Abstract
Commodity financing is financing against the pledge of warehouse receipts of Central Warehousing Corporation (CWC) / State Warehousing Corporation (SWC) and private warehouses / cold storages / godowns. The goal of financing against thewarehouse receipt is to enable small farmers to access finance against their commodities at competitive rates using a process that is fairly simple to execute. Such post-harvest financing will give farmers the option towait during the usually low prices offered immediately after harvest, and sell at a later time, when prices tend to rise. Commodity finance is getting popular all over India. States like Punjab, Haryana and Uttar Pradesh are pioneers in commodity finance in agri commodities as major crops like wheat, paddy and cotton are grown in large quantities in these states. In Punjab where wheat, rice and cotton are the major crops grown, banks have started providing commodity finance on these crops. The present studywas undertaken to understand the perception and attitude of farmers and agri firms of Punjab towards commodity finance. A list of farmers and agri firms availing commodity finance in Amritsar and Bathinda was obtained from financial institutions providing commodity finance to them. Out of this list, 50 farmers and 30 agri firms availing commodity finance were chosen on the basis of random sampling technique. Commodity finance is availed by large farmers and this facility has still not percolated to small farmers. Majority of the farmers (82%) borrowless thanRs 5 lakhs, and18%borrow between Rs 5 – 10 lakhs on a per annum basis. Most farmers (65.79%) arrange their money frombanks, and 34.21% from middlemen. Most of the respondents are charged between 12-13% rate of interest. The agri firms feel that commodity finance is safe and more beneficial from other means of finance. Commodity finance has more benefits, but it is not easily available and it depends on the availability of warehouses. Farmers and agri firms who avail of commodity finance are overall satisfied with the servicesanddealings with banks.
Introduction
Commodity Finance has been described as short term financing provided to international multi commodity trading companies, commodity producers in industrialised countries and market players involved in oil and gas, metals and minerals, and agri-commodities by Rabo Bank (Trade and commodity finance, 2012). According to a study conducted by UNCTAD Secretariat in 2001, structured finance/ commodity finance is the art of transferring risks in trade financing from parties less able to bear those risks to those more equipped to bear them in a manner that ensures automatic reimbursement of advances from the underlying assets which are in the form of oil in the ground, plantations to produce cocoa or coffee, even fields to produce annual crops such as cotton or wheat etc. Structuring techniques make it possible to raise funds on the basis of thiswealth, funds that can then be used to access this wealth and convert it into ready money. Structured commodity finance is particularly relevant for commodity companies in countries that are considered as risky by financiers. Structured finance allows many of these companies to obtain finance at reasonable terms. But there are a number of obstacles to structured finance which do not exist in the case of more traditional forms of financing. In many countries, the understanding and awareness of structured financing techniques and modalities are quite weak, and this has often resulted in legal and policy barriers to this form of finance.
Facilitating access to finance and increasing investment is of the essence for commodity production and trade; it is crucial to the livelihoods of the most vulnerable producers and exporters within the commodity supply chain. Together with the emergence of newer threats bearing directly on the commodity sector (i.e. food and energy security and climate change), the global crisis has underscored a crucial need to understand the problems faced by small-scale producers and exporters of commodities, and to scale up the financial resources required in commoditydependent developing countries. The need to design appropriate policies and mechanisms to enhance access to commodity finance in lowincome commodity-dependent developing countries has never been more urgent. IFC (International Finance Corporation) launched the Critical Commodities Finance Program (CCFP) to channel funds to support the global trade of commodities. Through this innovative public-private partnership, IFC will maintain credit for traders and intermediaries that move food and agricultural products in and out of low-income countries. By supporting commoditybacked finance and in partnerships with banks, the CCFP will promote commodities as an asset class and encourage local and regional banks to participate in funding critical economic sectors, which will ultimately help increase access to finance and develop local markets (International Finance Corporation, 2012). Many international agencies like EBRD (European Bank for Reconstruction and Development) are actively involved in evolving loans against warehouse receipts in developing legislations and institutions for adequate warehouse licensing, inspection, insurance systems and performance guarantee systems to support the agri business sector throughout Central and Eastern Europe and CIS (Commonwealth of independent states).Tomake this facility a success,EBRDworked extensively with the Government of Romania to amend the existing warehouse receipt law. The Angolan Government and companies are trying to strengthen the system of commodity finance. Hence, experiences of different countries in the world show that this system is likely to stay and work.
A note by UNCTAD Secretariat in 2010 states that more than 50 developing and least developed countries (LDCs) depend on three or fewer commodities for at least half of their export earnings. As this commodity trade is highly credit dependent, inadequate access to finance has usually constrained the development of the sector in many developing countries, particularly the least developed, which tend to have more limited access tocreditandoften facemore onerous conditions.
Commodity financing is financing against pledge of warehouse receipts of Central Warehousing Corporation (CWC) / State Warehousing Corporation (SWC) and financing against pledge of warehouse receipts / storage receipts of private warehouses/cold storages / godowns. In case of agricultural commodities, at the time of harvesting, farmers usually sell a substantial quantity of produce at lower prices or resort to distress sales throughout the world. In India, farmers, especially small and medium farmers, are engaged in distress sales to repay loans taken from money lenders from time to time (Adhikary,2009). For instance, farmers in North-Karnataka have resorted to distress sales of cattle as they were unable to feed them; absence of cold storage and lack of government patronization has forced farmers producing cauliflower and cabbage in Keonjhar district to go for distress sales of vegetables; potato farmers in West Bengal and Punjab, Jaipur rice farmers and Orissa cotton farmers resorted to distress sales of their produce (Pattanayak, 2012; Karchalli and Naik, 2012; Ghosal, 2011 andNDTV, 2002). Farmers across the world resort to such measures in the absence of structured finance especially in developing countries. Farmers, who cultivate crops by taking loans, are especially vulnerable. However, price tends to rise as the season progresses. If farmers keep their goods in warehouses and use them as collateral to avail of credit facility, they would be better placed to meet their immediate credit requirements and take advantage of the benefits of higher price. Lenders can mitigate credit risk by using the stored commodity as collateral. This form of collateral (crop) is more readily available from rural producers and may be less difficult to liquidate than most assets traditionally accepted as collateral. The Warehouse Receipts systemwill alsomake it less necessary for lenders to monitor a large number of small borrowers as a few warehouse operators assure loan performance. This will reduce monitoring costs and encourage commercial lending to the rural sector, helping to capitalise the rural trade. A lender holding a Warehouse Receipt has a claim against the issuer (the warehouse company) as well as the borrower in the event of the non-existence or unauthorised release of the collateral. The risk of loss of value of the collateral can be reduced by monitoring movements in its market value as well as by margining and the use of price risk management instruments (Lacroix and Varangis, 1996; Bass and Henderson, 2000).
