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Collateral ManagementBalancing Growth and Regulation

Date: 22nd March 2012

Anil K. ChoudharyManaging Director & CEO, NBHC

Session: Indian Commodity Markets

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Indian Commodity MarketsRealizing its potential

• 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

• 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 (2011-2012) 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

• Commodity Futures – one of the world’s largestand 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

RECENT INITIATIVES

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Year 2011 – watershed year for the Warehousing sector, expected to spur investments with the sector’s traction becoming positive

Agri-Commodity ManagementAttracting positive traction

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

INFRASTRUCTURE STATUS•Granting of infrastructure status to PPP in this sub-sector - expected to attract large scale investments in cold-chains and storage infrastructure

FUNDING FROM RIDF•Recognizing warehousing as a critical rural infrastructure the allocation of about USD 400 million made (2011-12) 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

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

Key DevelopmentsKey Developments

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

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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 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 ManagementFacilitating efficient & economical Risk Management

Collateral Managers’ Role in Commodity FinancingCollateral 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

• 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

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

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Agri-Commodities & BanksWRF – Reliable instrument for Secure & Viable Credit to Agriculture

Banking Commodity Finance

• Disintermediation from Corporate lending & hitting a plateau in other asset segments

• Ever-increasing Priority Sector Lending targets

• Achieving financial inclusion in a sustainable and profitable manner

• Asset - Liability mismatch

• Improving performance & reduction of NPA vis-à-vis the regulatory aspects

• Increasing focus on direct agriculture / farm lending

• Evolving marketing & information infrastructure presenting opportunities of over USD 20-25 Bn

• A CM can address operational limitations thus increasing the banks asset base with wider borrower with fewer risks

• 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

• Commodity finance - short-term & self liquidating

• Commodities in storage act as collateral, effectively easing credit monitoring for large pool of borrowers

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Legal Risk

Farm Produce / Inventory FinancingRisk Matrix

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.

– Policy factors

– Social & Borrower related Factors

Operational Factors

– Location of the storage facilities

– Facility management and man-power involved

– Collateral Manager expertise and experience

CREDIT RISK

Regulatory RiskReputation Risk

Market Risk

Price Risk

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

Operational Risk (Quantity & Quality Risk)

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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

BORROWERS

STORAGE & SUPPORT INFRASTRUCTURE

FINANCIAL INSTITUTION

Affordability Accessibility

Acceptance Ability

ENABLERSFACILITATORS

Enablers & Facilitators

Source: In-house , various sources including USAID, UNCTAD, WORLD BANK studies

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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

Key Initiatives and SupportPolicy development, Investments and Regulation

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• 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

INDIA’S LEADING INTEGRATED AGRI-COMMODITY & COLLATERAL MANAGEMENT COMPANY

National Bulk Handling Corporation Ltd. (NBHC)

Commodities Managed

16+ mn MT

WRF Funding

USD 4.5+ billion

QA Labs

50Banks

37 CCPM Licenses

25Human Resources

3,500#+Number of commodities

125+

Facilitating complete operational and economic efficiencies in supply chain. Adding value to commodities.

NBHC – Quick Facts:

# also includes contractual staff

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THANK YOU