Warehousing Bill to help banks manage portfolios better

Warehousing Bill to help banks manage portfolios better

New Delhi: The Warehousing (Development and Regulation) Bill, which was approved by Parliament last week, could not only mitigate distress sales by farmers but also enable banks and financial institutions to step up their presence in a business that so far has largely remained in the informal sector.

“Now farmers will not be forced to sell all their produce in the mandi (local wholesale market) immediately after harvest. This will help them get better prices when they take out their stock at later dates and have the benefit of selling when prices are high," said Anil K. Choudhary, managing director and chief executive officer of National Bulk Handling Corp. (NBHC), an associate of the Multi Commodity Exchange of India.

Once the Bill is enacted and gets the expected and signed into law by President Pratibha Patil, farmers will also be able to pledge their warehouse receipts to secure working capital while waiting for better prices to prevail as well as trade the receipts themselves to others.

According to the Bill, warehouses receipts (WRs) issued to farmers or traders by the warehouses will become negotiable instruments, much like cheques and demand drafts.

Farmers and traders are already trading in WRs issued by NBHC and National Collateral Management Services Ltd, an associate of National Commodity and Derivatives Exchange, as also several other warehousing companies and also getting banks loans on them through select banks.

For instance, banks have issued Rs1,500 crore loans to various farmers based on WRs issued by NBHC.

However, this activity is still somewhat restricted as of now, as WRs are non-negotiable.

Choudhary also said the new law will potentially check fraud and duplication in W “These receipts change several hands in the process of trading," he says. “Currently, if a fake WR is transferred, the farmer or trader owning the receipts will get no legal protection even if he has procured the receipts in good faith, not knowing it was fake. With the Act, they will get legal backing."

The Bill has a provision of penalizing those involved in issuing fraudulent WRs or illegal duplicate ones. Those who knowingly issue a WR without taking actual physical delivery of goods or someone who knowingly issues a duplicate WR without proper procedure are liable for up to three years of imprisonment or a fine of up to Rs1 lakh.

The Bill also seeks to establish a Warehousing Development and Regulation Authority (WDRA) to regulate the industry, establish accredition agencies for warehouse registration and also do arbitration.

Some banks have also welcomed the move.

“The middlemen in mandis will be wiped off as farmers can directly go to warehouses," claimed a senior State Bank of India official, who did not want to be identified. “Besides, the credentials of the farmer as also that of the produce (which will be quality certified by the warehouses) will be established. This will help us take a fair decision on the amount to be disbursed to each farmer."

Senior officials in the National Bank for Agriculture and Rural Development (Nabard) also say the move will help banks build a healthy book.

“Though Nabard is not involved in refinancing these projects, we feel this new Act will help banks manage a good portfolio," said a senior Nabard official, who also did not wish to be identified.

Domestic banks in India—whether public or private—have a mandate to devote 40% of their lending to the priority sector, of which 18% has to go to agriculture. In 2007-08, banks are targeting a lending of Rs2.25 trillion to the agriculture sector.