National Bulk Handling Corp. (NBHC) is close to finalising a deal with eight to 10 banks to provide warehouse credit to farmers in an effort that will help farmers get a better price for their produce and banks meet their government-set target for lending to farmers.
The company itself, an associate of commodity exchange MCX (both are promoted by Financial Technologies India Ltd), benefits through an increase in the quantum of futures trading on the exchange. NBHC already has a similar arrangement in place with 12 banks from both the private and the public sector.
“We are in advanced stages of talks with these banks and expect to close the deals in four to eight weeks,” said Anil K Choudhary, managing director and chief executive officer, NBHC.
He declined to reveal the names of the banks but said that several of them would be public sector ones.
Through its existing relationship with 12 banks, NBHC facilitates warehouse funding of around one mt of commodities to the benefit of farmers and traders.
This accounts for 50% of the total bulk handling of commodities that NBHC does.
Farmers and traders who trade on MCX’s futures platform deliver goods at NBHC warehouses, which gives them quality and quantity certificates and a warehouse receipt.
Using these receipts as collateral, farmers and traders can borrow from banks. In case of default, the commodities will be seized by the bank.
Choudhary added that NBHC hoped to double the volume of commodities used to borrow from banks to 2 mt by March 2008.
“Backed by warehousing receipts, Rs1,500 crore of loan have been disbursed through NBHC’s collateral support so far we are quite sure this will cross Rs3,500 crore,” said Choudhary.
Banks such as Bank of India, HDFC Bank, SBI, UTI Bank, Kotak Mahindra bank and Syndicate bank have loaned money to farmers and traders against these receipts.
“Over one lakh farmers have indirectly benefited through Rs1,000 crore worth of credit extended against warehousing receipts through our bank. What is even more interesting is that in almost two years there has been no instance of default by farmers so far,” said a senior official with UTI Bank who did not wish to be identified. Besides NBHC, UTI Bank also works with National Collateral Management Services Ltd (NCMSL), an associate of National Commodity & Derivatives Exchange (NCDEX), a commodity exchange and some other private sector warehousing companies.
The UTI Bank official also said the bank has been able to extend credit to farmers at sub-prime lending rate of 10.5-11% through its 80-odd branches.
The prime lending rate (PLR), which is the benchmark rate, is between 12.5-13.5 for most banks.
SBI uses NBHC’s collateral support only for extending loan upwards of Rs10 lakhs.
“So far we have extended loan to around 70 farmers and traders with the total loan amounting to Rs100 crore. We plan to extend this service to more states, Orissa being one of them,” said a senior SBI official.
He, however, admitted the rate of interest for this hovers round SBI’s PLR of 12.75%. SBI refrains from dealing with commodities whose prices fluctuate such as pulses and essential commodities such as sugar. The benefit that accrues to the farmer is that he can get a competitive price for produce when he undertakes to sell a particular amount of a commodity at a future date for a future price, which will likely be higher than what he gets while selling during harvest season.
The farmer also benefits from grading, packaging, fumigation and auditing of the produce which is done by NBHC.
Banks are happy extending loans against warehouse receipts because it covers their lending obligations to the sector. Banks have a mandate to devote 40% of lending to priority sector of which 18% has to go to agriculture. In 2007-08, banks have to lend Rs2.25 trillion to the agriculture sector as mentioned in the Budget.
There is a direct correlation between the volume of commodities stored in warehouses and that traded on commodity exchanges. Around 35-40 commodities are handled by NBHC which has a chain of around 1,200 warehouses. Half these commodities are traded on the MCX platform. For the others, NBHC just takes care of the bulk handling business.