FIELD WAREHOUSING AND THE ROLE OF A COLLATERAL MANAGEMENT AGENCY

1
Grand Hyatt, Mumbai Date17th , March 2007
AGRI REVOLUTION FINANCING THE AGRICULTURE VALUE
CHAIN
FIELD WAREHOUSING AND THE ROLE OF A COLLATERAL
MANAGEMENT AGENCY
Presented by Anil K Choudhary MD CEO National
Bulk Handling Corporation Ltd.

• Title page

2
Post harvest liquidity A Major Challenge

• Present agro produce marketing system is
  inefficient fragmented
• Warehouses, their management receipts issued by
  them do not enjoy market confidence
• Despite being one of the oldest lending products,
  warehouse receipt funding has been a no-no for
  banks
• Higher margins interest rates do not leave
  viable option for farmers
• Farmers in India realize just about 30-35 value
  ot their produce vis-à-vis 65-70 in the
  developed economies

3
Ground Reality in Post Harvest Credit
4
Commodity funding Inhibiting issues
Warehouse Facilities

• Unreliable performance of warehousemen -
  fraud mismanagement
• High charges levied to farmers/traders

Warehouse Receipts (WR)

• Negotiability of warehouse receipts
• Non-uniformity of WRs
• Stamp duty on private Warehouse WRs in some
  states

Collateral Management Services

• Responsibility not understood properly
• Few quality service providers
• Cost of services

5
Commodity funding Inhibiting issues
Risk Management Issues

• Price knowledge
• Liquidity on commodity exchanges
• Non-acceptance of WR Tradability without
  physical delivery

Commodity Related issues

• Lack of standardization of grades
• Co-mingling / Fungibility risks
• Part delivery of goods

Other issues

• Double-financing of stocks
• Sales tax on goods changing hands in warehouse

6
Warehousing in India has Multiple Dimensions

• Post harvest liquidity better price realisation
  for farmers.
• A sine-qua-non for efficient commercial trade in
  agro-commodities.
• Backbone to commodity exchange Futures Spot.
• To boost Agro food processing industry

7
Recent InitiativesTrickle or Gush !

• Agri-credit to double in three years annual
  growth 30 with number of qualitative outreach
  targets-financial inclusion (This year Budget
  puts agri lending target at USD 50 bio)
• Setting up of national level commodity exchanges
  for price discovery, dissemination price risk
  management
• Electronic national spot market on anvil
• Partial rationalization of export-imports of agro
  commodities
• Policy initiatives
• Model APMC Act
• Integrated food laws
• Essential Commodities Act 1955 Amendments
• Warehousing Regulations Development Bill 2005

8
Warehousing Regulation Development Bill A
Major Step forward

• Major provision
• Regulation of warehousing business by registering
  warehouses issuing negotiable warehouse receipt
• The establishment incorporation of an authority
  to be called The Warehousing Development
  Regulation Authority (WDRA)
• The registration of accreditation agencies for
  warehouses to accredit warehouses based on
  required norms
• The condition for negotiability of warehouse
  receipts by delivery endorsement
• Constitution of the Warehousing Advisory
  Committee
• Likely to result into
• Increase in the liquidity in rural areas
• Encourage scientific warehousing of goods
• Lower cost of financing
• Shorter more efficient supply chains
• Enhanced rewards for grading quality
• Better price risk management

9
Warehouse receipt financing to spurt

• Post 1969 with introduction of the concept of
  priority sector banks lending in agri sector
  predominantly input financing oriented- 95
• The impending legislation coupled with several
  other enabling factors likely to make
  post-harvest lending a big draw
• Increasing disintermediation from corporate
  lending, Banks are looking for retail
  opportunities
• Warehouse receipt financing to meet mandatory
  requirements on a commercial keel
• Collateral management companies to provide
  support critical to commodity funding which is
  likely to touch US 25-30 billion in the next
  3-5 yrs (presently meagre US 3 Billion)

10
On the back of Collateral Management Services

• Collateral as understood in Indian banking
  parlance is secondary source of payment
  obligations
• Collateral in the present context is an asset /
  3rd party commitment accepted by the Collateral
  Taker (Bank) to secure an obligation of the
  Collateral Provider
• Collateral Management (CM) involves managing
  the collateral on behalf of the collateral taker.
  CM transactions are intended to protect against
  performance risk of counter party
• Banks in India have traditionally been assets
  based lenders with hardly any knowledge of asset
  financed
• Reach of Banks, pvt. sector Banks in particular,
  coupled with lack of domain expertise
• Banks, Public Private, under pressure to expand
  agri credit portfolio, sound collateral
  management therefore to become major enabler

11
What Collateral Managers do ?....

• Identify various inherent and external risks
  associated with collateral and mitigate these
  risks with integrated risk management system
• Audit , Accredit Provide storage facilities for
  commodity funding
• Quality and Quantity assurance for both lender
  and borrower, backs the same with guarantees and
  insurance
• Arrange quality certification and quality
  protection services
• Manage storage facilities adhering to operational
  standards for minimizing loss and risks
• Provides services for total control on stock
• In-bound and outbound logistics support
• Advisory and Inventory Management services
• Collateral status reporting on periodical basis
• Facilitating disposal of collateral, as and when
  required
• End to end commodity management solutions risk
  management practices targeted to minimize
  collateral risk and maximize returns to counter
  party

12
Field warehousing

• Warehouses operated by individual borrowers,
  under the supervision of a surveillance company
  (alternatively the surveillance company/warehouse
  operator may take full control of the borrower's
  store, sometimes known as " field
  warehousing").
• Forward Market Commission

13
Field Warehousing Prerequisites

• Collateral Manager with proven track record,
  adequate financial strength domain knowledge
• Storage facility audit to determine suitability
  for stored commodity
• Quality and quantity determination for proper
  valuation
• Leasing arrangement for legal management control
  over commodity
• Proper lien noting
• Proper documentation including secure warehouse
  receipt, insurance coverage , etc
• Access , Security and administrative staff to
  establish control on pledged stock

14
Field Warehousing...Benefits

• Lender
• No service location limitations
• Very convenient and cost effective lending
  mechanism
• More opportunities for expansion of lending
  portfolio with secure collateral for borrowers
  like millers , processors , exporters
• Stock management by domain experts
• Regular update on stock health commodity care
• Make free from any inclinations or prejudices
  about stock funding
• Assurance of quality and quantity to ease the
  funding process

15
Field Warehousing...Benefits

• Borrower
• No service location limitations
• No extra cost involved in logistics, warehousing
  handling
• Convenient and low cost solution for working
  capital
• Collateral remain in assurance circle and remain
  fully usable
• Credit without hassling production process at
  processing locations
• No additional cost involved in reducing risk
  perception
• Make free from administrative and transactional
  procedures

16
CM Arrangements with Banks

• Collateral Manager responsibilities
• Storage facility audit for structural integrity
• Commodity quality testing and certification
• Issuing warehouse receipt with commodity value
  and quality grade
• Marking of pledge / lien
• Risk Management of collateral
• Collateral Managers liability
• For anthropogenic damage CM is liable with
  provision for standard deduction
• Stock management
• Basic Risk Mitigation practices
• Full stock value insurance and security
  arrangements
• Know Your Customer (KYC) process as stipulated
• Fidelity guarantee to cover employee related
  liability
• Stock released only after delivery order from bank

17
- Initiative

• Converting status of warehousing from storage to
  adding value to commodities
• Have CM agreements with 8 leading banks including
  banks which are first time in WRF
• Implementing Integrated Risk Management System
  for commodity based funding
• Developed due diligence mechanism for hiring
  warehouses for exchange delivery , professional
  warehousing collateral management
• Standard Warehouse Operations Reference Manual
  complying to ISO 9001 standards
• Secure warehouse receipt, security features
  avoiding forging IBA preferred security
  features

18
contd
- Initiative

• Extensive use of Information technology in all
  operations
• Mobile commodity testing and in-house commodity
  protection services
• Weekly commodity update (IntelliComm)
• Facilitates disposal of collateral, when
  necessary
• To establish more control over system have
  in-house quality testing (NBHC PROCOMM),
  Commodity Protection (NBHC COMMGUARD) , Audit and
  Accreditation Commodity Valuation (NBHC
  MANDATE) Collateral Management (NBHC CECURE)
  Services

19

• Collateral Management Services
• Minimizing Risk Maximizing Value

20
NBHC Field warehousing

• Maintains custody of the inventory at location
  specified, and provides regular warehouse
  receipt to assist the bank in its administrative
  control of the lien noted stock and location
• Regular audit and stock condition intelligence
  with in-house team (NBHC MANDATE)
• Appoint administrative and security control on
  funded stock and storage facility
• Quality Testing (NBHC PROCOMM) and stock health
  management (NBHC COMMGUARD)

21
NBHC A Complete Collateral Manager
Warehousing Bulk Handling services
Commodity Care Pest Management NBHC CommGuard
Consultancy in agro-commodity management
Advisory services on spot/futures trading
Risk mitigation and management of commodities
NBHC PLATFORM
Pledge Loans from Banks
Demat Warehouse Receipt
QC, Gradation Certification NBHC ProComm
Procurement Disposal services
Audit, Accreditation valuation NBHC Mandate
22
NBHC Cecure- Comprehensive Collateral Security

• NBHC Cecure provides collateral management
  services based on structured warehouse
  accreditation operational fundamentals.
  Assurance of quality and quantity of the
  commodities is provided to both depositor and
  lender.
• NBHC Cecures Risk Management is a cyclic
  process. We adopt a 4-step process which includes
  Risk Identification, Risk Measurement, Risk
  Management Risk Mitigation. This process is
  methodical and proactive, and helps Lenders
  Manage Risk and Maximise Value.

23
Field Warehousing _at_ NBHC
1
Quality Assaying of Commodity by NBHC ProComm
3
Third Party / Own Warehouse
Deposit Commodity
2
Appointment of NBHC as Collateral Manager
WH Receipt by NBHC
4
Pledging WH receipt
5
Farmer/Trader
Financing
Bank
6
24
NBHC field warehousing
Necessary loca-tion Inspection exercise
determine risks
Stock lien marking and separate stock control if
more than one depositor
Proper stock management and health monitoring
NBHC CECURE
NBHC COMMGUARD / NBHC PROCOMM
NBHC CECURE
Necessary KYC other info with intention letter
to lender
Fund disbursed to borrower
Regular audit for quality and quantity
Quality testing and issuance of Warehouse Receipt
forwarded to lender
NBHC CECURE
NBHC MANDATE
Necessary Legal formalities and agreement with
Borrower
Borrower repays loan
NBHC CECURE
Lender instructions
NBHC PROCOMM
Appointment of security and administrative staff
Recognition of collateral LOCK KEY
Release the stock
NBHC CECURE
NBHC CECURE
25
Thank You

• Thank you page