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Warehouse Receipt finance: A game changer in agri finance

Warehouse Receipt finance: A game changer in agri finance

A silent revolution is underway in Indian agriculture in the form of warehouse receipt finance. More and more farmers are using warehousing receipts as a tool to meet their working capital and consumption needs after the harvest season.

Amith Agarwal
  • Updated Mar 7, 2016 5:08 PM IST
Warehouse Receipt finance: A game changer in agri finance

{mosimage}A silent revolution is underway in Indian agriculture in the form of warehouse receipt finance. More and more farmers are using warehousing receipts as a tool to meet their working capital and consumption needs after the harvest season.

Till recently, the focus of policy makers and lending institutions in India was to extend credit with an intention to boost farm productivity. Of late, the other leg, which is the post harvest credit needs of farmers, has started getting addressed.

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Since 2000, many emerging agri economies such as Brazil, Indonesia and Ukraine have adopted a warehouse receipts system successfully.

While the practice of lending against warehouse receipts is not new to India, it received major impetus post the enactment of the Warehousing (Development and Regulation) Act of 2007, which came into force from 2010.

The regulator

The 2007 law made way for a separate Warehousing Development and Regulatory Authority (WDRA) with an objective to develop scientific warehousing techniques in India.

The Act introduced a negotiable warehouse receipt system. WDRA bestowed confidence in banks about the warehousing system in India, ironing out worries about the underlying collateral. Banks have started funding against pledge of warehouse receipts in a big way.

For instance, a decade ago, loans worth only around Rs 5,000 crore were made to farmers against warehouse receipts. Currently banking institutions have advances of around Rs 40,000 crore against such receipts.

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While these numbers look smaller against the gross agri credit target of Rs 8,50,000 crore for the current fiscal, there is a tremendous scope for such financing in years to come on the back of renewed attention of policy makers and changing agri dynamics in the country.

The working

Post harvest, due to lack of liquidity, a farmer is compelled to sell his produce immediately, sometimes within days of harvest. Due to a supply glut in the market, the farmer is not able to realise the best price for his produce.

So, instead of selling, the farmer deposits his produce in a WDRA accredited warehouse, which issues him a warehouse receipt. Farmer takes the receipt, which has all the necessary details like quality and quantity of the produce, to the bank. Bank offers credit facility against that receipt up to 70 per cent of the value of the collateral with the warehouse.

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The farmer can use the fund for his consumption needs and inputs for the next season. Meanwhile, farmer keeps an eye on the price, and sells the produce, wholly or partly for a price that he thinks is right, and repays the bank.  

Benefits

A well developed warehouse receipt finance system includes farmers, banks, financial institutions, insurance companies, commodity exchanges. WRF brings about benefits at both micro and macro level. In fact, the mechanism has the potential to hit many targets with a single dart.

For Farmers: As against traditional loans by banks, loans against WR are quick. WFR brings about better price realization for farmers, especially small and marginal farmers thereby reduce poverty. A major impetus on WFR can help government realise their promise of a 50 per cent profit over input cost for farmers.

Bye-bye money lender: Lack of access to institutional credit forces farmers to knock the doors of informal sector that charges hefty interest rates. A well developed WRF will kill the back of the informal sector.

Encourage scientific storage: Spoilage and wastage have become the hallmark of Indian agriculture. It is estimated that 25-30 per cent of agricultural produce every year is lost due to poor storage and frail handling post harvest. Increased usage of WFR will kick-start a circle of investments in warehousing infrastructure - currently, there are 793 government and private warehouses in India, according to WDRA. More accreditation by WDRA will help scientific storage of farm produce and fix the missing link in the supply chain.  

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For banks: The average tenor of loan against WHR is around six months. This helps banks with their asset-liability mismatch issues as they can churn portfolios quickly. Further, lending against WHR is safer and more liquid for banks. Intermediaries like collateral managers make the job easier for banks as far as underlying collateral is concerned. WRF help banks achieve their priority sector lending targets in an efficient way, rather than following the mandate in a willy-nilly manner, so far.     

For the economy: WRF can dramatically reduce inter-seasonal price fluctuations. Rural demand has slumped in recent years, which impacted the overall economy. WRF increases liquidity in the rural economy, helping consumption. A well developed WRF system can also help fix the supply issues, which will lead to a lower inflation-lower interest rates regime in India.     

In conclusion

The contribution of warehouse receipt systems has been well recognised both in developed and developing agricultural markets in the recent past. WDRA is working towards making the WRF system more mature. It is already working towards creating an information repository of all the warehouses in the country and electronically connecting them. It is also working towards lowering compliance costs for warehouses and creating a rating system for warehouses.

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Indian agriculture is at a crucial juncture with back-to-back droughts in 2014 and 2015. After growing by just 0.2 per cent in FY15, it is feared that agriculture sector will not grow more than 2 per cent in FY16; this is way below the desired 4 per cent levels. Around 14 crore households (more than in China!) depend on agriculture.

Investments in the agriculture sector, share of which has stagnated at around 17 per cent of India's GDP, have come to a standstill. We need fewer farmers producing more to feed India's increasing population. There is an urgent need to modernise post-harvest management of farm produce with new technology and scientific processes. And warehouse receipt finance is the answer to most of these daunting questions.

The author is Executive Director, StarAgri Warehousing and Collateral Management Limited

Published on: Mar 7, 2016 5:06 PM IST
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