance of the State

Government may be provided in the following areas:

i) Organization of awareness programme for the farmers and

training programme for the prospective entrepreneurs. National

Institute of Agricultural Marketing (NIAM) has been provided

requisite funds for this purpose.

24



ii) Advising the State Warehousing Corporation to evolve a

simplified procedure to issue license to the entrepreneurs for

operation of such rural go-downs under the State Warehousing

Act.

iii) Advising the banks to provide adequate finances to the

prospective entrepreneurs for construction of the go-down and to

the farmers’ pledge loan on hypothecation of their produce

stored in such go-downs.

iv) Nominate a nodal officer of the State to closely monitor

implementation of the scheme in association with the officers of

the Directorate of Marketing and Inspection and the NABARD.

Key factors of Grameen Bhandaran Yojna:

1. Projects can be taken up by any individuals/group of farmers,

firms, NGOs, Self Help Groups, Company, Corporation,

Cooperatives, APMCs, Board, Agro Processing Corporations

2. Projects for renovation / expansion of rural go-downs can be

taken up by cooperatives

3. Restrictions:

a) Only outside the limits of Municipal Corporation

b) Minimum capacity is 100 MTs.

4. Subsidy is linked to institutional credit

5. SUBSIDY:

RATE OF SUBSIDY- 25% ( 33.33% FOR SC/ST)

CAPITAL COST UPTO 1000 MT =< 2000/- per MT/actual cost

CAPITAL COST ABOVE 1000 MT =< 1500/- per MT/actual cost

RENOVATION/EXPANSION =< 500/- per MT/actual cost

CEILING – 10,000 MT / Rs. 35.75 lakhs per project (Rs.50 lakhs for

SC/ST)

25



Market Lot requirement on Futures exchange makes it difficult for

small farmers to participate in warehouse receipt financing.

Quality and specification requirement present a formidable

challenge. Creation of suitable accreditation agencies for the

warehouses would facilitate lending

Difficulty in disposing of the security in case of default would be

removed by creating a screen based spot market along with

attendant clearing and settlement facilities.

Many of the farmers are in the stranglehold of local level non-

institutional middlemen (e.g. Arthias) and they are unable to access

bank loans.

Receipts issued by Central / State Warehouses are financed by

banks, but those of Private Warehouses are not freely financed by

banks. Since farmers / traders will not deposit their goods with a

warehouse whose receipts are not financed by banks, viability of

the private warehouse is at stake.

High margins, up to 40% stipulated by banks create liquidity

problem for the farmers who are, therefore, not very keen on

obtaining finance by means of Warehouse Receipts. The margins

could be reduced to 10-20% if the issues regarding quality and

grade and ease of disposing the stocks in case of default as

mentioned above are solved.

Some state governments have introduced stamp duty on pledge/

hypothecation. Since pledging or WHRs will attract stamp duty this

will have an adverse bearing on the farmers / traders.

27



CHAPTER 3:

WAREHOUSE RECEIPT AS AN INSTRUMENT FOR FINANCING

AGRICULTURE

3.1 Warehouse Receipts (WHRs)

WHRs are documents issued by warehouses to depositors against the

commodities deposited in the warehouses, for which the warehouse is

the bail. WHRs may be either non-negotiable or negotiable. These

documents are transferred by endorsement and delivery. Either the

original depositor or the holder in due course (transferee) can claim

28



the commodities from the warehouse. WHRs in physical form suffer all

the disadvantages of the paper form of title documents.

Warehouse Receipts, negotiable instruments backed by the underlying

commodities, are an integral part of the marketing and financial

systems of most industrial countries. The overall efficiency of these

markets, particularly in the agribusiness sector, is greatly enhanced

when producers and commercial entities can convert inventories of

agricultural raw materials or intermediary or finished products into a

readily tradable device. Since WHRs are negotiable instruments, they

can be traded, sold, swapped, used as collateral to support borrowing,

or accepted for delivery against a derivative instrument such as a

futures contract.

3.1.1 Benefits of Warehouse Receipts

1) WHRs provide farmers with an instrument that allows them to

extend the sales period of modestly perishable products well beyond

the harvesting season. When delivering the product to an accredited

warehouse, the farmer obtains a Warehouse Receipt that can be used

as collateral for short-term borrowing to obtain working capital. That

way, the farmer does not need to sell the product immediately to ease

cash constraints. Of course, this option will be attractive only if the

farmer expects that seasonal price increases will make it worthwhile to

store the product and sell it later.

2) The availability of secure WHRs may also allow owners of

inventories to borrow abroad in currencies for which real interest rates

are lower, particularly if loans are made against inventories of an

export commodity, thereby hedging against the foreign exchange risk

of foreign borrowing. This practice is followed in Kenya and Uganda,

where coffee stocks are often financed in pounds sterling. Also, since

high real interest rates are often linked to perceived risks, particularly

when it concerns agriculture, secure WHRs may reduce risk and lead to

lower lending rates.

29



3) Correctly structured WHRs provide secure collateral for banks by

assuring holders of the existence and condition of agricultural

inventories "sight unseen." WHRs can be used by farmers to finance

their production, and by processors to finance their inventories. If there

is a default on any obligation guaranteed with the Warehouse Receipt -

for instance, a bank loan - the holder has first call on the underlying

goods or their monetary equivalent. Collateralizing agricultural

inventories will lead to an increase in the availability of credit, reduce

its cost, and mobilize external financial resources for the sector.

4) WHRs contribute to the creation of cash and forward markets and

thus enhance competition. They can form the basis for trading

commodities, since they provide all the essential information needed

to complete a transaction between a seller and a buyer. Their

availability will thus both increase the volume of trade and reduce

transaction costs. Since buyers need not see the goods, transactions

need not take place at either the storage or the inspection location.

With a functioning Warehouse Receipt system, commodities are rarely,

if ever, sold at the warehouse proper. A transaction can take place

informally or on an organized market or exchange. In either case,

the Warehouse Receipt forms the basis for the creation of a spot, or

cash market. If transactions involve the delivery of goods on a future

date, WHRs can form the basis for the creation of a forward market

and for the delivery system in a commodity futures exchange. A

broader benefit of WHR is that they increase the confidence of

participants, particularly those in the private sector, in market

transactions.

5) A WHR system provides a way to reduce the need of government

agencies in procurement of agricultural commodities. Government

intervention in agricultural markets usually has two main objectives: to

support prices, by buying directly from producers, and to guarantee a

measure of food security. In order to support prices, governments can

30



accept WHRs when prices drop below a support floor, rather than

taking delivery of physical inventories. Since WHRs guarantee the

existence of stocks, governments can achieve their food - security

objectives by merely holding these receipts.

6) WHRs can be combined with price-hedging instruments. This

combination provides lenders with secure collateral, in the form

of WHRs, and puts a minimum value on it, through the hedging

operation. For example, the PTA Bank in Kenya finances coffee

exporters by taking their WHRs as collateral and also offers them a put

option, purchased at the London Commodity Exchange, that

guarantees sellers a minimum price for the coffee they have in

storage. By assuring a floor price for the stored coffee, the PTA Bank

can provide finance for a higher percentage of the value of coffee than

it could justify in the absence of the floor price. Banks will often

advance 80-90 percent of the value of the transaction if it is hedged,

but only 50-60 percent if it is not.

3.1.2 Limitations on the Use of Warehouse Receipts (WHRs)

1) The use of WHR is limited in many developing countries because of

institutional and structural shortcomings, among which the most

prevalent are the following:

• Lack of incentives for the development of a private storage

industry owing to government intervention in agricultural

markets - usually by setting support prices that take insufficient

account of price variations over time or in different regions to

allow for profitable storage;

•

Lack of an appropriate legal, regulatory, and institutionalenvironment to support a system of Warehouse Receipts; and

• Limited, if any, familiarity of the country's commercial, including

its banking, community with Warehouse Receipts.

31



3.2 Preconditions for Viability of Warehouse Receipt System

1) In order for a Warehouse Receipt system to be viable, the economy

within which it operates must meet certain conditions. The legal

system must support pledge instruments, such as Warehouse Receipts,

as secure collateral. The pertinent legislation must meet several

conditions:

• WHRs must be functionally equivalent to stored commodities;

• The rights, liabilities, and duties of each party to a Warehouse

Receipt (for example a farmer, a bank, or a warehouseman) must

be clearly defined;

• WHRs must be freely transferable by delivery and endorsement;

• The holder of a Warehouse Receipt must be first in line to receive

the stored goods or their fungible equivalent on liquidation or

default of the warehouse; and

• The prospective recipient of a Warehouse Receipt should be able

to determine, before acceptance, if there is a competing claim on

the collateral underlying the receipt. The lack of an appropriate

legal environment is probably the single most important

constraint on the creation and acceptance of WHRs in many

developing countries.

2) Operational conditions must be conducive to the creation of a

warehouse-receipt system and include the following:

• Reliable warehouse certification, guaranteeing basic physical and

financial standards;

• The existence of independent determination and verification of

the quantity and the quality of stored commodities, based on a

national grading system (with inspection of warehouses and

stored commodities performed, in most cases, by the private

sector under license from a government body - for agricultural

goods, usually the ministry of agriculture); and

32



• The availability of property and casualty insurance.

3) The integrity of the system must be assured through performance

guarantees. A key prerequisite for the acceptability of WHRs by the

trade and by banks is the existence of a performance guarantee for

warehouses, assuring that the quantities of goods stored match those

specified by the warehouse receipt and that their quality is the same

as, or better than, that stated on the receipt. Without this guarantee,

farmers and traders will be reluctant to store their crops, and banks

will be hesitant to accept WHRs as secure collateral for financing

agricultural inventories. The unavailability of performance guarantees -

for instance, because of the absence of reliable inspection and

certification - may occasionally lead to second-best solutions. For

example, in Brazil, a system of WHRs operates that is limited to

products stored in bank-owned warehouses.

3.3 Limitations of Warehouse Receipts

Some of the limitations of WHRs are as under:

• Need for splitting the Warehouse Receipt in case the depositor

has an obligation to transfer only a part of the commodities;

• Need to move the Warehouse Receipt from one place to another

with risk of theft/mutilation, etc. if the transferor and transferee

are at two different locations;

• Risk of forgery.

3.4 Electronic Warehouse Receipts

1) The advantages of electronic receipts over their paper counterparts

include:

• Reduction in manual-paper handling;

• Transporting paper documents is eliminated along with the

attendant risks;

• Information is moved faster;

• Multiple keypunching of data is reduced;

33



• An audit trail of receipt activity is kept, and the electronic receipt

system serves to back-up receipt data for the warehouse;

• Chances of forgery are reduced.

2) The Electronic Warehouse Receipt should be legally equivalent in

every respect to a paper Warehouse Receipt. Electronic WHRs are

different from paper WHRs in that any part can be fractionalized to

thousandths of the whole. And because of the digital nature of an

Electronic Warehouse Receipt, the bearer on demand can execute this

fractionalization, so long as the whole never exceeds the quantity of

the underlying goods in the warehouse.

3.4 Role of various participants:

• Banks - Bank's extend finance against WHRs issued by NBHC's

accredited warehouses. It also gives financial support for the

development and upgradation of warehouses. It also

disseminates information on futures trading through its vast

network of branches amongst the farmers and commodity

traders across the country.• Quality Control Agencies - They undertake technical

inspection of the warehouses and assist in gradation and

standardisation of commodities. They provide quantity

certification of the stored commodities.

• Logistic Companies - They help in smooth and efficient

movement of commodities in right Quality and Quantity to right

place at right time.

• NBHC Accredited Warehouses - It provides Efficient

Commodity Management as per internationally recognised

standards

34



3.4.2 Role of intermediaries (cooperatives, corporates, NGO’s

etc.):

In order to attract Farmers for utilizing storage capacity of NAFED, a

scheme of providing finance against storage of their produce in NAFED

warehouses has been introduced. For Making this scheme farmers

friendly, NAFED and HDFC Bank have signed a Memorandum of

agreement on 01 Feb 2005. The scheme envisaged providing finance

to farmers through NAFED and its member cooperatives against pledge

of their stocks. WRF will make cash available to the farmers at the time

of their need so that they take care of their crop.

Broad roles of NAFED and associated cooperatives would be:

a) To promote scheme

b) Documentation and security of documents

c) Loan disbursal

d) Market intelligence

e) Disposal of stock in the event of default

For implementation, a joint team with representation from NAFED and

HDFC Bank which will identify the commodity, Location, Cooperative

society and where house so as to design the promotional campaign

and finally launched.

CHAPTER 4:

BENEFITS OF WAREHOUSE RECEIPT FINANCING

To get rid of distress sale, Government of India, promoted Pledge

Finance Scheme through a network of rural godown and negotiable

warehousing receipt system. Through this scheme, small and marginal

farmers can get immediate financial support to meet their

requirements and retain the produce till they get remunerative price.

• After harvest the farmer deposits his crop in an accredited

warehouse and receives a warehouse receipt. The warehouse will

35



only release the crop to the owner against this warehouse

receipt.

• The farmer applies to the bank for a loan and in exchange for the

money issued he gives the bank the warehouse receipt as a

pledge.

• The farmer has two options:

o Repay the loan whenever he feels favorable and liquidate

his crop the warehouse. He can sell the same in the

market.

o Before the loan matures, the farmer sells his crop to the

processor by selling the receipt (for this the receipt mist be

tradable).

• When the loan matures, or when he needs the crop, the

processor repays the loan to the bank.

• The processor now can collect the crop from the warehouse.

4.1 Benefits of pledge finance:

A well functioning system of warehouse receipt financing has the

following economic benefits:

• Mobilizing credit to agriculture by creating collateral for the

farmer, processor, and trader

• Smoothing market prices by facilitating sales throughout the

year rather than just after harvests.

• Reducing risk in the agricultural markets, improving food security

and credit access in rural areas.

• Increasing market power of small-holders by enabling them to

choose at what point in the price cycle to sell to sell their crops

• Helping to create commodity markets which enhance

competition and market information.

36



• Helping to upgrade the standards and transparency of the

storage industry since it requires better regulation and

inspection.

• Providing a way to gradually reduce the role of government in

agricultural commercialization.

• Contributing to lower post harvest losses due to better storage

conditions (i.e. induces farmers to store in more appropriate

warehouses).

• Lowering transaction costs by guaranteeing quantity and quality.

• Increasing quality awareness (assuring the quality deposited is

the same as the quality withdrawn).

• Increasing the retention capacity of the small farmers, which in

consequent also enable the farmers to avoid distress sale.

• Minimizing the farmer’s dependency on the commission agents

as the pledge finance provides financial support to them

immediately after harvest period.

• Participation of the farmers, irrespective of their land holding

size, increases the arrivals in market yard throughout the year.

• Providing a sense of security to the farmers even if their produce

not sold out in the market yard immediately.

• Increasing the retention capacity of the small farmers to avoid

distress sale.

• WHRs as securities:

Important gains would be obtained by modifying the legal

structure so that WHRs become negotiable. It should be possible

to dematerialise WHRs at NSDL and CDSL. But it will have to be

preceded by appropriate upgradation of the systems and

creation of a regulatory apparatus to facilitate development and

adoption of uniform standards, creation of facilities for scientific

37



grading, packing, storage, preservation and certification at the

warehouses.

From the viewpoint of traders, intermediaries, institutional

investors, banks, etc. across the country, the existing business

process, which is used for securities, would work without a

change.

In India today, there are important gaps in the warehousing

industry. A sophisticated warehousing industry has yet to come

about. At present, public sector dominates warehouse sector and

Central Warehousing Corporation and State Warehousing

Corporations account for approximately more than 3/4 th of total

warehousing capacity in the country. This infrastructure,

including expertise in grading, standardization, and quality

assurance can be fruitfully utilized by galvanizing it to meet the

requirement of sophisticated market instruments, such as

negotiable Warehouse Receipt System.

Use of WHRs in the United States:In the United States, WHRs are used for four primary purposes:

• As collateral for standard nine-month loan programs, backed by

government guarantees,

provided through the US Department of Agriculture (farmers use this

post-harvest inventory financing to ease their cash-flow constraints

and to facilitate the marketing of

their crops)

• As inventory documentation for government-owned grain—for,

instance, in the US government’s strategic reserves—that is stored in

privately owned warehouse space

• As a means of making collateral out of crops held in commercial

storage (by, for instance, grain milling companies)

• As delivery documents that are acceptable for trading on futures

exchanges, against letters of credit in payment for exports, etc. The

38



relative importance of each of these uses depends upon market

conditions— principally prices and the sizes of inventories and

carryover stocks. The usefulness of WHRs in the economy has been

well established—for example, it is widely recognized that the United

States would have found it difficult to manage and liquidate the huge

grain inventories its farmers accumulated during the mid-1980s in the

absence of a system of WHRs as negotiable instruments.

4.2 Prospects of Warehouse Receipt based lending in India:1) Farmers:

At the time of harvesting, farmers usually sell a substantial quantity

of produce at lower prices. However, price tends to rise as the

season progresses. If farmers keep their goods in warehouses and

use them as collateral to avail credit facility, they would be better

placed to take advantage of the benefits of higher price and meet

their immediate credit requirements.

WHRs can be used to lower access barriers. By attracting deposits

from small farmers and traders, the system will help formalize their

trade transactions, enabling a database on their activities to be

generated. This will help overcome the problem of lack of trackrecord, and enable banks to screen borrowers more effectively and

with minimum delay.

Lenders can mitigate credit risk by using the stored commodity as

collateral. This form of collateral is more readily available to rural

producers and may be less difficult to liquidate than most assets

traditionally accepted as collateral. For instance, availability risk

associated with movable collateral can be reduced by the

warehouse operator’s guarantee of delivery from a stated location.

Foreclosure can be made simple and low cost, without any resort to

the courts, depending on how the financing is structured.

The WHRs systems will also make it less necessary for lenders to

monitor a large number of small borrowers as a few warehouse

39



operators assure loan performance. This will reduce monitoring

costs and encourage commercial lending to the rural sector, helping

to capitalise the rural trade.

A lender holding a Warehouse Receipt has a claim against the issuer

(the warehouse company) as well as the borrower in the event of

the non-existence or unauthorized release of the collateral.

The risk of loss of value of the collateral can be reduced by

monitoring movements in its market value as well as by margining

and the use of price risk management instruments.

2) Corporates:

There are many corporates who are in the business of procurement of

agri-commodity on large scale. These corporates are blocking their

capital at the time of procurement. Commodities kept by them in

warehouse could be taken as collateral and loan given to them.

3) Bank guarantee against Warehouse Receipts:

Brokers in commodities are required to deploy funds with the

exchange to obtain trading limit and the composition of funds is in the

form of bank guarantee and fixed deposit. In order to obtain bank

guarantee most of the brokers are required to deploy liquid funds

which reduced their leveraging capacity as a significant component of

their assets are in the form of commodities. This is particularly true for

traders in commodities that have long shelf life like castor, pulses,

cereals, cotton, rubber etc. Banks may provide guarantee to members

of commodity exchanges against commodities owned by members

through the mechanism of WHR.

4) Margin funding against WHRsLike securities market brokers, the commodity brokers are required to

fund margin to the extent defined by the exchange for obtaining

trading limits. In case of long-term requirement, the brokers would

normally take a bank guarantee and deploy cash or fixed deposit to

maintain the margins in the desired ratio of cash and bank guarantee

40



or fixed deposit. However, there may be times when due to short term

requirement, the broker may need some short term fund for which he

does not want to sell his commodity assets at the current prices to

generate the resources but may instead like to take a short term loan

against these commodities pledged with the bank. in such situations,

the banks can grant short term loans against the commodities more or

less on the lines of issuance of bank guarantees against WHRs so that

the trader or his client is not required to make distress sale of

commodity to make good the short term requirement of funds. The

banks would be protected through the use of warehouse based storage

system.

5) Lending to farmers through Corporate Purchase

arrangement

Companies for own consumption or meeting export commitments

purchase raw materials from a large number of farmers and pay them

upfront. Purchase is mainly made at the time of harvesting and the raw

material is the stored in the warehouse. A tripartite agreement

between bank, farmer and company could be worked out whereby

based on commodity market prices company agrees to buy certain

produce at a future price. If necessary, the company covers its risk by

using commodity futures. These goods are kept in warehouses by

farmers. As per the understanding with the company, the bank extends

higher finance (lower margin on future prices) to the farmer against

the warehouse receipt endorsed by the farmer in favour of the

company and pledged to the bank. On an agreed date, the company

pays to the bank and applies for vacation of the bank's lien / charge on

warehoused goods. The payment made by the company is adjusted by

the bank against the farmer's loan and surplus credited to his savings

account.

4.3 Way Forward:

1) From the above discussion, it is clear that

41



a. WHRs can greatly facilitate financing of agriculture.

b. Imparting negotiability to WHRs will lend confidence to lenders as

well as traders.

c. Electronic Receipts are superior to paper receipt from the point of

view of easy tradability, security and divisibility.

d. The widespread use of WHRs will be facilitated by changes in many

laws such as those for Foreclosure and Sale of Goods.

e. Widespread acceptability and faith in the integrity of Warehouse

Receipt based system is essential for modernization of agricultural

financing.

2) The proposed Warehouse Receipt Act seeks to provide negotiable

character to WHRs and to establish a system where a Central Authority

registers warehouses, accreditation agencies, grading agencies etc. It

can be hoped that in due course such a system will be well established.

3) In India, three new electronic commodity exchanges, viz., National

Commodities and Derivatives Exchange Ltd. (NCDEX), Mumbai, Multi-

Commodity Exchange Ltd. (MCX), Mumbai and National Multi-

Commodity Exchange Ltd. (NMCE), Ahmedabad have been set up.

These exchanges deal in commodity futures. Limited opportunity for

disposing of physical commodities exist by using futures contracts in

the near month and choosing to make physical delivery. However,

there is no specific platform for spot trading in commodities.

4) Commendable efforts have been made in developing a physical

infrastructure by NCDEX and other exchanges in collaboration with

the Central Warehousing Corporation and quality assurance and

grading agencies. NCDEX has set up a National Collateral Management

Services Company which would extend help in setting up warehouses,

their accreditation and management of collaterals for the banks. The

other exchanges too, are identifying warehouses and encouraging

creation of infrastructure, which would be accredited to them. For

42



healthy development of commodities market, such facilities should not

only be exchange specific but also be usable across exchanges.

5) The national level commodity exchanges are trying to create a

Closed User Group where some warehouses and quality assurance and

grading companies are members and provide a degree of comfort to

the persons dealing with the exchanges. The membership of the CUG

could be commodity exchanges; APMCs; commission agents registered

with APMCs; warehouses; exporters, importers and domestic users of

commodities; banks; insurance companies; and producers. In short,

everyone who may be connected with production, grading, trading or

financing of commodities may become a member of the group.

6) The umbrella structure or the CUG is envisaged as an electronic

platform that would offer straight through processing for everyone

connected with the commodities. Members would be accepted in the

CUG after they have satisfied stringent quality standards and Know

Your Customer (KYC) norms. A farmer who drives into a warehouse

with agricultural produce would either already be an associate member

of the Group through one of the member entities such as banks,

warehouses or the APMCs or would be made an associate member

after establishing his identity. The warehouse would get the farmer’s

produce graded through one of the member quality assurance and

grading agencies, insure the produce with one of the insurance

companies who are members of the CUG and would be given an

electronic receipt using the Electronic Platform of the CUG. The farmer

could approach a member bank, on-line, to process his application for

a loan against the electronic warehouse receipt that has just been

issued to him. As the farmer may already be an associate member and

history of his dealings are available to the bank, the loan could be

sanctioned on-line and farmer’s account credited. He could also, if he

would like, sell the commodity either spot or forward by going through

43



one of the intermediaries. Similar ease in dealing would be available to

purchasers of the commodities as well as other players.

7) The proposed CUG would offer a near perfect market place

where every player concentrates on conducting his own business in the

best possible way without worrying for the quality and availability of

ancillary services. The CUG would have its own rules grievance

redressal, arbitration and adjudicating procedures. The CUGs should be

subjected to regulation and supervision by a regulatory authority such

as FMC.

8) To sum up the advantage of establishing a CUG which as an

umbrella super-structure will be

• Obviate the immediate need for legislative changes; most of the

situation which require intervention of law could be handled by

the bye-laws of the Group. Having agreed to the discipline of the

Group, a member dissatisfied with the action taken by the CUG

in any of the disputes will have common law recourse against the

CUG only. The counter-party member of the CUG need not be

concerned with the common law enforceability of the contracts

entered into within the CUG.

• Create a place for dematerialization of Warehouse Receipts;

• Provide a platform for Spot Trading.

• Make bank finance readily available as the farmer/trader would

be able to offer liquid and tangible security and the credit history

of the borrower would be available with the CUG.

• Reduced transaction time and transaction cost.

• Provide speedy and effective dispute resolution.

• Over a period of time, the system should so evolve as to make

the farmers’ taking loans against WHRs the norm rather than an

exception. It may be kept in mind that ultimately, the CUG /

Group of CUGs will become so large that the entire agricultural

44



sector operates through it. The design of the system has to

provide for large-scale scalability – even to 3 orders of

magnitude.

CHAPTER 5:

RECOMMENDATIONS

i) A national system of negotiable warehouse receipt needs to be

introduced in the country. WHRs can play an important part in making

Indian agriculture more responsive to market opportunities and more

competitive in relation to world markets.

ii) A system of quality certification and grading of commodities will

have to be established, with a view to minimizing disputes and

permitting cost savings through the combining of stocks of different

owners.

45



iii) WHRs can also be made an important instrument to make it more

attractive for banks to lend to the agricultural sector, to reduce the

cost of public support for agricultural marketing, to reduce transaction

costs and to improve price-risk management.

iv) It is also necessary to encourage private sector to specialize in the

storage of commodities and perishable storage, marketing credit,

standardization and in building the warehousing infrastructure in the

country. An expert has been engaged to work out the legal

amendments required in various Acts and an action plan in this

regard.

iii) Through pledge financing farmers are enabled to access credit

from the organized credit market at cheaper rates of interest, to

dynamically take advantage of favorable prices and improve their net

margin. It enables farmers to hold inventory of graded produce under

storage conditions and standardized preservation.

iv) The legal and regulatory framework should be created, through

which negotiability and tradability of WHRs is made possible. Law

relating to warehousing will have to be amended and a formal

regulatory authority instituted to enforce standards and protect the

interest of those holding WHRs against negligence, malpractice or

fraud.

v) WHRs have not yet gained its acceptability as a negotiable

instrument that could be freely transferred from one person to

another. This can be accomplished by creating a secure system, where

the banks accredit warehouse operators and where investors can build

warehouses in the knowledge that they can gain accreditation

provided they meet prescribed standards.

vi) To promote pledge loans for agricultural commodities, it is

recommended that in respect of high value crops, RBI should enhance

the ceiling of advances from existing Rs.1 lakh to upto Rs.5 lakhs to

farmers against pledge/ hypothecation of agricultural produce

46



(including warehouse receipt) where the farmers were given crop loans

for raising produce, provided the borrowers draw credit from the same

bank.

vii) The repayment of these loans may also be extended from the

existing 6 months to upto one year depending on the nature of crops

stored in the godowns and the appropriate time to sell the produce.

viii) Since pledge financing is considered to be crucial to farmers to

enhance their holding capacity to obtain remunerative price for their

produce, it is recommended that RBI should monitor pledge financing

to farmers within the overall target of 18% of NBC to agriculture, fixed

for commercial banks.

REFERENCES

Journals and Articles

Conference of in charges of priority sector advances of

commercial banks. By Reserve Bank of India. College of Agriculture Banking, Pune.

Websites:

1. www.icici.com

2. www.ficci.com

47

http://www.icici.com/

http://www.ficci.com/

http://www.icici.com/

http://www.ficci.com/



3. www.iqidr.ac.in

4. www.fmc.gov.in

5. www.agmarknet.nic.in

6. www.statebankofindia.com

7. www.rbi.org.in

8. www.emandi.ac.in

9. www.ikisan.com

10. www.manage.gov.in

11. www.imf.com

http://www.iqidr.ac.in/

http://www.fmc.gov.in/

http://www.agmarknet.nic.in/

http://www.statebankofindia.com/

http://www.rbi.org.in/

http://www.emandi.ac.in/

http://www.ikisan.com/

http://www.manage.gov.in/

http://www.imf.com/

http://www.iqidr.ac.in/

http://www.fmc.gov.in/

http://www.agmarknet.nic.in/

http://www.statebankofindia.com/

http://www.rbi.org.in/

http://www.emandi.ac.in/

http://www.ikisan.com/

http://www.manage.gov.in/

http://www.imf.com/

Project on Pledge_financing Dec 2010 (1)

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Transcript of Project on Pledge_financing Dec 2010 (1)