Warehouse Receipts Financing (B)
Code :FCF0030 |
Region : Asia |
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BACKGROUND NOTE: Kundan’s modus operandi so far had been to buy food grains (mainly wheat, paddy, maize, and barley) from farmers and store them in his brother’s warehouse which had a total capacity of 4,000 metric tonnes (MT) of food grains. In case of large procurements, he stored the excess in his cousin’s warehouse (with a total capacity of 3,000 MT). His business had costs like advancing (sales) cost, interest cost, storage cost (including transport and insurance), as well as price risk cost. He was able to take care of his advancing and storage costs through Warehouse Receipt Financing (WRF) from the bank based on Warehouse Receipts issued by his warehouseman brother, Chandan Shah (Chandan), as collateral (See Figure I for process and players in warehouse receipt financing)... |
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THE PROPOSAL: Chandan had come to Kundan with a proposal that they work together in his warehouse and incorporate a company, provided Kundan brought in an additional storage capacity of over 1,000 MT. Chandan suggested that Kundan should construct additional storage capacity adjacent to their existing warehouse on their ancestral property. This could make them (as partners) eligible for a possible tie up with the Collateral Management Agency (CMA). CMA’s function was to provide services to the banks. Banks generally were not adequately staffed and found it difficult to assess all the commodities against which they were providing credit. In addition, they were not able to track the price movement of commodities...
COLLATERAL MANAGEMENT SYSTEM: Once he became an accredited warehouseman, Kundan would be able to accept and store the agricultural produce deposited by the farmers in his WDRA accredited warehouse and issue a Warehouse Receipt (WR) to the farmers. The farmers could take the receipt, which would have all the necessary details like quality and quantity of the produce, to the bank. The bank would then offer working capital credit...
DECISION POINT: From using the Warehouse Receipt as a trader to issuing one as a warehouseman seemed like a giant leap for Kundan. Taking a plunge into this new role of a facilitator (i.e., helping farmers as against taking advantage of their situation) and being part of a collateral management model to contribute to agriculture infrastructure building would be a positive shift for him. ..
EXHIBITS:
Exhibit I: Warehouse Receipt Financing System
Exhibit II: SEBI Eligibility Criteria for WSPs
Exhibit III: General Guidelines on Certification Procedure of a Warehouse, Inspection, Offences and Penalties
