Warehouse Receipt Funding- Geared for the next trajectory of growth?

Sustainable Agriculture, MSME & Green Value Chain Finance | Priority Sector Finance | Manoj Rawat, ValueFin India

Warehouse Receipt Funding- Geared for the next trajectory of growth?

Warehouse Receipt Funding- Geared for the next trajectory of growth?

Warehouse receipts are becoming important tool in the transition to markets, securing access to credit, serving to reduce uncertainty, enhance efficiency and fair price realization to growers. However Warehouse Receipt funding is far below the market potential and its access is limited ?

For a setting up a Scalable and Robust warehouse receipt systems Government and Agro-industry must build a strong institutional framework to guarantee performance and minimize transaction costs.

Market inefficiencies

The farmer takes an average 6 months to grow a crop and the fate of his harvest is decided in few seconds by trader, Aarthiya or aggregator. While Agriculture marketing and trading system has been well established it has inherent inefficiencies and gross transparencies, which ultimately get loaded against the Farmers.

Poor prices realization to producers

Due lack of organized and transparent marketing arrangement, affordable warehousing facilities and lack of availability of credit in a timely manner the Farmers in India realize just about 30-35% value of their produce as compared 70-75% in the developed economies.

Agriculture is a seasonal business with high price uncertainty. During harvest, prices drop due to excess supply or glut situation. But, if the harvest is lower than expected, the prices rise.The farmers are pressed for continued cash flows as the harvest is season and there is non-availability of finance for the intermediate period.

With the harvest season approaching, farmers find themselves in need of immediate liquidity else they find no other option to sell the stock in glut or peak arrival season and settling for the price at the mercy of trader (in case it not supported by minimum support price).

Warehouse receipts effective tool to access credit

Warehouse receipts can be an important and effective tool for creating liquidity and easing access to credit. Such schemes also offer additional benefits such as smoothing the supply and prices in the market, improving producer’s incomes and reducing food losses. Warehouse receipts are becoming important tool in the transition to markets, securing access to credit, serving to reduce uncertainty, enhance efficiency and fair price realization to growers.

10 pointers of Warehouse receipts system benefits

  1. Mobilizing credit to agriculture by creating collateral for the farmer, processor, and trader
  2. Smoothing market prices by facilitating sales throughout the year rather than just after harvests
  3. Reducing risk in the agricultural markets, improving food security and credit access in rural areas
  4. Increasing economies of scale for small & marginal and help them realize fair price for sale of crops
  5. Help prevent post-harvest losses with better storage conditions
  6. Lowering transaction costs by guaranteeing quantity and quality
  7. Help bring Transparency and Standardization in Agri-storage industry
  8. Help create agriculture commodity trade markets which promote competition and quality
  9. Bring better information technology, market information and enable international trade
  10. Provide a way to gradually reduce the role of government in agricultural market management.

Precondition to scalable Warehouse Receipt Funding

While a warehouse receipts system can help smoothen uncertainty in agri commodity prices  and increase efficiency and transparency in agricultural markets there are certain precondition to its success on scalable basis.

  1. Availability of credit for Warehouse Receipt Funding both for Perishable and Non Perishable commodities including IT enabled robust lending solutions.
  2. Developing a Trustworthy framework for banks and financial institutions to operate
  3. Development of organized and integrated Agri-warehousing network
  4. Instituting Transparent licensing and Strong Monitoring & Surveillance system
  5. Making available Reliable market information on prices and crop forecasting through real time & ICT enabled solutions
  6. Ensuring viability of storage industry- Returns to storing commodities should be market-determined or alternative market consistent instruments be introduced.

Potential under warehouse receipt funding

Warehouse receipt funding can play a key enabler for bank credit for commodity funding and trigger the next phase of growth for organized warehousing in India, which currently is less than 30%. The projected warehouse receipt finance market of Rs. 25,000 crore is way below the market opportunities and commodity trade potential. With proper systems, support and trust enablers can reach a minimum of Rs 75000 crore ( $ 12 bn market) by 2020. This does not include the huge credit that would be required for setting up modern warehousing and agri-logistics in India. The regulatory framework is also positively disposed and is according high priority to this segment.

Manoj Rawat

The views expressed in this article are purely personal.
Blog http://manojrawat.com

Email: mkrawat@gmail.com


Twitter : @TheManojRawat

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