Relevance: GS-3: Indian Economy, mobilization of resources, issues of buffer stocks and food security.

Key Phrases: Commodity Market, Supply Chains, collaterals, Warehousing Development and Regulatory Authority, Farmers, Collateral issue, Warehouse Service Providers, Asset Service Managers, Commodity Repositories.

Why in News?

• Asset service providers can offer a range of services to commodity market players.

Context:

• India had exported approximately 32 million tonnes of food grains worth $12 billion in FY22, indicating our farm exports thrust. Our food processing industry is estimated at ₹2.24 lakh crores and is growing at about 11 per cent, ably supported by well-developed supply chains with the potential to deliver quality raw materials at competitive prices.
• Exports and the food processing industry rely on robust supply chains and their connectivity with financial institutions to source cheap funds and raw materials. Given that agricultural commodities are seasonal, they need to be procured at competitive prices and carried forward. Besides adding to the costs associated with storage and losses, early procurement and storage locks in the capital.
• Many of these processors operate with raw materials procured during the peak season and sell their products after a few weeks or even months, making them vulnerable to the volatility in the economy.
• Such a business model, be it export facing or markets for processed products, will lock in a large part of the capital, crippling the businesses and their ability to respond to the market signals with agility.
• Besides the quality of the raw materials, the traders and processors would also require a competitive financial environment and access to it. An expected outcome of a competitive financial environment would be access to cost-effective capital for traders and processors.
• Apart from financing receivables, the commodities procured and stored (warehouse receipts) can also become effective collateral for the bankers to lend against. However, it requires active financing of commodity collaterals stored safely and securely, ensuring the quality and quantity of the commodity.
• Financing commodity collaterals will be an attractive proposition for the traders and processors to unlock that part of their working capital invested in stored commodities that otherwise serve to protect themselves from fluctuations in their input costs.

Benefits of NWRs:

• NWRs issued by registered warehouses help farmers to seek loans from banks against NWRs and this way NWRs become a prime tool of trade.
• NWRs provide farmers with an instrument that allows them to extend the sales period of modestly perishable products well beyond the harvesting season. When delivering the product to an accredited warehouse, the farmer obtains a Warehouse Receipt that can be used as collateral for short-term borrowing to obtain working capital. That way, the farmer does not need to sell the product immediately to ease cash constraints.
• This option would be attractive only if the farmer expects that seasonal price increases will make it worthwhile to store the product and sell it later. This way NWRs can avoid distress sale of agricultural produce by the farmers in the peak marketing season when there is glut in the market.
• Negotiable warehouse receipts allow transfer of ownership of that commodity stored in a warehouse without having to deliver the physical commodity. These receipts are issued in negotiable form, making them eligible as collateral for loans.
• It is also beneficial to other stakeholders, such as, banks, financial Institutions, insurance companies, trade, commodity exchanges as well as consumers. NWRs can enhance banks’ interest in lending in respect of farm goods deposited by farmers in the registered warehouses which can increase liquidity in the rural areas and encourage scientific warehousing of goods.

Collateral Issue and Asset Service Managers:

• WDRA registered warehouse service providers (WSPs) and the issuance of eNWRs, are expected to ensure the quality and quantity of goods underlying the warehouse receipts. The potential lenders can avail the services of professional agencies in physical commodities and commodity markets to help them in valuation, margins/haircuts to be maintained, analysis and forecasts about price movements expected policy announcements and their impact on collateralised commodities, and secure disposal of commodities in the event of borrower default.
• Entities that provide similar services in various financial asset classes are typically called 'Asset Service Managers'. Due to a lack of expertise and resources to mitigate risks in lending against commodities, lenders usually hire third-party agencies to provide services such as valuation, market intelligence, protection against pest attack, asset inspection and audit, asset disposal, etc.
• Asset service providers are not new to the banking or NBFC sector. Immovable asset classes such as real estate, large machinery, industrial inventories, etc., are financed by the banks, as service providers for such assets provide the lenders with services related to risk management, asset takeover and disposal at the time of default.
• Given the price volatility of some assets, lenders must manage the risk to ensure that the value of the financed assets does not fall below the amount lent. Independent service providers need to collect and share the asset price information on a periodical basis so that the lender can make adjustments to the margins and call for additional margins.
• Asset service providers in commodities may also extend forecasting services to forewarn risks in commodity financing and advisory in areas such as stock limits, disclosure of storage, etc.

Way forward:

• The finance against NWR is related not only to warehousing and banking but also to the market. Likewise, the agencies having integration with the market have been found better equipped for disbursement of pledge finance like the collateral management service providers, APMCs and warehousing corporation.
• Awareness about advantages of NWR loans needs to be generated by involving banks, Krishi Vigyan Kendras, State Agricultural Marketing Boards, Regulated Market Committees, NGOs, co-operatives, FPOs and even APMCs.

Source: The Hindu BL

Mains Question:

Q. What do you understand by Negotiable Warehouse Receipts? How do NWRs provide help to the farmers in situations of price volatility in the market? Examine.