Right from nationalization of
banks and the emphasis on priority sector lending to financing self help groups
through micro finance many innovations had taken place in agriculture and rural
finance in India. However, the efforts mainly concentrated on production
financing and neglected to a large extent the equally important marketing
finance. A good marketing system facilitates easier financing and a good
financing system improves efficiency in marketing. Warehouse receipt financing
can help a great deal in bringing liquidity to marketing of agricultural goods.
Warehouse receipts are
documents issued against the deposit of the commodities in the warehouses. When
these receipts are backed by legal provisions to ensure quality and safety of
the stocks stored they can be used as collateral. These receipts can be pledged
to raise money, sold or transferred. Generally, farmers face two problems bulky
cash flows at the time of harvest and non availability of intermediate finance.
Lack of adequate post production financing impedes the ability of farmers to
realize optimal prices for their crops. Warehouse receipt finance can play an
important role in smoothening income for farmers by providing liquidity at times
when cash flows dry out.
Agricultural Marketing and Finance
Farmers in India generally dispose
of the crops immediately after harvest. Prices are normally low when the supply
is high. Farmers have to resort to immediate post harvest sales as they have no
holding capacity. They cannot hold on to the harvested crop as they need
immediate cash to pay back the loans raised to cultivate the crop and as well
as to meet their household expenses. Further, most of the farmers lack storage
space with them. This twin handicaps prevent them from taking advantage of a
better price that may prevail few months down the line. Warehouse receipts
provide farmers with an instrument that allows them to manage their liquidity
requirement by extending the selling well beyond the harvesting period. This
helps in preventing the farmers from resorting to distress sales.
How does the warehouse receipt
financing system operate? The warehouse receipt financing operate with some
variations in different countries. However, it essentially has the following
mechanics. After harvest the farmer deposits his crop in an accredited
warehouse and receives a receipt of the stock stored. The warehouse promises
secure and safe storage. The warehouse
will release the stock only on production of the receipt. The farmer then can
approach a bank to raise a loan by pledging the warehouse receipt. The bank
gives the loan based on the current market valuation of the crop. Usually it
will lend upto a certain percentage of the value of the crop deposited, for
example, may be upto 70 percent. The period of the loan is related to the
annual price pattern the borrower is required to repay before the time when
prices normally pass their seasonal peak. The bank places a lien on the
commodity so that it cannot be sold without the proceeds first going to repay
the loan outstanding.
Farmer can in consultation
with the bank sell the stocks when the prices are favourable and payback the
loan with interest. The farmer instead of taking out the physical stock to sell
simply hands over the receipt to the trader or processor who made the purchase.
The buyer can take delivery of the commodity by paying storage fees loan
principal and interest are deducted before delivery is made. The lender/ bank
can dispose of the commodity/pledged goods only if the borrower defaults on the
loan. Otherwise, the title and any changes in the value of the deposited
commodity belong to the depositor/borrower.
As it is clear from the above description
there are three parties involved in the process. a) the borrower i.e. the
farmer who uses the produce as a security for a loan. b) the bank which treats
the produce as collateral. The bank has several advantages in lending this way.
Warehouse receipts’ liquidity is much higher than conventional collateral such
as land and machinery which are difficult to enforce hence, provides banks and
financiers with the comfort to lend to the farmer without lengthy documentation
and long processing delays. c) the
warehouse operator who maintains the produce in good condition and assures the
bank that the collateral is secure. Apart from collecting the rent for storage
the warehouse owner collects insurance fee to guard against fire or unusual
weather conditions to offset any loses in terms of quality and quantity of
stored commodities. So, empowering farmers to hold on to the produce would need
three enablers i) accredited warehouses in the vicinity ii) commercially
acceptable grading and assaying standards and iii) ease of raising liquidity
against commodities stored in the warehouses.
The farmers can also use
future trading for the purpose. Here, the farmers can book a short (sell)
contract in the commodity exchange for a future price. The collateral
management companies such as National Collateral Management Limited have
accredited warehouses which are electronically connected to the central hub
which enables the stock position to be updated on real time. The collateral
management company issues a dematerialized (demat) warehouse receipt to the
farmer through the warehouse where he has deposited his crop. The farmer then
approaches a bank for loan against the electronic warehouse receipt. The
collateral management company will electronically update all information of the
warehouses to the bank, this will also decrease the risk attached to the loan issued against the
pledged warehouse receipt
As it is clear from above
description the warehouse receipt is the instrument which is pledged /traded in
lieu of the fundamental assets. Warehouse receipts are functionally equivalent
to stored commodities. As the whole transaction takes place without the
physical verification of the stocks by the bank or the processor the assurance
about the quality and quantity of the goods mentioned in the warehouse receipt
is of at most importance to the entire process of making the warehouse receipt
negotiable. The integrity of the warehouses needs to be ensured by licensing or
accreditation to carry out the activity. The rights, liabilities and duties for
each party to a warehouse receipt (producer, bank warehouse etc) must be
clearly defined. Ideally, the receipt should be freely transferable by delivery
and endorsement. Holders of receipts must have the right to receive stored
goods or their fungible equivalent if the warehouse defaults or its business is
liquidated and the lender should be able to determine before granting the loan
if there is a competing claim.
Warehouse Receipts in India
In India, Agricultural Produce
(Development & Warehousing) Act, 1956 was enacted, later repealed and replaced by Warehousing
Corporations Act, 1962. Central & State Warehousing Corporations were
established under this act. Private sector initiative on warehousing was
limited. Warehouse receipts were issued
by a warehouseman to any person depositing goods in the warehouse. The licensed
warehouseman was authorized to issue a negotiable or a non negotiable warehouse
receipt. Banks did have a facility for lending against commodities. However,
this potential has never been realized in the Indian context as lending against
commodities was considered to be risky. Further, the banks were not internally
equipped to evaluate the goods stored in the warehouse and was uncertain of the
quantity and quality of the goods lodged therein.
The Warehousing receipts in
vogue did not enjoy the fiduciary trust of depositors and banks. There was fear
of not being able to recover the loans in events, such as fraud, or
mis-management on behalf of the warehouse or insolvency. The available legal
remedies were also time consuming and inadequate. Further, the format of
warehouse receipts used in the country was not uniform. Hence, there were
impediments in the negotiability of warehouse receipts creating difficulties to
the farmers and other depositors of goods.
In order to ensure an
efficient warehouse financing system the government of India had enacted the
Warehouse Regulation and Development Act 2007. Under this act the warehousing
development and regulatory authority would be established. (It has been
established in 2010). The authority is
in charge of certifying or registration of warehouses, renews, modify,
withdraw, suspend or cancel such registrations. The authority will regulate the
registration and functioning of accreditation agencies who grant accreditation
to warehouses. It will regulate the process of pledge, creation of charges and enforcement in respect of goods deposited with
the warehouse. Specify the duties and responsibilities of the warehouse. WDRA
can regulate the rates, terms and conditions that are offered by the
warehousemen. It ensures a fair dispute settlement between warehouses and
warehouse receipt holders. Ensure minimum percentage of space for storage of
agricultural commodities in a registered warehouse. Further, the grades and
standards to be followed for different crops that are to be stored are
specified in the act. In short, the act has put in place proper measures to
ensure the negotiability of the warehouse receipts.
