Commodities Backed Finance Project Report

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Chapter 1 INTRODUCTION

•

An Introduction

INTRODUCTION

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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.

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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.

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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 4

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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

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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

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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 Owned

PUBLIC by

individual, business

BONDED

the Owned

by Specially

large Government house

and seaports and

for meant for the storage

storage of own goods

constructed

of goods.

near

airports and

accept goods for storage till 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

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GENERAL

REFRIGERATED

Storage of fertilizers, cotton, tobacco,

Warehouses in which temperature is

food grains, 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 Cooperation 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 Godowns and 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

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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:

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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. 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, cooperative 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 other commodities.

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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.

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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 12

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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

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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 godown on 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)

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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)

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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.

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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.

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Chapter 4 COMMODITY BACKED FINANCING •

Existing scenario

• The crux of the situation • Changing

face

of

Commodity

Backed

Financing

COMMODITY BACKED FINANCINING 18

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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 farmers community 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 programmes for 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.

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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, cooperatives, NGOs and farmers will learn to work together for their own selfinterest in order to gradually revamp the Indian agriculture. The scene would look something as follows:

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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.

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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.

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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.

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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.

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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,

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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 26

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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.Also in 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

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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. 28

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 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.

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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

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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 crores in 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

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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

Interest Rates

ICICI 8.5-11%

UCO 9%

SBI 11% - 14%

30%

40%

Depending on the amount Security Margin 25-30%

Major changes in the terms proposed from those at present are as under: SR.No. Terms of Finance 1 Rate of Interest

Existing 11% to 14%

Proposed Remarks 9.75% to 1) Self 11%

liquidating 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 • Random checks will be conducted either before receipts, or misrepresentation of

disbursal of the loan or anytime later to cross

quantity/quality of the commodity

check the authenticity of the warehouse receipt

stored.

and take stock of the commodities stored in the

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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

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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 34

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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

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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.

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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 Security

ICICI 10%

UCO NA

SBI 100%

8.5-11%

9%

11% - Traders

Margin Interest Rates

Depending

on

9% - Farmers

the amount Limit

Upto 10 crores

Up-to

1 Upto Rs.20lacs

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

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Cost of land

25% - Owners Equity/ Contribution

Cost of Construction

25% - Subsidy

Cost of Necessary Equipments Remaining by way of Bank 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 Interest

8.5-10.25%

Rates

Depending on

9%

8.75%

the

amount 38

8.5%

Indore 8.5%

11%

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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

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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 Risk

associated

completion

of

with the

address these risks adequately. timely We may stipulate a penalty of

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

the warehouse resulting in an

warehouse

increased credit risk probability

warehouse whose construction is

receipts

of

the

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 Risk

associated

with

volumes. 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.

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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

associated

occurring Calamities.

due

with to

risk. losses Comprehensive insurance policy of Natural the Warehouse in joint names of the 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 41

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• 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 Gold Silver Chana Urad Pepper

QUANTITY 397 kgs 14790 kgs. 630 tonnes. 75 tonnes. 10 tonnes.

6.1.1 Delivery Mechanism at MCX MCX has three types of

delivery contracts:

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• 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. MCX will match the intentions to arrive to design the delivery positions. Once the delivery is assigned to a buyer he cannot square off his position 6.1.2 Matching of Delivery In MCX the delivery matching happens before the expiry date. 3-5 days before expiry the tendering period starts whereby the sellers’ intentions are matched with the buyers intentions and deliveries are assigned. Once the expiry date is over, whatever is the open position, which is Cash settled. In case of compulsory delivery the delivery is assigned to buyer and if he refuses then a penalty is charged to him. For the both option delivery there is no delivery period and the intention matching takes place after the expiry date. The delivery is assigned on the first come first basis and also in following order: 1. Same city 2. Near by City 3. Far away City 6.1.3 Default of Delivery 43

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There can be two scenarios when a delivery is in default: 1. If seller after giving intention to deliver fails to deliver 2. If the buyer after assigning delivery refuse to take delivery In both the cases the settlement will happen on cash basis. There will be a penalty of 1-3% of contract price depending on the commodity for the defaulting party. This penalty will be distributed between defaulted party and the exchange in the ratio of 90:10. Exchange feels that this will be sufficient to compensate for any loss that has occurred to defaulted party. 6.1.4 Warehousing The exchange has accredited warehouses in various states depending on the availability of the commodity. Hence for Rubber Kochin is the center while for soyabean its Indore. The delivery takes place through the warehouse. The seller will deposit the commodity with the warehouse on or before the pay-in date. The warehouse will check it for the quality specification. If it found the specification to the mark it will accept the material and issue a warehousing receipt. The warehousing receipt will be transferred in the name of buyer once buyer pays the money. The buyer will then collect the material on the production of same receipt. 6.1.5 Quality In case the buyer has doubts about the quality there will be recertification of commodity. There will be three samples taken – for exchange, seller and buyer. The buyer’s sample is tested. If buyer is still not happy then exchange’s sample is tested. That certification will be final and then buyer

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has to take delivery. In case the buyer is right the seller has to bear the charges of recertification and also take back the commodity. In case the buyer is wrong the certification charges are born by buyer and he has to accept the delivery.

6.1.6 Quantity If the quantity of material varies from prescribed in the contract then the buyer will pay more or less as per the excess or deficit. The excess or deficit will be priced as: Price = (Excess or Deficit) * Price / Contract Size 6.1.7 Premium and Discount Quality of commodity is fixed at the time of launching the contract. But unlike precious metals it is very difficult to get the commodity of same specification. Hence exchange allows certain concession in the quality parameter. Hence there is a tolerance limit allowed in all commodities. So if the commodity is not of exact quality but fits into tolerance limit it will be considered as acceptable delivery. If the quality is better than what is prescribed in the contract then the seller must be compensated for that. This will be assured by asking buyer to pay a premium for it. Similarly when the commodity is inferior the buyer will be compensated by giving him discount over contract price. The premium or discounted is calculated by the formula provided by exchange in each contract.

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The premium and discount is settled in supplementary settlement of exchange.

6.1.8 Tax and Duties Exchange feels that uniform tax and duty structure will help the situation. Seller handles the taxes up to delivery in the warehouse whereas once delivery is accepted it becomes buyers’ responsibility. If you take delivery and then keep the material in warehouse and then sell the next month you will not be required to pay CST. 6.1.9 Buyer’s option If a delivery is allocated to a buyer on the 1st day of the tender period, on the immediate succeeding day he is required to inform the Exchange that he is not willing to lift delivery and wishes to settle the contract as per the Due Date Rate. In such a case, such buyers are required to settle the contract as per the Due Date Rate and also to pay a penalty of 1% of the DDR, of which 90% will go to the seller. In case the buyer intends to take delivery, he is required to make the payment within 2 working days of the allocation of delivery. 6.1.10 Clearing Agents

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For the purpose of effecting delivery of gold and silver, every member will be entitled to appoint a maximum number of two Clearing Agents, who will be entitled to receive and deliver precious metals on behalf of such member 6.1.11 Intimation about clearing agents By 5.00 pm on the 2nd day of tender period, the member will be required to forward name of the Clearing agent, who will visit Group 4 Securities office for giving or lifting delivery. 6.1.12 Delivery The seller will be required to deliver gold at Group 4 securities facilities at specified centers. Such specified centers are Mumbai and Ahmedabad. The seller has to submit the delivery along with bill made in favor of individual buyers. 6.1.13 Non-performance by the seller In case a seller who has submitted tender notice fails to deliver gold on 6th working day as per schedule stated above, the contract will be closed out as per the Due Date Rate and a penalty of 1% will be imposed on him, out of which 90 % will be paid to the buyer, while 10% will be appropriated by the Exchange 6.1.14 Tolerance Limit In respect of gold, there will be no tolerance in respect of weight. It must be imported gold bar of 1 Kg weight. 6.1.15 Quality adjustment

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The price of gold is on the basis of 995 purity. In case a seller delivers 999 purity, he would get a premium. In such case, the sale proceeds will be calculated by way of delivery order rate * 999/ 995.

6.2 Banking Requirements of MCX members Since its inception MCX has grown steadily both in terms of the number of members as well as the quantum of business transacted through it everyday, currently the MCX has around 920+ Members and 4500+ workstations across the country and the daily volumes on the exchange is averaging more than Rs. 1000 crores. MCX members have a variety of banking requirements ranging from maintaining a clearing and settlement account for MCX trades to Bank guarantee facility to meet the daily margin requirements. Though the SBI group has around 30% stake in MCX only 3% of the MCX members bank with SBI, the main reasons for this is that SBI has not developed any product keeping the requirements of MCX members into focus. Thus the 3% of the members that currently bank with us are basically using Bank’s existing products to meet their requirements. Also the terms and conditions offered by SBI is completely out of sync with the current trends and hence do not attract more MCX members towards Banking with us.

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Given the sizable business potential possible from MCX members we recommend introducing 3 products specially targeting the MCX members. These products are: - Clearing and settlement accounts - Bank Guarantee for Margin requirements - Financing Members for Delivery of Physical Commodities at MCX We expect that introducing the above products will help the SBI attract more MCX members to bank with it.

6.3 Clearing and settlement accounts for MCX members MCX members need to maintain a clearing and settlement account with one of the banks to settle the margin requirements of all its MCX trades. We have identified many of the existing members and their sub brokers who are banking with other banks wish to migrate to our Bank for their transactions with MCX. There is a good scope for attracting current accounts and other related new businesses from these Members / Sub brokers. MCX has appointed our Mumbai Main Branch, M.S. Marg, as their Clearing Bankers. The clearing arrangement envisages opening of principal account titled MCX Settlement Account at Mumbai Main Branch. The members’ accounts are opened at different up country branches and their settlement account is opened at Mumbai Main branch through which MCX and members settle their trade.

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MCX will have the authority (backed by suitable Undertaking / Power of attorney from the Members) to operate / withdraw funds from the Member’s “Settlement Account” as and when required. The Settlement Account of the Members would not be available for any other use by the Members except for transferring surpluses to the respective Client’s (their own) Accounts at the upcountry branches. Required margins are funded by the Members through transfer of funds from their Client Accounts to their Settlements Accounts with Mumbai Branch. Similarly surplus margins are remitted back to the clients account from settlement account with Mumbai Main Branch. In view of the foregoing and available business opportunities all the Branches have been advised to open Current Accounts as and when approached by the Members of MCX, observing ‘KYC’ norms. Simultaneously branches should forward one more set of KYC compliant account opening forms, with necessary backup documentation for opening of the Member’s ‘Settlement Account” at the Mumbai Main Branch.

6.4 Bank Guarantee for Margin requirements Multi Commodity Exchange of INDIA Ltd requires its members to deposit and maintain in their accounts a certain minimum amount of funds for each open position held. These funds are known as “Margin” and represent a good faith deposit that serves to provide protection against losses in the market. The Clearinghouse collects margins directly from each of MCX clearing members who in turn are responsible for the collection of funds from their clients. The different types of margins are 50

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• Initial Margin – Typically 3-10 % of the contract size depending on the commodity • Variation Margin – This margin is collected to avoid any adverse movement in the commodity prices as per the exchange rules. • Delivery Margin – This is the Margin required during the delivery period of the contract and is typically 20-25% of the contract size.

Members of the Exchange can deposit initial margin in cash or may furnish Fixed deposit or bank guarantees or such other instruments as may be specified by the Exchange from time to time to fulfill the initial margin requirement in respect of open positions. Variation margin shall be paid only in cash or cheque, or by electronically debiting the account of the member of the exchange with the designated Clearing bank of the Exchange.

6.4.1 The Potential The total volume of trade on the MCX for the month of April’2005 was Rs 26493 Crores. Taking a modest average Initial margin of 4 %, the total Initial Margin requirement of the Members of the MCX for the month April’2005 stands at Rs.1060 crores. Hence the potential of Bank Guarantee requirement of the MCX members has already crossed Rs 1000 crore a month mark, of these even if we take 25% to be provided in the form of Bank Guarantees by our branches, the market potential for Bank guarantees business for MCX Members will stand at Rs 250 Crore a month.

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This level of business opportunity is big enough for us to venture into this business, since the current exposure to this business is a paltry Rs. 2 crore. 6.4.2 The Product For the proposed product, a one-time credit assessment of the member needs to be carried out by the bank to determine the extent of Bank Guarantees that can be sanctioned to the member. During this assessment the member will be rated on various parameters and depending on his score in the Risk Rating Matrix he may be assigned a suitable Credit Limit. Also at the time of this assessment the following documents should be demanded from the members • Provisional financials for the current financial year - Balance Sheet / P&L Account/all Schedules • Audited Balance Sheet / P&L statements with all schedules / audit report for the previous accounting year. • Brief profile of the Member / Company - Back ground /Years in business/ Group Co. details etc • Brief profile of directors - Name, Age, Qualification, Experience, Directorships in other companies etc • Latest Net worth Certificate (as certified by CA) & copy of IT returns of two major shareholders • Latest Shareholding pattern of the company • Latest margin statement of MCX - Details of capital with exchange Cash/ Fixed Deposit /Guarantee

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• Business Plan, covering details of their existing business model - like business mix, viz., Proprietary, Retail, Corporate, Approximate Number of registered clients, risk management, exposure management etc • Details of existing banking arrangements. • Bank Guarantees / Other Credit facilities enjoyed from banking system (other banks) • Settlement

volumes

(MTM

pay-in/pay-out

for

last

30-50

settlements) • Month-wise turnover for last six months • Status report from MCX • Certified true copy of MCX Membership Certificate

6.5 Credit assessment of the members All the MCX members interested in availing of the bank guarantee facility need to be assessed for their credit worthiness, depending on which appropriate limits can be sanctioned to each of them. To facilitate the process of Credit Assessment a Risk Rating Matrix needs to be developed with important parameters given adequate weightages so that the result of the matrix decides the limit that should be allotted to a particular member Some of the Parameters that can be used are:

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• Type of Membership of the member – There are three types of membership of MCX, thus better the membership better should be the credit standing of the member. • Size of Business – This can be determined using the number of SubBrokers and other clients of the member. • Balance sheet analyses of the member for the last 3 years (if available) • Assessment of the business model of the member. • Previous Credit Standing These are just few of the points we need to consider for the Risk Rating Matrix. The development of the Risk Rating Matrix was out of the scope of this project.

6.6 Financing Members for Delivery of Physical Commodities at MCX This is yet another new Business opportunity from MCX. Around 3-5% of the trades on MCX result in Physical Delivery of the commodity on the expiry of the contracts. 6.6.1 Warehousing at MCX The exchange has accredited warehouses in various states depending on the availability of the commodity. For Rubber Cochin is the center while for soyabean is Indore. The delivery takes place through a warehouse. The seller will deposit the commodity with the warehouse on or before the pay-in date. The warehouse will check it for the quality specification. If the quality of the

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commodity is upto the specification agreed on, it would accept the material and issue a warehousing receipt. The warehousing receipt will be transferred in the name of buyer once buyer pays the money. The buyer will then collect the material on the production of the receipt. There can be dispute on the basis of quality and quantity of commodity. Bank will not be responsible for the

6.7 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. MCX will match the intentions to arrive at the delivery positions. Once the delivery is assigned to a buyer he cannot square off his position, otherwise but through delivery. 6.7.1 Matching of Delivery In MCX the delivery matching happens before the expiry date. 3-5 days before expiry the tendering period starts whereby the sellers’ intentions are matched with the buyers intentions and deliveries are assigned. If a delivery is allocated to a buyer and he intends to take delivery, he is required to make

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the payment within 2 working days of the allocation of delivery. SBI can come in here and finance the payment requirements of the buyer.

1 – MCX Member indicates his willingness to take delivery of the commodity 2 – MCX seeks the payment requirement from SBI. 3 – SBI makes the payment to MCX. 4 – MCX endorses the Warehouse receipt in favor of SBI 5 – MCX member makes payment to SBI 6 – SBI delivers the warehouse receipt to the MCX Member

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Incase the MCX Member defaults SBI can make good of the loss by selling the commodity backed by the warehouse receipt in the open market. For the above product to be implemented a Tripartite agreement needs to be inked between • State Bank of India • Multi commodity Exchange • Member of MCX. According to this agreement SBI will agree to honour the margin requirement of the MCX member relating to delivery of commodities upto a fixed limit that is specified separately for each of the MCX member depending on his credit assessment. MCX in turn will agree to endorse the Warehouse receipts financed by SBI in favour of SBI and deliver it to SBI. In addition to this MCX will also facilitate the liquidation of the warehouse receipt in case of defaults. A security margin of around 30-35 % of the value of the contract will be required from the member and an interest rate of around 8-11 % will be charged.

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6.8 Potential The total physical delivery from February 04 to December 04 is given in the following table: COMMODITY Gold Silver Chana Urad Pepper

QUANTITY 397 kgs 14790 kgs. 630 tonnes. 75 tonnes. 10 tonnes.

Given the above size of delivery there is good scope for our Bank to enter this arena. Also the bank is waiting for approval from the RBI for entering into propriety positions in the commodities derivatives market. As and when the product rolls out and the RBI grants approval for entering into propriety positions by the banks, the Commodities desk at the Treasury department should be ready to take up the responsibility of recovering any principal that will be at risk due to defaults by the bank’s customers.

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Thereby resulting in better price recovery of the goods and resulting smaller losses on account of NPA.

Chapter 7 CONCLUSION

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CONCLUSION Key Recommendations Based on my study of the various products I recommend the following changes

Warehouse Receipt Finance • Downward revision in the interest rates currently charged as these are not competitive. • Downward revision in the security margin currently demanded as this is against the market practice • Increase in the warehouse wide limit for finance against W.R. of Private warehouses. •

Advances against Warehouse receipts are classified as “Clean” and does not accept the warehouse receipt endorsed in its favor as a primary security. This methodology of the bank needs to be modified and the warehouse receipt endorsed in its favor should be treated as Primary Security.

• Mandating the branches to encourage customers to avail of the Warehouse receipt finance even if they are not current customers of the bank.

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Warehouse Construction Finance •

Revision in interest rate that are currently charged

•

Offering Comprehensive deal to Warehouse owners availing of

Warehouse Construction finance, whereby the receipts of the warehouse whose construction is funded by SBI will be readily financed, thereby increasing the business prospect of the venture and reducing the probabilities of credit risk. •

Currently only 80% of the subsidy portion is funded by SBI

thereby increasing the owner’s contribution by another 5%. We recommend financing 90% of the subsidy portion.

MCX Related Business •

I recommend introduction of the following new products specially targeting the MCX members -

Clearing and settlement accounts

-

Bank Guarantee for Margin requirements -

Financing Members for Delivery of Physical

Commodities at MCX

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I recommend using the existing Corporate Internet Banking Platform for the above products and the bank need not wait for implementation of the Core Banking Solution.

Considering the existing market conditions and the tremendous potential in the commodities business as presented in the paper, I can certainly conclude that State Bank of India, with its monumental size, and deepest reach in all over India, can leverage its strength and capitalize the most to bring about an enhancement in the commodities sector, as well as contribute towards the overall agricultural development of the country. India is a predominantly an agriculture dependent nation, and the contribution made by State Bank of India in this sector, would lead to a boost in the country’s Gross Domestic Product, finally leading to the nation’ s economic enhancement. To summarize it all, I can be certain enough to say that the steps taken by State Bank of India would have a substantial impact of the future Agricultural as well as economic progress of India

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Annexure 1 Financing against CWC/SWC receipts TERMS & CONDITIONS a) To finance traders against the warehouse receipts of Purpose

Eligibility

commodities stored by them in CWC/SWC warehouses, & warehouse accredited by MCX by way of demand loans. Any trader dealing in commodities. Demand Loan: 70 % of the value of the warehouse

Eligible amount of finance

receipt, valued at the market value OR 80% of the minimum support price declared by State/Central Government, whichever is lower.

Interest Rates (in percentage)

Loan category Upto Rs. 2,00,000

Interest

Rate

to

Charged 0.50% Below SBAR

Effectively 9.75% Over Rs. 2,00,000 up to 0.25% Below SBAR Rs.25,00,000

Effectively 10.00 %

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Over Rs. 25 lacs based on credit risk assessment

9.75% to 11%

In addition to the above-mentioned Interest rates the ZCC & CCC will have powers to reduce the interest rates on loans in the Rs. 2 lacs and above category by upto 50 bp based on competition and strengths of proposal.

Processing charges

Nil 30% (minimum) of the value of the warehouse receipt, valued at the market value OR

Margin

20% (minimum) of the minimum support price declared by State/Central Government, whichever is higher Comprehensive Insurance

Insurance

Insurance cost to be borne by the warehouse receipt owner.

Security Charge over the deposited warehouse receipt, being a) Primary

endorsed in favour of the bank. None

b) Collateral

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Repayment

The loan should be liquidated as and when the produce is sold during the interim period not exceeding 12 months. None. The loan would be repayable in a maximum

Moratorium

period of twelve months. Interest as and when due would be payable. 1) The Warehouse receipt should be duly endorsed in the favour of the bank. 2) Depending on the type of commodity the Margin may vary.

Other terms and

3) The branch should verify the authenticity of the

conditions

warehouse receipt and get its lien noted with the warehouse before disbursal of the loan. 4) The Branch should inspect the commodity before disbursal takes place and subsequently, every three months at irregular intervals.

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Annexure 2 Financing against Warehouse receipts of Private Warehouses TERMS & CONDITIONS a) To finance traders against the warehouse receipts of Purpose

commodities stored by them in Private warehouses, by

Eligibility

way of demand loans. Any Trader dealing in Commodities. Demand Loan: 60 % of the value of the warehouse

Eligible amount of finance

receipt, valued at the market value OR 70% of the minimum support price declared by State Government, whichever is lower.

Interest Rates (in Loan category Upto Rs. 2,00,000/percentage)

Interest Rate Charged 1.00% Below SBAR Effectively 9.25 %

Over Rs. 2,00,000/- upto Rs. 25 lacs

0.5% Below SBAR Effectively 9.75 %

Over Rs. 25 lacs

10.50% to 12.00%

In addition to the above-mentioned Interest rates, the ZCC & CCC will have powers to reduce the interest rates on loans in the Rs.25 lacs and above category by upto 1%.

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Processing charges Nil 40% (minimum) of the value of the warehouse receipt, Margin

valued at the market value OR 30% (minimum) of the minimum support price declared by State Government Comprehensive Insurance with Bank’s interest duly

Insurance

noted. Insurance cost to be borne by the warehouse receipt owner.

Security Charge over the deposited warehouse receipt, being a) Primary

endorsed in favor of the bank. None

b) Collateral The loan should be liquidated as and when the produce is Repayment

sold during the interim period not exceeding 12 months.

Other terms and

a) The Warehouse receipt should be duly endorsed in

conditions

the favor of the bank. b) Depending on the type of commodity the Margin may vary. a) The branch should verify the authenticity of the warehouse receipt before the disbursal of the loan. The Bank’s charge should be duly noted warehouse before disbursal

67

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b) The commodity should be inspected before disbursal of the loan and once every three months at irregular intervals thereafter.

Annexure 3 Warehouse Construction Financing TERMS & CONDITIONS Purpose Eligibility

To finance construction of warehouses and cold storages. Any Trader dealing in Commodities.

Eligible amount of Term Loan: 75 % of the cost of construction of the 68

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finance

warehouse.

Loan category Upto Rs. 5 lacs.

Interest Rate Charged 0.25% Below SBAR Effectively 10.0 %

Over Rs. 5 lacs. upto Rs. 25 lacs Interest Rates (in percentage)

At SBAR Effectively 10.25 %

Over Rs. 25 lacs upto Rs. 1 crore.

0.25% Above SBAR Effectively 10.50 %

More than 1 crore upto 5 10.50 % - 12.00 % crores.

Depending on the Credit assessment.

In addition to the above-mentioned Interest rates the ZCC & CCC will have powers to reduce the interest rates on loans in the 1 crore and above category by upto 1%. Processing charges Nil 25 % of the value of the warehouse construction cost. Margin Comprehensive Insurance in the joint names of the Insurance

borrower & Bank. Insurance cost to be borne by the warehouse constructor.

Security a) Primary

First Charge over the Warehouse Constructed.

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None b) Collateral The loan should be repaid in Equated Monthly Repayment

installments of upto 84 months.

Moratorium

Six months

Annexure 4 Bank Guarantee for MCX Members Term & Conditions Purpose Eligibility Eligible amount finance Commission Margin

To meet different margin requirements for trade at commodity exchange Members of the Multi Commodity Exchange of India (MCX) Depending on the credit assessment of the borrower of not exceeding Rs 25 crores. Commission to be charged @1.50% At least 25% margin should be secured in cash, and balance amount by other securities, so as to secure the exposure However, in case of existing customers with sound means and good track record, and based on

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value of relationship, collateral security may be waived at the discretion of the sanctioning authority.

Processing Fee

0.25% of the Bank Guarantee amount, subject to a maximum of Rs.1 lac.

Other Terms & a) All the members interested in availing of this service Conditions

need to be assessed for their Credit Standing by the respective Branches. In this process the following documents should be asked for and scrutinised and depending on the scores on these parameters in the Risk Rating Matrix suitable Credit limit should be fixed. The required documents (indicative) are: 1) Provisional financials for the current financial year - Balance Sheet / P&L Account/all Schedules 2) Audited Balance Sheet / P&L statements with all schedules / audit report for the previous accounting year. 3) Brief profile of the Member / Company - Back ground /Years in business/ Group Co. details etc 4) Brief profile of directors - Name, Age, Qualification, Experience, Directorships in other companies etc 71

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5) Latest Net worth Certificate (as certified by CA) & copy of IT returns of two major shareholders 6) Latest Shareholding pattern of the company 7) Latest margin statement of MCX - Details of capital with exchange - Cash/ Fixed Deposit /Guarantee 8) Business Plan, covering details of their existing business model - like business mix, viz., Proprietary, Retail,

Corporate,

registered

clients,

Approximate risk

Number

management,

of

exposure

management etc 9) Details of existing banking arrangements. 10) Bank Guarantees / Other Credit facilities enjoyed from banking system (other banks) 11) Settlement volumes (MTM pay-in/pay-out for last 30-50 settlements) 12) Month-wise turnover for last six months 13) Status report from MCX

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14) Certified true copy of MCX Membership Certificate

BIBLIOGRAPHY MAGAZINES REFERRED: • Capital Market • Business World • Dalal Street • Business India

WEBSITES REFERRED: •

www.statebankofindia.com

•

www.mcx.com

•

www.cwc.com

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Downloaded from a2zmba.blogspot.com •

www.google.com

•

www.soople.com

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