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INTRODUCTION
• An Introduction
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INTRODUCTION
• Healthy environment
Even though the reaping, harvesting and storing of crops is seasonal, the
consumption of the commodities is perpetual, as well as variable in nature. The
market value of the commodities is the lowest at the time of harvesting, primarily
due to an abundant supply. Also, the consumption requirement is periodic, and not
in a bulk at a time. This naturally gives a rise to need of storing the commodities,
thus giving a way to requirement of strong storage facilities for the producers, in
order to hold a portion of the produce. This would facilitate him to meet his
requirements such as fertilizers, seed, etc. by selling the stored surplus
commodities in the market, whenever the market price is favourable. A need for
storage facilities also comes into picture when there is an inadequacy or
unavailability of the transport facilities.
This has contrived the Indian Government to come up aggressively with
warehousing facility all over India.
India is currently the largest producer of fruits and vegetables at about 44 Million
tons per annum. However, the export of these commodities is comparatively low.
This is mainly due to poor storage and transport facilities, effectively leading to a
large-scale wastage. In order to counter this problem, a large number of cold chains
of controlled atmosphere are being set up.
WAREHOUSE
WAREHOUSE
Warehouses are the scientific storage structures that are specially constructed to
facilitate the preservation as well as the protection of the commodities. As far as
India is concerned, the Warehousing scheme is an integrated scheme of scientific
storage, rural credit price stabilization and market intelligence. Overall, the scheme
is intended to supplement the efforts of the co-operative institution.
2.1.3 Price Stabilization: Warehouses also offer the facility to the individuals
who hold their commodity stocks with them, in the form of providing
them with updated market information. They are informed about the
prices prevailing in the markets, as well as advice them as to when to
release their products into the markets.
The warehouses are classified into various types, based on the following two
parameters:
GENERAL REFRIGERATED
Storage of fertilizers, cotton, tobacco, Warehouses in which temperature is
foodgrains, wool, petroleum, etc. maintained as per requirement. Meant
Generally no specific requirements. for perishable commodities such as
Storage items with a longer life span. Vegetables, fruits, fish, beefs and Meat.
The temperature in these Warehouses is
maintained below 3 to 5 degrees.
A very good example of the active warehousing and Cold storaging can be
found in Maharashtra. The Maharashtra Warehousing Co-operation Act provides
for the setting up of the Warehouse to aid the farmers to store their agriculture
produce. Besides, the warehousing Corporation, the agriculture co-operative
societies provide for the storage facilities to members under provisions of National
Grid of Godownsand Schemes. The scheme also includes financial assistance up to
50% of the cost of the storage facilities by the Central and the State Government.
This assistance is rendered in the form of the subsidy.
The Maharashtra State Agricultural Marketing Board undertook the first initiative
in 1990 to promote the use of temperature management technology by setting a
pre-cooling unit and a cold storages facility under co-operative sector. The main
aim was to promote the export of fresh fruits and vegetables from the state. Under
the guidance of the Maharashtra State Agricultural Marketing Board today,
Maharashtra is the main exporter of the fresh grapes from the country and exports
nearly 70% of all the vegetables exported from the country.
Maharashtra State Agricultural Marketing Board also monitors the running of these
cold storages units from time to time reviewed. It also controls the working of
existing pre-cooling and cold storages, and suggests appropriate storage capacity
utilization, improvement in efficiency and financial viability.
The number of cold storages financed by the Bank is less than the actual number of
units present in the region. But it is found that there is a significant growth, mainly
due to the implementation of the Capital Investment Subsidy Scheme (CIS) and
Interest Subsidy Scheme.
a) To acquire and build godowns and warehouses at the suitable places in India
b) To run the warehouses for the storage of the agricultural produce, seeds,
fertilizers and notified commodities for individuals, co-operative societies
and other institutions.
c) To act as an agent of the Government for the purchase, sale, storage and
distribution of the above mentioned commodities.
Food grains, sugar and fertilizers occupy about 78% of the total utilized storage
capacity, while the remaining 22% of the storage capacity is primarily occupied by
cement, chemicals an othercommodities.
RURAL GODOWNS
RURAL GODOWNS
The Government of India had launched a scheme for the establishment of NGRG
(National Grid of Rural Godown) in the year 1979. The scheme aims at the
creation of a network of rural godowns in state and union territories, primarily to
take care of the storage requirements of small and marginal farmers. The objectives
of the scheme are as follows:
1. The size of the Godown varies from a capacity of 200 tonnes to 1000 tonnes
depending upon the produce expected for storage in the village.
2. The cost of construction of the rural godowns is subsidized to the extent of
50% to be shared equally by the Central and State Governments. The
remaining 50% of the capital is arranged by implementing agencies such as
co-operative marketing society in the form of a loan from the commercial
banks.
3. The State Warehousing Corporation provides all the technical guidance. Its
also provides supervision to the implementing agencies in the maintenance
and management of the rural godowns.
4. The receipt that is issued by the manager of the rural godownon the basis of
stocks is a negotiable instrument. On the basis of the receipt, the farmers
can get a loan from a commercial bank, up to the extent of the 80% of the
value of the produce stored.
In spite of being self sufficient in production of the food grains, the farmers obtains
low prices for their produce. The main reason for this being a lack of sufficient
storage facilities forcing the farmers to sell the produce in the peak of the harvest
season. The farmers can expect a pledge loan of around 70 to 75% of the stored
produce.
Subsidy under the scheme is linked to institution available only on such projects,
which are financed, by the Commercial Banks, Cooperative Banks, Nationalized
Banks, and Regional Rural Banks. The composition ca be shown as:
25% - Government Subsidy Scheme
25% - Own Investment
50% - Banks Loan
A future target of 500 godowns has been fixed with the resulting calculated amount
of subsidy coming out to be around 99 lacs.
The Agriculture Produce Market Committees are the statutory bodies established
under the provisions of the Maharashtra Agriculture Produce Marketing Regulation
Act 1963.
The Agriculture Produce Market Committees create the infrastructure for the
agricultural markets in the operational areas at the main markets. Presently,
Maharashtra alone has about 256 Agriculture Produce Market Committees ad 572-
sub yards.
The APMC market in Navi Mumbai has a total capacity of 6500 MT godown of
which 1500 MT is utilized for various commodities. The godown at the auction
hall has been leased out by the Agriculture Produce Market (APM) to the
Maharashtra State Warehousing Corporation (MSWC).
In spite of all such available facilities, it has been found that there is a low
utilization of Cold Storages and a slothful progress in the field of Warehousing.
The following reasons can be attributed to this:
1) Low capacity utilization of Cold Storage in certain areas mainly due to high
concentration of cold storages in a particular area.
6) Selling of the produce by the producers at their doorstep in order to avoid the
transportation cost.
8) High interest rates for the loan amount and a comparatively shorter period of
repayment of these loans.
9) Pledge loan mostly not provided.
10) The fact that the financial bank generally does not meet the working capital
requirement adequately.
Chapter 4
It is found that the farmers often sell their produce to square off their debts soon
after harvesting. Large price spreads and low price realization due to imperfections
and weak linkages in commodity markets have been dominating the Indian
agriculture over a substantial period.
A sub-optimal credit support from formal banking sector had an adverse effect on
the development of agricultural marketing systems in India. The informal sector,
which includes the commission agents, provides significant credit to agriculture
and wholesale trade but the cost of credit is much high as compared to the rate at
which the banks may provide it. The credit that the Banks have been providing to
the farmers is certainly not substantial. The lending policies and programmesfor
financing the agriculture should focus more on the increasing financial needs of the
agriculture marketing. The input based financing of the agricultural credit would
give way to output based finance, which are certainly more aligned to the market,
where production, processing and marketing become an integrated activity and
financed as a package.
There have been radical changes in the agricultural sector in the past decade such
as the recasting of important laws governing the sector, the rise in commodities
trading volumes, the setting up of new warehouses, and the growing share of the
organized food retail.
Interestingly, unlike the Green revolution, the government would no longer be the
main driver of the chain. Instead, Government will be functioning just like an
enabler or a catalyst. And a motley group of private companies, co-operatives,
NGOs and farmers will learn to work together for their own self-interest in order to
gradually revamp the Indian agriculture. The scene would look something as
follows:
The Indian farmer usually carries a huge load of risk on his shoulders. He plants
his crops not knowing what the harvest will be like, or how much it will fetch in
the market. Many things can go wrong between sowing and harvesting.
There are steps that have been already taken in this respect. Two years ago
National Commodity and Derivative Exchange (NCDEX) was set up. It is
connected to about 6000 trading terminals in 400 Indian towns. Today, 36
commodities – 33 of them agricultural – are traded everyday on this exchange.
That translates in to a daily turnover of around Rs. 2300 crores.
Till now, most of this turnover comes from companies and speculators. The
companies want to hedge what they buy. Day traders and speculators bet on how
much a commodity like wheat might cost three months later. They look at the spot
price; the cost of warehousing the produce, followed by the cost of capital, and
accordingly trades on the futures of these products.
The first thing that this will do is that it will improve that way in which the farmer
decided what to grow. Today he does it on the basis of the past year’s price. If a
particular crop yields good prices, everyone sows it the next year. The result is that,
at the harvest time, there is a glut in the market, resulting in the price crash of the
commodity.
Commodity Futures would serve as a better barometer for consumer demand when
sowing time comes. Here is how it will work:
Let us say that Mandi offers the farmer Rs. 650 for a quintal of wheat, while the
exchange suggests that the prices will climb to Rs 750 in the next three months.
The farmer then decides to wait. In order to hedge this risk, he picks up a future,
thus committing to sell at this price three months down the line. There would
however be skepticism within the farmers as to what would happen of the prices
rise.
The solution of this lies in Options. This is how it will work:
In the above case, instead of futures the farmer picks up an option. Three months
down the line, if the prices in the Mandi are still at Rs. 650, the farmer will sell. On
the other hand, if the spot prices move up to Rs. 850, he can decide no to go ahead
with the sale, pay his buyer a small penalty and take his stock to the Mandi.
Thus the exchanges will fix the mandis, not by competing for procurement but by
helping the farmer to time his visits to the Mandi better.
A major hurdle today is that how to get the real time prices across to the Indian
farmer. Today, there are about 10000 – odd information kiosks in the country. Even
if each of them would reach out to five villages, it would cover about 50000
villages. But India has over 600000 villages. The kiosk infrastructure will have to
be increased by 8 to 9 times to give an adequate reach.
Also, before anything is traded, it has to be graded and valued. But there is no
grading infrastructure in the country. Another issue is the cost of warehousing.
Farmers often need money from their harvests immediately to finance their next
crop.
At present, NCMSL has about 100 warehouses across all over the India. By the end
of the year 2007, it has a target of setting about 1000 warehouses. NCMSL has
aggressively being going ahead in this respect, with their higher authorities
themselves touring various states in India, talking personally to the various
warehouse owners and persuading them to sign up with NCMSL, thus converting
their warehouses into NCDEX – accredited warehouses. NCMSL intends to have a
NCDEX – accredited warehouse after every 40 kilometers, all over the country.
One more important factor is that there has been a radical change in the
consumption pattern of the Indian. Indians today are consuming fewer cereals, and
more vegetables, fruits, meat, fish, eggs and milk. Indian agriculture is undergoing
a change accordingly.
Thus Social Justice demands that some rebalancing needs to be done so that all
factors of production are adequately compensated for their efforts.
Even though the reaping, harvesting and storing of crops is seasonal, the
consumption of the commodities is perpetual, as well as variable in nature. The
market value of the commodities is the lowest at the time of harvesting, primarily
due to an abundant supply. Also, the consumption requirement is periodic, and not
in a bulk at a time. This naturally gives a rise to need of storing the commodities,
thus giving a way to requirement of strong storage facilities for the producers, in
order to hold a portion of the produce. This would facilitate the farmer to meet his
requirements such as fertilizers, seed, etc. by selling the stored surplus
commodities in the market, whenever the market price is favourable. A need for
storage facilities also comes into picture when there is an inadequacy or
unavailability of the transport facilities.
This has led to the Indian Government to come up aggressively with warehousing
facility all over India under the aegis of Central Warehousing Corporation (CWC)
and State Warehousing Corporations (SWC). However government itself for
storage of Grains meant for Public Distribution System (PDS) utilizes most of the
warehouse space in these warehouses. Thus the farmer/ trader still resorts to either
storing the commodities in his own premises or using the private warehousing
facility.
Similarly most of the steps taken by the Government had “Food Security” or
supporting the farmer through minimum support price as the primary objective,
which resulted in greater emphasis to schemes such as PDS, and the benefits of the
other constituents of the value chain are still largely unaddressed.Alsoin the case of
financing agricultural activities, local institutions still dominate the scene while
institutional finance is perceived to be something very difficult to be availed off.
Thus the only substantial measure of the Government seems to be the setting up of
the “Minimum Support Price” mechanism, which ensures the bare minimum
returns to the producers, however this alone wont be enough to revitalize the
agricultural sector and an easy availability of Institutional finance for improvement
in infrastructure and marketing facilities is urgently needed.
4.3 Changing face of Commodity Backed Financing.
SBI has been active in Commodity Backed Financing for a long time now,
however most of the products are not in tune with the current market trends and are
hence losing market share. Also there has been recent developments such as the
setting up of the Commodity Exchanges like Multi Commodity Exchange (MCX)
and National Commodity Derivatives Exchange of India (NCDEX), which has
given rise to newer business opportunities for SBI in this arena.
Also there has been structural changes in the area of Warehousing with Warehouse
receipts been made negotiable, thereby resulting in better marketability of
warehouse receipts.
Due to these developments the Trade and Services Wing of the SME department
decided to have a revisit their Commodity Backed Financing Business Portfolio.
The Study
The SBI thus conducted a study analyzing the commodity backed financing
business of the bank. The study included a visit to the Gwalior (Morena) area in
Madhya Pradesh along with several visits to the APMC Navi Mumbai to
understand the ground realities related to this business.
Given below are the recommendations on the various product offerings of the bank
in the commodity backed financing arena along with new potential for business in
these areas. These recommendations are based on the above study as well as an
analysis of the current product offerings of the bank vis-à-vis that offered by other
banks and also takes the current trends in the industry into account. The
recommendations considers the recent directives from the regulatory authorities and
also the new measures taken by other departments of the bank which also deal in
commodity backed financing area namely, Agriculture. This will ensure that the
recommendations suggested below will not conflict with the measures taken by the
other departments.
Chapter 5
All the major Public as well as Private sector banks have already brought this
business into focus, and have started taking aggressive steps in this direction. Other
Banks with a substantial presence in Morena area of Madhya Pradesh where a
detailed study was conducted are UCO Bank, ICICI Bank, Oriental Bank of
Commerce, Central Bank of India, State Bank of Indore etc.,
SBI currently has a portfolio of around Rs.17 croresin this area. However the terms
at which other banks are extending finance are very much liberal. We can improve
our portfolio if we modify the terms and conditions of our product and make it
more tuned to the current industry trends. Such modifications will require change
in the margin requirements, Rate of Interest, Cap on the amount of loan and the
period of credit currently offered. (The detailed terms and conditions are detailed
in Annexure 1).
Major changes in the terms proposed from those at present are as under:
SR.No. Terms of Finance Existing Proposed Remarks
1 Rate of Interest 11% to 14% 9.75% to 1) Self
11% liquidati
ng
2) Max period
of 12 months
2 Processing Charges
3 Margin 40% 30%
The detailed terms and conditions are detailed in Annexure 1
Risk Assessment and Mitigation:
Default on interest and/or principal The Security Margin of 20-30% should be good
payment (Credit Risk) enough to cover for the probabilities of Credit Risk
Since these warehouses will be accredited by either NBHC or NCMSL who would
guarantee superior warehousing facility and also protection against frauds (as one
of the terms of the above mentioned agreement), the Bank can offer finance against
receipt from such warehouses at par with central warehouse/ state warehouse
corporations, detailed as per Annexure 1.
(3) Indemnity/ Guarantee to be obtained from the owner against the losses the bank
may suffer on A/c of management / genuinity of receipts/ Quantity/ Quality /
Insurance etc.
(4) This may also be topped up with personal guarantee from proprietor.
The risks that we apprehend in lending to such WR’s are in lending mainly from
the credibility of the owners/ managers, systems and procedures, checks and
balances, safety and safeguard in holding of the stocks.
Depending on the above parameters, the branch will appraise and sanction a credit
limit for advances against receipts of these warehouses and the warehouses will be
assigned to particular branches.
The farmers / traders should not suffer for want of adequate capacity of Public
Sector Warehouse capacity. Till such time at least till the accredited W.R. capacity
increases we may consider financing against private W.R. receipts to traders also
subject to a cap of Rs. 100 Lacs as is in Agri Business. Similar safeguards will be
taken against fraudulent use/ mischief.
After the above process, the said branch will accept and approve requests for
advances against warehouse receipts of these Private Warehouses.
Comparative Analysis of SBI’s offering with respect to other banks
ICICI UCO SBI
Security 10% NA 100%
Margin
The new terms and conditions proposed based on the current industry trends
are detailed in Annexure 2
5.4 Warehouse Construction Financing
Warehouse construction activity is flourishing due to availability of subsidy from
NABARD. However, this subsidy is available only if the construction is
undertaken using bank finance. Generally the warehouse construction is financed
as under:
Uses Sources
The subsidy is “Back-ended” and the banks’ finance even this portion until the
owner/promoter receives the subsidy.
Other banks are funding the entire subsidy portion, whereas we are funding just
80% of it making the Warehouse owner to bear the remaining thereby increasing
the quantum of his contribution by another 5%.
Comparative Analysis of SBI with Competitors in Warehouse Construction
Finance Business
The branches can consider sanction of Term Loan and construction of warehouses,
subject to detailed terms and condition as per the Annexure – 3.
Risk Assessment and Mitigation
Given below in the table are the various risks associated with the product and the
proposed mechanism to mitigate them.
Chapter 6
• About MCX
• Banking requirements of MCX members
• Clearing and settlement account for MCX
members
• Bank guarantee for Margin requirements
• Credit assessment of the members
• Financing members for Delivery of Physical
commodities at MCX
• Delivery mechanism at MCX
• Potential
COMMODITY QUANTITY
Gold 397 kgs
Silver 14790 kgs.
Chana 630 tonnes.
Urad 75 tonnes.
Pepper 10 tonnes.
6.1.1 Delivery Mechanism at MCX
MCX has three types of delivery contracts:
• Sellers Option: Only seller has the option to decide about delivery
MCX contracts are launched on 16th of every month and expire on 15th of next
month. The delivery period starts from 1st of every month. During this period the
seller or buyer can give his / her intention to give or take delivery.
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