Collateral management service to ensure easy loans to farmers

Farmers can look forward to get bank loans at attractive rates once the National Collateral Management Services Ltd starts operations.

The new dispensation would reduce the credit risk for banks, which are eagerly waiting for NCMSL to become operational, managing director and chief executive officer A Hari Prasad said.

Collateral management business in India has tremendous growth potential, particularly in agri-commodities, Prasad said.

He said that as the volume of these services increases, the farmers would increasingly be able to obtain finance at lower interest rates from banks.

This is because, for banks, the operational risk faced in managing the collateral, as well as the credit risk on default, is reduced to almost nil as the collateral manager assumes this risk.

Using the warehouse receipts issued through the NCMSL warehouses, the farmers could pledge their output as collateral and obtain finance from banks.

A collateral management company undertakes to manage the collateral pledged with the bank by the farmers by taking possession of the output deposited by the farmer in its warehouses and giving a performance guarantee.

Thereafter, NCMSL grades the farm produce for quality, quantity and other parameters and issues a receipt to the farmer, known as the warehouse receipt.

The farmer can present this receipt to a designated bank and obtain credit against it, as such a receipt acts as a proof of collateral. In case of default, the collateral manager undertakes the sale of goods in the spot market or the forward market if there has been an agreement to this effect.

Speaking on the competition, Prasad said that existing players like Societe Generale de Surveillance India offer cross-border services. But their services are expensive for the Indian farmers.

NCMSL will have a cost advantage over such players, he said. Again such players offer stand-alone services (like inspection, testing, collateral management, supervision, etc.) whereas NCMSL plans to offer such services as a package.

NCMSL also plans to advise the farmers in respect of when to dispose their produce by providing them the data on prices and arrivals as well as the position in the previous year.

Dwelling on the matters which could be taken up by the government to help the collateral services business in agri-commodities to grow, Prasad said it could come out with regulations that restrict the Food Corporation of India from procuring agri-commodities in excess of the stock required to maintain the country's food security.

Excess stocks can be stored with agencies like us, Prasad said. The farmers can opt to obtain loans immediately through the warehouse receipt financing or sell their produce later when market conditions improve.

On the negotiability issue of the warehouse receipts, Prasad said the government has appointed a committee, which will suggest changes in the existing warehousing regulations shortly.

Currently, a warehouse receipt is transferable, but is not considered as a negotiable instrument under the Negotiable Instruments Act, 1881.

Once the changes in the regulations are done, the entire system of warehouse receipt financing in India will be revolutionised, Prasad said.

He said that NCMSL, along with Haryana State Co-operative Supply and Marketing Federation Limited and Indian Farmers Fertiliser Co-operative Limited will undertake initiatives to spread the awareness about NCMSL's services across India.