The Hindu Business Line : Warehouse receipts to be made negotiable instruments

BANKERS have welcomed the Union Agriculture Ministry's proposal to make warehouse receipts (WR) issued by warehouse operators, both in the public as well as private sectors, fully negotiable instruments.

``It is a good move and will encourage banks to expand pledge financing for marketing of agricultural produce'', said Mr Rajesh K. Srivastava, Director, Rabo India Finance Pvt. Ltd.

An inter-Ministerial task force headed by Mr R.C.A. Jain, Additional Secretary in the Ministry, which submitted its report last week, has targeted Rs 7,000 crore worth of pledge financing by the year 2006-07.

Currently, there is no authentic estimate of the extent of pledge financing extended by banks, considering that these loans (meant for marketing of crops) get clubbed with their regular short-term crop (production) loans. A rough assessment made by Nabard puts the present quantum of pledge financing at Rs 1,200 crore annually, the bulk of which takes place against the WRs issued by the Central Warehousing Corporation (CWC) and the various State Warehousing Corporations (SWC).

Under the WR system, farmers or traders, instead of directly selling their produce in mandis, deposit it with licensed warehouse operators, who, in turn, issue them WRs. The farmers can either retain these receipts — to reclaim the underlying commodities later in anticipation of higher prices or use them as collateral for obtaining bank finance.

This is considered a superior option compared to the existing system, where the farmer is desperate to sell his produce immediately after harvest because he needs ready cash. In the WR system, the farmer can store his grain in a private silo and receive 60-70 per cent of the payment upfront. He may redeem the receipt within a day of storage or any time within eleven months and get the day's sale price.

The lender, in turn, records his security interest with the concerned warehouse operator, so that in the event of the farmer defaulting, he can claim the stored commodities and sell these to liquidate the loan. Further, the WRs can also be traded in a secondary market, helping the bank to refinance its loans.

But significantly, banks are hesitant to lend even against the WRs of these public sector operators, especially when the holder is not the person in whose favour the receipt was originally issued. Bankers often insist that the original WR holder can transfer it to another person only after the pledge loan extended to the former has been cleared.

As a result, WRs have not gained the necessary acceptability as a negotiable instrument that is freely transferable and can serve as a collateral for banks to grant loans against the underlying commodities stored in the warehouse. ``The problem is worse when it comes to WRs issued by private sector warehouse operators. This is because there is, first of all, no accreditation agency for private sector warehouses and banks are obviously wary of accepting WRs that do not confer any transferability or legal recourse on the underlying goods,'' Mr Srivastava pointed out.

The task force's report has recommended the enactment of a Central legislation on the pattern of the Multimodal Transporation of Goods Act, 1993, to make WRs fully negotiable instruments that are transferable by endorsement. This would enable the WR holders to take delivery of the underlying goods on the same terms and conditions on which the person who had originally deposited the goods would have been entitled to receive them.

Further, it has suggested appointment of CWC as an accreditation agency for warehouse operators to enforce prescribed warehousing standards and protect the interest of WR holders against negligence, malpractice or fraud. ``The status of WRs has to be enhanced through legal changes for creating an effective system of regulatory oversight and by instituting a secured central electronic register allowing for the tracking of all changes in ownership and liens on the receipts,'' the report has stated, while noting that the negotiable WR system could even emerge as the `demat' counterpart of commodity futures trading.

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Warehouse receipts to be made negotiable instruments