Warehouse Receipt Financing – A Game Changing Perspective

Field Warehousing is a security device which enables the borrower to deliver to the lender legally valid documents of title and to grant a possessory pledge of goods stored in the borrower's own plant, mill, refinery or warehouse. The issuer of the field warehouse receipts creates a legally independent warehouse within the borrower's premises by leasing the storage area, controlling movements in and out, and posting prominent signs giving public notice that the controlled area is operated by the field warehousing company. Access to the warehouse is controlled either by members of the borrower’s staff who are temporarily employed by the warehouse company for this purpose, or by members of the field warehouse company's staff. The warehouse records and inventory levels are periodically audited. The integrity of the staff (whether permanent or temporary) and contractual liability of the field warehouse company are insured under a fidelity and errors and omissions policy.

Visualising the growing financial needs of the farmers, WDRA licensed two repositories for facilitating the issue of NWRs. In India, the term ‘negotiable warehouse receipt’ is defined in Section 2(m) of the Warehousing (Development and Regulation) Act, 2007 (WDR Act), which came into force from 25th October 2010. WDR Act provides for issuance of Negotiable Warehouse Receipts (NWRs)   by the warehouses registered under this Act. A "negotiable warehouse receipt" means a warehouse receipt under which the goods represented therein are deliverable to the depositor or order, the endorsement of which has the effect of transfer of goods represented thereby and the endorsee for which takes a good title. A negotiable instrument is essentially a document embodying a right to the payment of money /goods [which implies creating a right in favour of some person] and it may be transferred from person to person. This developed historically from efforts to make credit instruments transferable; that is, documents proving that somebody was in their debt were used by creditors to meet their own liabilities. A negotiable instrument can be transferred to any number of persons before maturity. The means of accomplishing a transfer from one creditor to another is by endorsement. It means writing of a person’s name on the back of the instrument for the purpose of negotiation. There are about 55,000 warehouses in the country out of which only 735, having a capacity of 6.6 million tonnes, have valid registration with WDRA. About 50% of this capacity is located in Gujarat, Madhya Pradesh and Rajasthan, while Jharkhand, Odisha and West Bengal have just one registered warehouse each. The farmer/trader has no protection against the warehouse in case of deterioration in quality of produce or pilferage by the warehouse. The produce stored in such warehouses is generally managed by collateral management companies and they arrange pledge loans against such WRs.

Stakeholder wise use of warehouse receipt finance:

Farmers: As against traditional loans by banks, loans against WR are quick. WFR brings about better price realization for farmers, especially small and marginal farmers thereby reduce poverty. A major impetus on WFR can help government realise their promise of a 50 per cent profit over input cost for farmers.

Money Lender: Lack of access to institutional credit forces farmers to knock the doors of informal sector that charges hefty interest rates. A well-developed WRF will kill the back of the informal sector.

Encourage Scientific Storage: Spoilage and wastage have become the hallmark of Indian agriculture. It is estimated that 25-30 per cent of agricultural produce every year is lost due to poor storage and frail handling post-harvest. Increased usages of WFR will kick-start a circle of investments in warehousing and fix the missing link in the supply chain.  

Banks: The average tenor of loan against WHR is around six months. This helps banks with their asset-liability mismatch issues as they can churn portfolios quickly. Further, lending against WHR is safer and more liquid for banks. Intermediaries like collateral managers make the job easier for banks as far as underlying collateral is concerned. WRF help banks achieve their priority sector lending targets in an efficient way.     

Overall Economy: WRF can dramatically reduce inter-seasonal price fluctuations. Rural demand has slumped in recent years, which impacted the overall economy. WRF increases liquidity in the rural economy, helping consumption. A well-developed WRF system can also help fix the supply issues, which will lead to a lower inflation-lower interest rates regime in India.

Advantages of warehouse receipt financing:

Ø  Improve farm income and smooth domestic prices by providing an instrument to farmers to spread sales throughout the crop year.

Ø  Mobilize credit to agriculture by creating secure collateral for banks.

Ø  Help create cash and forward markets and thus enhance price discovery and competition.

Ø  Provide a way to gradually reduce the role of government in agricultural commercialization.

Ø  Combine with price hedging instruments to predetermine the cost of future purchases of sales.

Major constraints in warehouse receipt financing:

Ø  Ø  Most of the products of warehouse financing / modus operandi do not reflect the full range of interested stakeholders and are not closely linked to the timely availability of credit hence, identification of common minimum quality items suitable to all stakeholders will help to design the system and thereby improve customer satisfaction.

Ø  Lack of awareness among the grass-root level customers and there are non- uniform complex, non-transparent models of financing to cater the need of different category of customers, there is a need to modify these models as per the current conditions or requirement of clientele, taking into account input and output parameters along with the process parameters of lending institutions.

The inter dependability of critical dimensions / parameters of warehouse financing against other priority sector financial product has not been researched.