1 Title page FIELD WAREHOUSING AND THE ROLE OF A COLLATERAL MANAGEMENT AGENCY Presented by Anil K...

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Title page

FIELD WAREHOUSING AND THE ROLE OF A COLLATERAL MANAGEMENT AGENCY

Presented byAnil K Choudhary

MD & CEO National Bulk Handling Corporation Ltd.

AGRI REVOLUTION FINANCING THE AGRICULTURE VALUE

CHAIN

Grand Hyatt, Mumbai

Date:17th , March 2007

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www.nbhcindia.comwww.nbhcindia.com

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

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Lower credibility Lack of confidence

High risk perception Not seen as an

alternative by farmers /Traders

Lower liquidity & high price for credit

Ground Reality in Post Harvest Credit

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Commodity funding…Inhibiting issues

Warehouse Facilities

•Unreliable performance of warehousemen - fraud & mismanagement

• High charges levied to farmers/traders

WarehouseReceipts (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

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Risk Management

Issues

• Price knowledge

• Liquidity on commodity exchanges

• Non-acceptance of WR: Tradability without physical delivery

CommodityRelated 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

Commodity funding…Inhibiting issues

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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

PRODUCE

VALUE

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Recent Initiatives…Trickle 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

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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

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Warehouse receipt financing …to spurt

• Post 1969 with introduction of the concept of priority sector – bank’s 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)

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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

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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

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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

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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

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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

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• 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

Field Warehousing...Benefits

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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 Manager’s 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

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- 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

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contd…

• 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

- Initiative

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Collateral Management ServicesMinimizing Risk… Maximizing Value

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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)

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NBHC : A Complete Collateral Manager

Consultancy in agro-commodity management

Risk mitigation and management of commodities

Procurement & Disposal services

Advisory services on spot/futures

trading

Demat Warehouse Receipt

Pledge Loans from Banks

Warehousing & Bulk Handling services

QC, Gradation & Certification

NBHC ProComm

Commodity Care & Pest Management

NBHC CommGuard

NBHC PLATFORM

Audit, Accreditation & valuation NBHC Mandate

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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 Cecure’s 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.

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Field Warehousing @ NBHC

Farmer/TraderBank

Quality Assaying of Commodity by

NBHC ProComm

Pledging WH receipt

WH Receipt by NBHC

Financing

Third Party / Own Warehouse

Appointment of NBHC as Collateral Manager

Deposit Commodity

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2

3

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NBHC – field warehousing

Necessary KYC & other info with intention letter

to lender

Necessary loca-tion Inspection

exercise & determine risks

Necessary Legal formalities and agreement with

Borrower

Appointment of security and

administrative staff

Recognition of collateral

LOCK & KEY

Quality testing and issuance of

Warehouse Receipt &

forwarded to lender

Fund disbursed to borrower

Stock lien marking and

separate stock control if more

than one depositor

Borrower repays loan

Proper stock management

and health monitoring

Lender instructions

Release the stock

NBHC CECURE

NBHC CECURE

NBHC CECURE

NBHC CECURE

NBHC CECURE

NBHC PROCOMM

NBHC CECURE

NBHC COMMGUARD /

NBHC PROCOMM

Regular audit for quality and

quantity

NBHC MANDATE

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Thank You

Thank you page

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