Chapter 1

INTRODUCTION

• An Introduction

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INTRODUCTION

Agriculture, the sector engaging about 70 of the Indian population, is proved to

have a great impact over India’s overall economic performance. This is in spite of
its reduced contribution towards the GDP from 60% to 25%. Recent trends clearly
indicate that agriculture is getting highly commercialized and is going through
rational changes globally, mainly due to the liberalization of the trade in
agricultural commodities. To benefit the Indian farmers, the agriculture system in
the country should be totally revitalized. Following changes need to be
incorporated

• Healthy environment

• Smooth channels for transfer of commodities

• Physical infrastructure for marketing activities

• Cash support to commodity producers

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.

In addition to these, the Government needs storage facilities in order to maintain a

buffer of reserve stocks to counter the effects of variabilities of weather and other
natural calamities on the agriculture in India.

The producers, processors, transporters as well as the people concerned with

storage of commodities have to develop the storage facilities for a proper storage
of commodities such as food grains, oilseeds, commercial crops like chilies,
vegetables, etc., and the seeds needed for sowing in the following seasons.
 Chapter 2

WAREHOUSE

• Functions of the warehouse

• Warehousing in India
• Types of warehouses
• Functions of National Co-operative
Development and Warehousing Board
 • Functions of Central Warehousing Corporation
(CWC)

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 Functions of the Warehouse

A warehouse is constructed bearing in mind that it should perform the following
different functions: -

2.1.1 Scientific Storage: A large quantity of the agricultural commodities may

be stored. The commodities must also be protected against the
 quantitative as well as qualitative losses occurring due to unavoidable
circumstances such as floods, pests, etc.

2.1.2 Financing: Another need that a warehouse is expected to meet is the

financial needs of the individual who stores his produce into the
warehouse. This is facilitated by the national banks, which extend credit
to the individual against the security of the warehouse receipt that is
issued to him after he has stored his commodities. A credit of 75 – 80 %
of the value of the commodities is generally extended.

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.

2.2 Warehousing in India

According to the report submitted by THE ALL INDIA RURAL CREDIT

SURVEY COMMITTEEE of Reserve Bank of India, the Government of India
enacted the agricultural produce, Development and Warehousing Corporation Act,
1956. In addition to this, the other actions taken in the concerned field are:

• Establishment of NCDWB (National Co-operative Development and

Warehousing board in 1956.)
• Establishment of Central Warehousing Corporation (CWC) in 1957.
 • Establishment of State Warehousing Corporation (SWC) in all the states,
between July 1957 and August 1958

2.3 Types of Warehouses

The warehouses are classified into various types, based on the following two
parameters:

2.3.1 Types of Warehouses based upon the basis of ownership

2.3.2 Types of Warehouses based upon the basis of commodities stored

Types of Warehouses on the basis of the ownership

PRIVATE PUBLIC BONDED

Owned by the Owned by Specially constructed near
individual, large Government and seaports and airports and
business house for meant for the storage accept goods for storage till
storage of own goods ofgoods. payment of customers by
importers. The method of
operation and charges for
storage is regulated by the
Government.

Types of Warehouses on the basis of types of commodities stored

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.

2.4 Functions of National Co-operative Development and

Warehousing Board:

a) To advance loans and grants to State Government for financing co-operative

societies engaged in Marketing processing or storage of agricultural
produce, including contributions to the share capital of these institutions.

b) To provide funds to warehousing corporations and the State Government for

financing co-operative societies for the purchase of agriculture produce on
behalf of the Central Government.

2.5 Functions of Central Warehousing Corporation (CWC):

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.

The corporation has introduced a scheme called as “FARMERS”. This scheme

circumscribes an extension service at the selected centers to educate the farmers in
the benefits of scientific storage and use of public warehouse.
The Central Warehousing Corporation (CWC) also provides a package of services
such as handling, transportation, safety and security of goods, insurance,
standardization, documentation and other connected service facilities.
 Chapter 3

RURAL GODOWNS

• Features of Rural Godowns

• Rural Godown Scheme
• Credit Linked Scheme
 • Agriculture Produce Market
Committee

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. Prevention of distress sale of food grains, other agricultural commodities,

immediately after harvest.
2. Reduction in the quantity and quality losses, arising primarily due to the
storage in substandard places.
3. Creation of employment in the rural areas.
4. Helping the farmers in getting loans against the stored products and facilitate
an easy procurement of the food products by Food Corporation of India.
3.1 Features of Rural Godowns

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.

3.2 RURAL GODOWN SCHEME (Gramin Bhandaran Scheme)

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.

3.3 Credit Linked Assistance:

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.

3.4 Agriculture Produce Market Committee (APMC)

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.

2) Erratic power supply disrupting the working of the Cold Storages.

3) High Electricity bills, leading to reduction in profits.

4) Lack of transportation facilities.

5) Complicated and time-consuming procedure of depositing and withdrawing

the produce from the warehouses and cold storages.

6) Selling of the produce by the producers at their doorstep in order to avoid the
transportation cost.

7) Lack of regular business for the warehouses, as well as lack of grading

facilities before the storing of the produce.

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.

11) Time lags in the releasing of the subsidy amount.

Chapter 4

COMMODITY BACKED FINANCING

 • Existing scenario
• The crux of the situation
• Changing face of Commodity Backed Financing

COMMODITY BACKED FINANCINING

4.1 Existing Scenario

Currently, most of the marketing of the commodities takes place through the
private trading in organized markets/mundis. There exist a few restrictions on the
marketing of commodities outside the regulated markets. The present Indian
farmerscommunity is primarily made up of small and marginal farmers. About
54% of the marketable surplus and distress sale by these small farmers accounts for
about 50% of the marketable surplus.

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.

Presently, National Commodity and Derivative Exchange (NCDEX) is

aggressively holding seminars for traders in large towns, and telling its brokers in
the small towns to do the same. The main barriers here is that the small farmers
cannot afford to pay Rs. 30 lakhs to become the member of the exchange. They
would have to become the clients of the existing members. Also the minimum
trade has to be 10 tonnes. To solve both these problem, National Commodity and
Derivative Exchange (NCDEX) is trying to reach out through cooperatives, banks
and NGOs.

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.

In order to tackle these issues, NCMSL, an offshoot company of the National

Commodity and Derivative Exchange (NCDEX), is setting p its warehouses all
over India. These warehouses will be open to any farmer who wants to hold his
produce after the harvest instead of selling it immediately and sell later when the
prices would be favourable. When the produce would arrive at the warehouse, it
will be graded into one of the three categories: Premium, Standard or Discounted.
If the farmer would be in a need of an urgent money, then NCMSL would be in a
position to give as much as 75% of the value of the crop as a loan. The stock lying
graded, packed and valued in the warehouse will easily serve as a collateral.
Presently, NCMSL can make this payment within a week’s time. But it is expected
that over the time when the bank and other parts of the jigsaw would fall into
pieces, farmer would be in a position to get their money immediately, without
much time delay.

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.

Changes in the consumption pattern of selected foods over 1990 –

2000(Kg/person/year)

CEREALS VEGETABLES FRUITS MILK MEAT EGGS FISH

1990 159.9 53.4 28.2 53.9 4.6 1.2 3.8

2000 153.1 65.9 37.5 64.9 5.0 1.4 4.7

Annual -0.4 2.1 2.9 1.9 0.9 1.9 2.0

Growth
(%)

Source: FAO Food Balance Database

4.2 The Crux of the situation

Agriculture has been one of the focus areas for the Government of India for quite
sometime now, and substantial impetus has been given to it lately, through
measures intended to liberalize the sector mainly by providing easy Finance
through institutional sources such as Banks. However even after all these measures
the primary producer still gets only a small share of the benefits which are meant
for him, as most of it gets lost in the long agricultural value chain mainly
comprising of the traders and the middlemen.

Thus Social Justice demands that some rebalancing needs to be done so that all
factors of production are adequately compensated for their efforts.

This rebalancing act can be comprised of the following steps:

• Creation of Superior Infrastructural facilities thereby facilitating efficient
storage, transportation and marketing of the agricultural produce.
• Development of a Price Stabilization Mechanism

• Reducing the overall cost involved in agricultural production, processing

and marketing activities

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.

The study focused on the following businesses:

➢ Warehouse Receipt Financing
 Financing against Receipts of Central Warehousing Corporation (CWC)
/ State Warehousing Corporation (SWC) Warehouses.
 Financing against Receipts of Private Accredited Warehouses.
  Financing against Receipts of Private (Unaccredited) Warehouses.

➢ Warehouse Construction Financing

➢ Meeting the banking requirements of MCX Members such as:

 Clearing and settlement accounts
 Bank Guarantee facility to meet margin requirements.
 Funding the Margin requirements for Delivery based trades of MCX
Members.

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

WAREHOUSE RECEIPT FINANCING

• Financing against CWC/SWC Receipts

• Advances against Accredited Warehouse
• Advances against Warehouse Receipts issued by
Private Warehouses
• Warehouse Construction Financing

WAREHOUSE RECEIPT FINANCING

5.1 Financing against CWC/SWC Receipts

The business of “Financing against Warehouse receipts” is currently in its nascent

stages, as far as India is concerned. However, it can certainly prove to be a highly
lucrative business with tremendous potential that it possesses, especially in view of
organized trade through multi commodity futures exchanges as also impending
launch of spot trade in agricultural commodities.

Loan against Warehouse Receipts is basically a self-liquidating loan with the

tenure of the loan not exceeding 12 months (stipulated so as to guard against
depletion in quality/valuation of the underlying goods) and with security margin of
up to 30-40%. This margin is taken to guard against the “Market Risk” that the
bank is subject to, due to unfavorable movement in the prices of the underlying
commodity.

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).

Comparative Analysis of SBI’s offering with respect to other banks

 ICICI UCO SBI
Interest Rates 8.5-11% 9% 11% - 14%
Depending on the
amount
Security Margin 25-30% 30% 40%

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:

Risks Identified Ways to Mitigate Risk

Risk Associated with fake warehouse
receipts, or misrepresentation of
quantity/quality of the commodity
stored.
• Random checks will be conducted either
before disbursal of the loan or anytime later
to cross check the authenticity of the
warehouse receipt and take stock of the
commodities stored in the warehouse.
• In case of Private warehouses, a warehouse
will be linked to a particular branch. Only
 through this branch Advances will be made
to avoid duplication and difficulties in co-
ordination.
Risk Associated with volatility in The security margin that would be initially charged
price movement of the underlying at 30% should be sufficient for mitigating these
commodity risks.

Risks related with the All the commodities stored will be

damage/obsolescence of the stored comprehensively insured to mitigate this risk.
commodities

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

5.2 Advances against Accredited Warehouses

This is a new concept gaining prominence with the advent of professional

collateral management companies in the country like

• NBHC - National Bulk Handling Corporation, a Joint Venture between

MCX and the PRB group Australia
• NCMSL - National Collateral Management Services Limited, promoted by
NCDEX and banks
These institutions provide various services which improves the quality of
warehousing, thereby reducing the risk due to reduction in quantity and quality of
the deposited commodity. Once an agreement is inked with either or both of these
institutions, the Bank can look forward to sanction advances against receipts of
warehouses accredited/franchised by them and treat them in a very similar manner
as it treats for advances against CWC/SWC warehouses.

Services Offered by these Institutions

• Scientific warehouse maintenance and storage of agri-commodities.
• Arrangement of Bank finance for construction and renovation of
warehouses.
• Installation of “V Sat” terminal, to get information about online stock of
commodity.
• Arrangement of Bank finance for lending against warehouse receipt.
• Logistic assistance.
• Quality certification assistance.
• Training and Awareness programmes.
• Receiving, storage and outturning of commodities
As we can see from above that NBHC only arranges for Bank Finance for
Warehouse Construction and also for financing against the warehouse receipts and
does not provide any financial assistance for the same, with the result, promoter
has to depend on Banks for financing of warehouse construction in order to claim
the subsidy available on the same, and also for getting finance against the
warehouse receipts issued by him.
The Bank can develop a customized product in which it will not only finance the
construction of such warehouses but also facilitate easy availability of finance
against warehouse receipts issued by them.

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.

5.3 Advances against Warehouse Receipts issued by Private

Warehouses
With the advent of Private Warehouses, there is a good potential in lending against
warehouse receipts of private warehouses, however the modalities of advances
against private warehouse receipts will be different than those against CWC/SWC
warehouse receipts.

1) Quality and Quantity – Margin stipulated for financing is higher at 40%

compared to 30% for CWC/ SWC

2) Genuinity of Receipts – (a) Name and specimen signature of authorised

signatory to be held on record.
(b) Only one branch in the centre will be authorised to
finance against private Warehouses.
 (c) Encourage construction of these warehouses with
our finance.

(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

Interest Rates 8.5-11% 9% 11% - Traders

Depending on 9% - Farmers
the amount
Limit Up-to 1 Upto Rs.20lacs
Upto 10 crores
crore

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

Cost of land 25% - Owners Equity/ Contribution

Cost of Construction 25% - Subsidy

Remaining by way of Bank

Cost of Necessary Equipments Finance
 Working Capital for the immediate
period after Construction

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

ICICI UCO OBC CBI State SBI

Bank of
Indore
Interest 8.5-10.25% 9% 8.75% 8.5% 8.5% 11%
Rates Depending
on the
amount
Quantum 75% 75% 75% 75% NA 70%
of Finance

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.

Warehouse Construction Financing

Risks Identified Ways to Mitigate Risk

Risk related with title of the land. Detailed verification should be

carried out to ascertain the
ownership of the land selected for
warehouse construction. The Title
investigation report as part of
revised SME documentation should
address these risks adequately.
Risk associated with timely We may stipulate a penalty of
completion of the warehouse additional interest for delays in
construction project completion, so as to act as a
disincentive for delays.
• A comprehensive product
Risk related inadequate business of facilitating easy financing of
the warehouse resulting in an the warehouse receipts of the
increased credit risk probability warehouse whose
construction is financed by
the bank.
• A liberal moratorium period
of 12 months may be allowed
at the discretion of the local
authority (ZCC, CCC),
which should take care of the
slow building up of volumes.
Risk associated with non- A detailed scrutiny of the necessary
fulfillment of necessary regulatory documents should be carried out
requirements like licenses from before sanctioning the loan so as to
applicable authorities. overcome this difficulty.

Risk Associated with default on Verification of the business model

Interest and/or Principal repayment and projected volumes of business
based on scientific and
sophisticated storing facility
offered may be good enough to
cover this risk.
Risk associated with losses Comprehensive insurance policy of
occurring due to Natural the Warehouse in joint names of the
Calamities. Warehouse constructor and SBI
should be taken.

Chapter 6

MULTI COMMODITY EXCHANGE OF

INDIA (MCX)

• 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

Multi Commodity Exchange of India (MCX)

6.1 About MCX

Multi Commodity Exchange (MCX) has about 920+ trading members across 300+
cities and 4500+ workstations. The average daily turnover is around 900 crores.
The total physical delivery from February 04 to December 04 is given in the
following table:

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

• Compulsory Delivery: Gold and Silver

• Both options (Cash Settled)

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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