Warehouse Receipt Finance for Farmers â A Glimpse - MCX in Marathi

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And finally what is required is a combination of fair and transparent spot and futures markets that provide liquidity and price discovery, enabling both farmers and banks to value and sell warehouse receipts at short notice if need be. In the Indian context, the proposed Warehousing (Development and Regulation) Act, 2007 incorporates almost all the aforesaid legal and warehouse infrastructure related requirements. Once approved and implemented, it should provide a sound basis for developing and promoting warehouse receipt-backed trade and finance activity in the country. IFMR Trust’s Pilot in Kadi Taluka (Gujarat) In pursuit of its mission for financial inclusion, IFMR Holdings has ventured into the agricultural space. Dealing exclusively with small and marginal farmers in the Kadi Taluka of Mehasana in Gujarat, three of its entities, Agricultural Terminal Markets Network Enterprise (ATMNE), IFMR Holdings, and IFMR Capital are working together on a pilot with the following objectives: • To provide price discovery to farmers for their crops in a fair and transparent manner (ATMNE); • To explore other services required but not available to small farmers currently such as transportation from the village to the market/buyer, village level warehousing capability, and agricultural extension services (ATMNE and IFMR Holdings); • To provide commodity-backed finance to farmers who would like to avail of finance against the commodity as collateral (IFMR Holdings); • To explore other financial products and services required but not available to small farmers currently such as commodity forward contracts and deltahedging (IFMR Holdings and ATMNE); • To develop tradable Asset-Backed Warehouse Finance Receipts (ABWFRs) so that they may be sold to mutual funds and other financial institutions (IFMR Capital). As part of this pilot, the three IFMR Trust entities are working with the National Spot Exchange Ltd. (NSEL) to help farmers realise the best possible price for their agricultural commodities. ATMNE is an institutional trading and clearing member and provides trading access to small and marginal farmers. IFMR Holdings provides warehouse receipt finance, helping farmers wait out the low price realisation period during harvest. This is in line with IFMR Trust's mission of ensuring complete access of financial services to every individual and every enterprise. Towards this, after extensive survey, Dharampur, a village 20 km from Kadi town, with 1,000 acres under castor production and a population of 3,000, has been identified as an ideal village to operate the pilot from. Trading operations: The trading facility is located at Kadi in the exchange-managed warehouse premises. As part of the servicer agreement, the exchange provides guarantee on quality, quantity, and storage of commodities in the warehouses managed by it. The electronic exchange market provides nationwide access to buyers and sellers. The first crop to be traded was castor seed. While the market is still at its nascent stage, its volumes have been encouragingly large. The market caters to farmers from around 125 villages around Kadi. Farmers come to the warehouse with their commodities which are then put through a standard weighing and quality testing process. Depending upon the quality, weight adjustments are made and the commodity is packed in 75 kg bags and stacked away. The collateral manager issues a receipt of weight and quality, following which the farmer places a sell trade through the ATMNE agri-broker sitting at the trading terminal at the warehouse. Once the trade goes through, the farmer is handed over the cash and receipt for the same. So far castor seed worth Rs. 2.5 crore has been traded by over 500 farmers based in 25 different villages surrounding Kadi, the smallest trade being one bag and the largest 70 bags. Over the last four months, price differentials between the mandi and the electronic exchange have dropped from Rs. 75 to Rs. 18 a bag possibly in response to a credible price discovery mechanism being provided to small farmers through the exchange. Financing operations: Warehouse receipt finance in India is typically used by traders and affluent farmers. It is largely perceived to be non-applicable to or non-viable for the small and marginal farmer. Barriers to participation from the financiers’ side include reluctance on their part to deal with small-size transactions due to operational reasons. From the farmer’s end, there are issues concerning non-availability of reliable price information, lack of storage space, inefficient quality testing procedures, existence of multiple layers of intermediaries, hidden charges, documentation challenges, and high transportation costs. EXPERTS’ VIEWS | 45
In our experience, the biggest challenge in terms of giving farmers access to warehouse receipt finance has been awareness creation. IFMR Trust has been putting in a lot of efforts at farmer education. By interacting with farmers in their local settings, it is explaining to them the concept of an electronic exchange that provides a transparent price discovery process, as well as the documentation, process, risks and returns from availing commodity-backed finance through IFMR Holdings. IFMR Holdings provides loan against commodities as collateral. The purpose of the loan product is to provide short-term finance to farmers collateralised by commodities for which warehouse receipts are issued by a collateral management company. The exchanges arrange for collateral management services and act as a service provider. The branch through which the IFMR Holdings finances farmers against commodities is located at Dharampur village such that it would serve a cluster of villages that cultivate in large quantities crop such as castor seed, mustard seed, and wheat, among others. Currently, loans are being given to farmers coming from five villages. Farmers can avail of finance against a single bag of castor seed placed in a warehouse. The maximum loan amount they can avail of against a particular commodity is Rs. 10 lakh (Rs.1 million). It goes like this: a farmer visits the branch and registers himself, which involves fulfilling the KYC (Know Your Client) process that includes biometric identification and physical verification of address proof. On completion of the process, the farmer is given a smart card which henceforth is used as a single source of identification and data capture for all transactions done by the farmer. After charging appropriate margins to cover price fluctuations, loan is given against the warehouse receipt for the commodity stored by the farmer in the NSEL-managed warehouse. While farmers’ response to the warehouse receipt finance mechanism has so far been a cautious one, they are definitely gradually becoming aware of this facility and coming forward to avail of loans through this route. Reasons for their initial inhibitions could be: Lack of awareness - For farmers used to centuries of trading through adhathiyas on the mandi and availing of loans from them, trading on an electronic exchange and availing of finance against the stored commodities has been a new experience. Rigour of the quality testing process - The exchange follows a rigorous quality-testing procedure unlike regular mandis where quality is gauged simply by picking up a handful of commodity. A value reduction is applied if the commodity does not meet the set parameters. Farmers who initially took a while to understand the quality testing process now feel the process is more fair and transparent than the one they were used to. Reluctance to store commodity in warehouse - Perishability of castor seed is almost negligible. Instead of storing it in a warehouse and incurring storage costs, farmers prefer to store it in their backyards. Prior advances taken from traders - Almost 30-40% of farmers around Kadi have already taken loans from traders against commitments to sell their existing commodities to these traders. Conclusions The contribution of warehouse receipt systems in developing agricultural markets has been well recognised across the world. The Ghana experience shows that these schemes can dramatically reduce inter-seasonal price fluctuations, benefiting small and marginal farmers who otherwise have no choice but to resort to distress sales (sell immediately after harvest). Warehouse receipt finance can offer farmers a marketing and credit option that spurs productivity and thus increases their incomes. Farmers can also sell some of their stored products to finance future crop, thereby obviating or reducing the need for borrowing from moneylenders and traders. Financial institutions benefit from reduced risks and from liquidity due to ready collateral to guarantee or reimburse defaulted loans. Farmers, on their part, benefit from higher profitability being able to delay sales; from improved price transparency, and from increased bargaining capacity through working in farmers’ groups. 46 | A PUBLICATION BY MCX AND PRICEWATERHOUSECOOPERS
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Warehouse Receipt Finance for Farmers â A Glimpse - MCX in Marathi

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Warehouse Receipt Finance for Farmers â A Glimpse - MCX in Marathi