Kochi: Riding on the growing interest in the futures market in commodities exchanges, commercial banks are devising schemes to fund farmers and traders against the stock stored in warehouses. The futures trade recorded a turnover of Rs36.7 trillion in 2006-07.
Farmers keep commodities in a warehouse while traders take a position in a futures contract by either buying or selling a certain quantity of a commodity at a future date. There can be fluctuations in the price throughout the contract period and margins are required to be paid when the price of a particular commodity rises.
The bank funding against warehouse receipts helps traders as their funds are not blocked in certain futures contracts in which they have invested. It also helps farmers who keep goods in warehouses.
By funding against warehouse receipts, banks take care of the risk involved throughout the contract period. And receipts issued against the stock of the commodity held in the warehouses have become legal documents against which banks and financial institutions are lending money.
The Indian government recently gave negotiable instrument status for receipts issued by certified warehouses. A negotiable instrument is one that can be pledged with banks and financial institutions to raise money and the ownership of this instrument can be transferred. The Rajya Sabha has passed the Bill but it will take a while to become an Act. However, even before that banks have started showing interest in financing warehouse receipts.
According to P.H. Ravikumar, CEO of National Commodity Exchange (NCDEX), the amount lent against warehouse receipts last year was Rs4,391 crore. This is very low considering that bank credit grew by 30% to over Rs19 trillion last year.
The Kerala-based Federal Bank recently introduced a unique product for lending against warehouse receipts. The bank’s executive director K.S. Harshan says this facility of getting money against warehouse receipts is targeted at farmers or farmer co-operative societies. The product, commodity futures trade-linked finance, is structured in such a way that it supports only farmers and not brokers trading in the futures market.
The Ahmedabad-based National Multi-Commodity Exchange (NMCE) was the first to look at such a finance mechanism. According to the exchange’s vice-president Poonam Gupta, the Delhi-based Punjab National Bank (PNB), a partner in MCX, has been financing warehouse receipts issued by the government’s Central Warehouse Corporation for commodities stored there and sold through futures contracts on the exchange.
Many rubber and pepper traders have benefited from the scheme, says Gupta. PNB has till date advanced over Rs90 crore against these receipts and is also looking at raising the present limit of Rs2 crore for financing warehouse receipts up to Rs5 crore.
According to S.I. Kannan, vice-president of Kotak Commodity Services, banks did finance warehouse receipts earlier, but these were never treated as negotiable instruments. “With the final passage of the Bill, farmers can plan their finances effectively and this will also ensure banks a deeper penetration into rural markets. The Bill also allows government a greater control on monitoring warehouses, warehouse stocks and supply,” Kannan adds.
According to Ravikumar of NCDEX, farmers and traders selling on futures exchanges can receive bank credit on favourable terms as there is no credit risk run by banks and they are assured a full return in case of default as the contract is pledged to the bank and the exchange assures a full realization. Banks are actually offering them finance at 9%.
National Bulk Handling Corporation, a subsidiary of Financial Technologies India Ltd (that has promoted the commodity exchange MCX) is an end-to-end solution provider in the entire gamut of commodity management and handling, says its executive director Anil Choudhary. “We have arrangements with 12 major banks of the country which do warehouse receipts-based funding against receipts issued by us and under our quality and quantity guarantee.
In nine months, banks have lent about Rs1,500 crore against commodity managed by us. We have a presence in 16 states and have over 200 warehouses/cold storages under out management with around 9 lakh tonne capacity,” he adds.