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The Confederation of Indian Industries and National Commodity & Derivatives Exchange in a paper has argued for a warehouse registry, which will open up bank finances to the industry.
With commodity financing still not finding much support from the banking fraternity, the paper talks about how warehouse receipt transactions registry will help bridge the gap.
Samir Shah, MD & CEO of NCDEX, said, “Warehouse financing is a crucial enabler in the holistic development of the agricultural markets in India and there is a perceived trust deficit that the banks have as far as the sector goes. An electronic registry, which provides transparency and tracking of commodities in every single warehouse in the country, will go a long way in giving comfort to the banks and this can be the single biggest game changer for the industry. This is in line with the development in the Indian capital market, which has witnessed several initiatives that have helped in bringing transparency to the trade and building confidence among the participants.”
The electronic registry will keep record of goods deposited with the warehouse and removed from the warehouse. Based on goods deposited in the warehouse, a trader will be issued receipts.
Since the commodities markets regulator, the Forward Markets Commission, is pushing for forward trading on the national commodities exchanges, transfer of goods through warehouse receipts becomes crucial.
But since physical warehouse receipts are subject to manipulation, banks are reluctant to finance against stocks lying in warehouses. However, they do finance against stocks which are with exchange accredited warehouses.
FMC is putting in place regulations for warehouse service providers but that will be limited to warehouses accredited by the exchanges.
The government’s plan is to make warehouse receipts as a negotiable instrument, which will be possible only when the use of such instruments is popular. Electronic registry will help speed up the process.
Currently, the use of warehouses receipts continues to remain very limited in many developing countries due to lack of incentives for the development of a private storage industry owing to government intervention in agricultural markets. Also, lack of appropriate legal, regulatory and institutional environment to support a system of warehouse receipts.
The CII-NCDEX joint report has said that there is a need for splitting the warehouse receipts in case the depositor has an obligation to transfer only a part of the commodities. There is also a risk of theft while moving the receipt from one place to another.
