Here at the Indian Development Blog we like to highlight the efforts of our partners. The IFMR Trust Guarantee Company (ITGC), a member of the IFMR Trust group of entities, is launching an exciting initiative in collaboration with the recently established National Spot Exchange (which is also a very exciting initiative – more on that later) to provide warehouse receipt financing to farmers. Below is a description of the initiative, along with a background on the reasons for the initiative in their own words. Thanks to Gaurav Kumar for the write up!
Current practices in commodities and problems
All agricultural commodities in India are traded in a wholesale market called a Mandi. Mandi forms a part of the spot market designed for the trading of commodities in India. The price of the commodity is set at a mandi. Mandis are set up with the permission of the state government. Each state government has a State Agricultural Marketing Board (SAMB) which sets up a mandi at the district level. Initially there was one mandi for a specific district. But now there are many mandis within a district, usually at the Taluka level. Today there are around 750 mandis all across India and around 140 commodities are traded in total across these mandis. Most mandis in the same district trade in a similar set of commodities. This makes for a fragmented market for a single commodity in the country.
All the quantity of commodities that are produced in excess of local consumption pass through the mandi. Hence mandi becomes an important source of information to understand the flow of commodities in the country. Every mandi deals with at least one primary commodity that is usually very specific to the region. It may also take up other primary and non-primary commodities for trading. Once the sellers come to the market yard, they usually approach a licensed trader at the yard. Traders are intermediaries between the farmers and the wholesalers. Traders can also have multiple roles. Some traders are only commission agents or brokers for major processing firms in the region, some are traders and stockiest and some are traders and hedgers as well. However any licensed trader at the APMC will have to pay two types of fees, a transaction fees that is a fraction of volume traded and tax which varies from state to state. However, the traders recover these charges by charging this to the farmers. Only in case of the primary commodities which are protected by using the MSP, the traders pay the full price for the produce.
Traders who are only ‘kachcha adathiya’ or only commission agent do not stock any commodity. They usually clear the traded commodity the same evening while the ‘pucca adathiyas’ store the traded commodity depending upon the cost they can bear on it. As can be seen, storage happens to be an important function in the flow of commodities.
A standard warehouse receipt is typically used only by traders and affluent farmers as a tool for financing. Warehouse receipt finance has thus become an exclusive product that is perceived to be non applicable to the small and marginal farmer. The apparent barriers to the farmer in participating in such a product are observed to have been
1. Non availability of reliable price information leading to information asymmetry
2. Lack of Storage Space: Curtailing the holding capacity of the small farmer
3. No fixed parameters of judging quality
4. Multiple layers of intermediaries
5. Hidden Charges, Documentation Challenges
6. High Transport Cost
In order to address many of these issues IFMR Trust has entered into a collaboration with National Spot Exchange Limited (NSEL) in line with which ITGC has structured a Warehouse receipt finance product to leverage the Warehouse Receipt as a liquidity smoothing financial instrument, by riding on a warehouse linked electronic market.
While the combination of ITGC Warehouse receipt finance and NSEL's warehousing and electronic price discovery would resolve many of the issues faced by the small and marginal farmer, it is felt that these would still not be sufficient to clinch the issue and catalyze him to move out of the traditional mandi system into a contemporary electronic mandi. Some issues involved in achieving this are:
The goal of the warehouse receipt financing product is to enable small farmers to access finance against their commodities at competitive rates using a process that is fairly simple to execute. To enable this, ITGC has signed a partnership agreement with National Spot Exchange Limited (NSEL). The alliance will create a seamless process for providing finance to farmers and traders against commodity warehouse receipts for the commodities deposited in NSEL approved warehouses. The pilot for this financing model is to be launched shortly at Kadi, Gujarat. Under the partnership, IFMR Trust will provide loans to farmers against agricultural commodities deposited in NSEL-approved warehouses, by way of warehouse receipts issued for these deposits. Such post-harvest financing will give farmers the option to wait out the usually low prices offered immediately after harvest, and sell at a later time, when prices tend to rise. It will also allow farmers to take advantage of changing market prices rather than being burdened by them. The loans backed by warehouse receipts will be pooled and repackaged into securities. ITGC will structure, arrange and sell these commodity loan-backed securities in the capital market.