Multi-benefit opportunity lures banks

Banks are rushing to take part in the booming commodities business.

Apart from the mercantile motivation, they also have a couple of incentives to go the whole hog into the segment: the commodities business ratchets up their directed lending ""or priority sector loans "" numbers and secondly, meets the the finance minister's fiat to double the flow of credit to the agriculture sector.

It's secured lending too since loans are given against actual produce.

Among private sector banks, HDFC Bank already gives loans to farmers against their produce. The loan is granted based on the quality of the produce and warehouse receipt. Today, the bank has exposure to commodities such as castor, wheat, soy, chilli, maize and cotton.

Currently, 25 to 30 per cent of commodity financing is done through the banking channel. This offers banks a huge untapped market.

"Our advances against commodities currently stands at over Rs 100 crore and we plan to increase this figure to around Rs 1,000 crore in the current year," said P V Ananthkrishnan, vice-president and head, capital market & correspondent banking services of HDFC Bank.

Public sector Corporation Bank has also recently tied up with the Multi-Commodity Exchange (MCX) to lend to farmers and traders against their agricultural produce with a target to give Rs 500 crore worth of loans by March 2006.

With banks offering 'secured-lending' against commodities, these institutions are keen to trade on the commodity exchanges and enter into commodity futures contracts. ICICI Bank is working closely with the regulators to facilitate banks' entry into trading in commodities.

An amendment is required in the Banking Regulation Act for banks to trade on commodity exchanges and get into commodity futures.

"Warehouse receipts also need to be acknowledged as a negotiable instrument so that banks can trade in them," said a senior official from a private sector bank.

Public sector banks like Corporation Bank have had a two-man commodities desk in place for the past six months. "Even though commodities trading is not allowed now, the moment it is permitted our dealers (who are currently trading in bullion) will be ready for it," said a Corporation Bank official.

Though at this junction, banks are not allowed to trade on commodity exchanges, private sector banks like HDFC Bank and ICICI Bank as well as their public sector counterparts like Corporation Bank, Canara Bank, State Bank of India and Union Bank of India have started creating multiple linkages.

Canara Bank, State Bank of India and Union Bank of India have taken stakes in the commodity exchanges and are ready to set up trading desks.

HDFC Bank plans to set up a specialised desk to conduct research on various agriculture and non agriculture commodities. The team would provide advisory services to high networth individuals and corporates which plan to invest in commodities, said Ananthkrishnan.

Food for thought

• Currently, 25 to 30 per cent of commodity financing is done through the banking channel. This offers banks a huge untapped market
• HDFC Bank gives loans to farmers against their produce. The loan is granted based on the quality of the produce and warehouse receipt
• Corporation Bank has also recently tied up with the Multi-Commodity Exchange to lend to farmers and traders against their agricultural produce