Ncdex

New Initiatives in credit flow to Farmers: NCDEX Journey Mr P.H.Ravikumar MD & CEO, NCDEX Limited

Oct 8, 2005

Present Financial Concerns Financial Risks of Framers

Pre-Production

Credit needs •Lack of timely farm inputs •Forward price risk •Credit flow 2

Insurance needs •Weather leading to crop failure •Yield risk

Post-Production • Price risk •Lack of proper storage •Credit flow

Present Financial Concerns Entities covering risk

Pre-Production

Post-Production

Credit needs

Insurance needs

• NCDEX

•NCDEX

•Insurance Company

•NCMSL

•Banks

• NCDEX –NCMSL

•Banks

Price risk •NCDEX 3

Integrated role of Arathiya „ „ „ „ „

4

Price Buyback Insurance Liquidity Flexible turn around time

To replace Arathiyas, we need alternative ‘singlewindow’

agencies

performing

with

same

efficiency and turn around time; costs are secondary

5

Banks lend, but… „

Banks charge farmers high interest rates „

Price risk „ Volumetric risk „ Crop failure on account of natural factors as also failure in supply of inputs „ Other Risks run by farmers and lenders „

Default Risk „ Accidental death of farmers „

Slower process & lower quantum lent

Can the arathiya’s role be entwined with that of the banks? 6

Single window model: Pre-harvest Small Farmers

Small Farmers

Large Farmers

Aggregators Future price ensured Liquidity enhanced Banks Insurance NCDEX NCMSL

7

Weather derivatives /Crop Insurance Bank lending

Single window model: Post-harvest Small Farmers

Large Farmers

Sell forward Banks NCDEX NCMSL

Storage facility

Assaying & grading

Commodity backed bank finance (WR) 8

Information Dissemination Matrix Information on commodity price, warehouse status, weather & rainfall etc. Price Ticker „Rural

Post offices „Bank’s rural branches „Railway platforms „Co-operative offices „Rural warehouses „Panchayat offices „Kissan Call centres

9

Awareness Program

Print Media

Electronic Media

„ Covering remote

„

„

TV

villages „ In vernaculars „ Documentary movies

newspapers „ Training materials

„

Radio

Regional

Current Spot Market Structure „

Spot Markets „ „ „ „ „

Over 7000 ‘Mandis’ Opaque prices Long Value Chain Asymmetric market & price information Bundled Processes „ Price Information „ Decision to buy/sell „ Geographically influenced „ Subjective Grading „ Physical Delivery „ Realisation of value

Currently both the buyer/seller to depend on intermediaries, elongating the value chain 10

NCDEX Approach in Spot Market Unbundling the process Price Information „ Information Dissemination „ Spot Prices

„

Informed decision on when & where to sell – at his place itself

„

„

Trade execution- at his place itself

„

Physical Delivery of produce – quality migration

„ „ „

Prompt commercial realization Low cost funding of stocks Cashflow funding for intermediary period, when sold forward

Electronic Trades

Warehouse & Logistics „ Accredited warehouses „ Weather „ Scientific Grading

„

11

Receipt of value

Benefits of unbundling „ „ „ „ „

Increase of holding power of small & marginal farmers Remove the price & market information asymmetry Improves realization Larger flow of credit to the sector through risk mitigation Shrinkage of value chain „

12

Higher realization to the primary producer & lower cost to the consumer

NCDEX Pilots „

Cotton grading project with CIRCOT „ Grading cotton scientifically possible „ Reduced subjectivity in grading of cotton „ MOU with IARI „ Objective gradation of cereals „ Cotton pilot in AP & Gujarat „ farmers to sell forward before harvest „ Insurance player included to cover volumetric risk „ Issue of aggregators „ Farmers said they preferred options „ Bank finance in MP with MPSWC „ Banks to provide finance up to 85% of crop value

13

Impact of NCDEX on farm incomes Guar Seed Price (Rs/qtl)

Raw Jute Price (Rs qtl)

FY02

FY0 3

FY02

FY0 3

FY04

FY05

FY04

FY05

1st Qtr

823

840

1217

1082

1491

1st Qtr

1146

1008

842

1056

1454

2nd Qtr

821

1575

847

1625

-

2nd Qtr

1042

857

823

1405

-

3rd Qtr

698

1434

978

1669

-

3rd Qtr

1042

827

784

1557

-

4th Qtr

758

1439

958

1534

-

4th Qtr

1167

804

794

1303

-

FY06

FY06

Castor Seed price (Rs/20 kgs) FY02

FY03

FY04

1st Qtr

197

247

375

2nd Qtr

224

263

3rd Qtr

211

4th Qtr

211

FY05

FY06

304

304

287

357

-

297

292

348

-

363

300

305

-

Prices are those received by the farmers after adjusting for the taxes and other incidentals. The Prices are from the following mandis: Bikaner, Calcutta and Ahmedabad. Numbers marked in red pertain to Prices after trading was enabled on NCDEX. 14

One-stop shop in Non Urban India Unit

Function

Warehouse

Hub of activities

Banking

Franchised branches Low cost ATMs, Agri-loans, financing, aggregation

Crop Insurance

Franchised branches, Crop risk mitigation

Life Insurance

Life risk mitigation

NCDEX (Price & Trading)

Price risk mitigation & real time knowledge

Grading Agencies

Scientific grading, quality migration

Input suppliers (seed, fertilizers & Increase availability to farmers machine tools) Agri-extension services 15

Facilitate other needs & services

Regulatory Facilitation „

Options „

Can be a substitute for MSP „ Can be done for specific commodities without amendment in FCRA (by notification under Section 27) „ „

Indices & weather derivatives not tradable Bank participation as aggregators „

16

Can be done by notification under Section 6 (1)(o) of Banking Regulation Act

Regulatory Facilitation „

Institutional participation „

Mutual funds: Modification in SEBI regulation „

„

FIIs: Notification by RBI „

„

SEBI to issue a notification Policy to be put in place

Legal recognition needed for demat WR „

Not under Depository Act presently „ Not a negotiable instrument

17

About NCDEX

18

NCDEX – Current shareholders

NABARD 15%

NSE 15%

ICICI Bank 15%

LIC 15%

IFFCO 12%

Canara Bank 8%

-No private shareholding, only institutional shareholding -NCDEX fully compliant with shareholding guidelines 19

CRISIL 12%

PNB 8%

Independent Board of Directors Name

Organisation

Expertise in

Shri U. S. Awasthi

MD, IFFCO

Agriculture

Shri A.K. Shukla

Chairman, LIC

Insurance

Shri B.V. Bhargava

Chairman, CRISIL

Credit rating/finance

Shri S.H. Bhojani

Partner, Amarchand Mangaldas & Co.

Legal

Shri Dileep Choksi

Sr. Partner, C.C Choksi & Co.

Accounting

Shri D. S. Kolamkar

Director, FMC

Market Regulation

Smt Ranjana Kumar

Chairperson, NABARD

Rural finance/Banking

Shri Ravi Narain

MD & CEO, NSE

Exchange operation

Shri Lamon Rutten

Chief - Finance & Energy, UNCTAD

Finance & Energy

Shri Ravi Mohan

MD, CRISIL

Credit rating

Dr. Ajay Shah

Consultant, Ministry of Finance

Economics & Finance

Shri H.N. Sinor

CEO & Secretary, IBA

Banking & Finance

Shri P. H. Ravikumar

MD, NCDEX

Banking & Finance

20

Product Calendar Dec 2003 Gold, Gold, Silver, Silver, Crude Crude Palm Palm oil, oil, RBD RBD Palmolein, Palmolein, Cotton, Cotton, Mustard Mustard seed, seed, Mustard Mustard oil oil Soybean, Soybean, Refined Refined soy soy oil oil

Apr-Dec 2004 Guar Guar seed, seed, Jute Jute sacking, sacking, Chana, Chana, Rubber, Rubber, Pepper, Pepper, Wheat, Wheat, Castor Castor seed, seed, Guar Guar gum, gum, Raw Raw jute, jute, Urad, Urad, Yellow Yellow peas, peas, Sugar, Sugar, Turmeric, Turmeric, Soymeal Soymeal

Crude oil just

Jan – Aug 2005 Gur, Gur, Rice, Rice, Maize, Maize, Raw Raw silk, silk, Cocoon, Cocoon, Jeera, Jeera, Chilli, Chilli, Steel, Steel, Cashew, Cashew, Cottonseed Cottonseed oilcake, oilcake, Sesame Sesame seed, seed, Tur, Arabica Tur, Arabica & & Robusta Robusta Coffee, Coffee, Copper Copper cathode cathode ,, mentha mentha oil, oil, Crude Crude oil oil

launched

In pipeline Other Other base base Metals, Metals, Energy Energy Products, Products, More More Agricultural Agricultural products products

Indices Indices-NCDEXAGRI NCDEXAGRI FUTEXAGRI FUTEXAGRI NCDEXRAIN NCDEXRAIN

Each product is selected after in-depth research & market feedback 21

Average daily volumes

Rs cr

4500

4157 3835

4000 3500

Peak Volume for a single day

3000

Rs. 7,197 cr on 22 Aug’05

3040 2575

2500

2231 2015

2000

1619

1500

1231

1000

2095

1444 1229

691 21

55

Q 1 -2 0 0 4

Q 2 -2 0 0 4

500

•Impressive growth of NCDEX with 85% volume contribution from agriculture •Volumes in Steel & Copper picking up- daily average steel trade- 10,000 tonnes •NCDEX has 60% of the market share in commodity trading 22

S e p '0 5

A u g '0 5

J u l y '0 5

J u n e '0 5

M a y '0 5

A p r '0 5

M a r '0 5

F e b '0 5

J a n '0 5

D e c - '0 4

O c t -N o v 0 4

Q 3 -2 0 0 4

0

Thank You

23

Value Chain Farmers Farmers Kaccha Kaccha Arathiya Arathiya

Pucca Pucca Arathiya Arathiya

Farmers Farmers Co-operatives Co-operatives

Mandis Mandis Co-operative Co-operative Mills Mills

Pucca Pucca Arathiya Arathiya

Private Private Mills Mills Consumer Consumer 24

Retailer Retailer

Wholeseller Wholeseller