Kolkata: The financial health of India’s tea auctioneers is worrying and they need to separate their financing and broking businesses, management consultancy AF Ferguson and Co. has said in a recent report.
“The report suggests the financing business of tea auctioneers should be run through NBFCs (non-banking financial companies) and governed by RBI (Reserve Bank of India) regulations,” Tea Board of India chairman Basudeb Banerjee said.
Trouble brewing: A file photo of tea plucking at Durgabari estate on the outskirts of Agartala, Tripura. Around half the tea produced in India is sold through auctions and almost all tea auctioneers finance planters. Jayanta Dey/Reuters
The board commissioned a study following the collapse of 131-year-old Carritt Moran and Co. Pvt. Ltd, one of India’s leading tea brokers, a year ago after it failed to recover loans given to tea growers in southern India. Indebted and cash-strapped, the broker defaulted on payment to clients for whom it had sold tea in early January last year—a first in many decades.
Around half the tea produced in India is sold through auctions. Eighteen of India’s 27 tea brokers, who together sell 95% of the crop through auctions, voluntarily disclosed business data for the Ferguson study, which was submitted to the Tea Board in March.
Almost all tea auctioneers finance planters for whom they sell tea. It is a natural extension of a broker’s relationship with a grower, which often dates back many years, said Samar Sircar, managing director (MD) of Contemporary Brokers Pvt. Ltd, the second biggest auctioneer in India.
Some board officials, who did not want to be named, said auctioneers started financing growers to expand revenues. “There’s very little scope to increase earnings from broking; auctioneers earn as brokerage only 1% of the total value of tea sold,” a board official said.
The brokerage is paid by buyers, while sellers pay a small service charge, which could be as little as 0.3% of the value of tea sold. “If the price of tea hardens, brokers’ earnings rise, but not by much; it’s only a little over 1% that they can charge,” the official added.
Financing, on the other hand, could give much better returns if loans are repaid, he said. But to run this business, auctioneers need to borrow—often at high rates from private lenders—and this leads them into debt.
Because auctioneers have no expertise in making and monitoring loans, the Ferguson report said most brokers spend more on servicing their debts than they earn from loans given to their clients.
At least one of the 18 brokers that were audited had been defaulting on repayment of secured loans since 2005-06. In 2007-08, these brokers had a combined loss of Rs88.6 lakh from financing, the report said.
Losses from financing are gradually eating into auctioneers’ net worth, according to Ferguson, and many do not have the financial strength to act as “guaranteed brokers”.
Their net worth is far below the desired level, which according to Ferguson should be at least 15-20% of the average value of tea sold by each in two auctions.
The board has already mitigated the risk of defaults to some extent by introducing cash-and-carry settlement, under which buyers can take delivery of tea only after paying.
Learning from Carritt Moran’s collapse, tea auctioneers are now treading cautiously. Sircar said his firm now lends only against a ready crop, and not more than 50-60% of its value. It is also shoring up its paid-up capital, he added.
Ashok Batra, MD of J Thomas and Co. Pvt. Ltd, the world’s biggest tea auctioneer, said his company borrows only from banks and within prudential limits set by them.