warehouse receipt financing in cotton by: mr. b.s. sivakumar, executive vp & business head –...
TRANSCRIPT
Warehouse Receipt Financing in Cotton
by:
Mr. B.S. Sivakumar, Executive VP &Business Head – Agri Business Group
Overview of Cotton SectorOverview of Cotton Sector
Need for Warehouse Receipt FinanceNeed for Warehouse Receipt Finance
Enablers for WRFEnablers for WRF
Kotak Bank’s Model of WRFKotak Bank’s Model of WRF
Overview of Cotton SectorOverview of Cotton Sector
Need for Warehouse Receipt FinanceNeed for Warehouse Receipt Finance
Enablers for WRFEnablers for WRF
Kotak Bank’s Model of WRFKotak Bank’s Model of WRF
Contribution of Cotton to Economy
• Produced in 130 countries & traded in as many as 170 countries
• India is the 2nd largest producer after China
• Largest employer in India
• Estimated labor force directly involved in production in the world is more than 100 mn
State % ProductionGujarat 36%Maharashtra 20%AP 15%Punjab 7%MP 7%Haryana 5%Loose lint 4%Rajasthan 3%Karnataka 3%Tamil Nadu 2%Others 1%GRAND TOTAL 100%
Positive Cotton Scenario
0
50
100
150
200
250
300
350
Lak
h B
ales
2005 2006 2007 2008 2009
Production
0
100
200
300
400
500
600K
gs P
er H
ecta
re
2005 2006 2007 2008 2009
Yield
• Estimated output is 322 lakh bales in the year 2008-09
• Yield per hectare is also estimated to increase from 472 KGs in 2005 to 591 KGs in 2009
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
Million
s of
480
lb B
ales
2005 2006 2007 2008 2009*
World Cotton Production
China India US Pakistan Others
40
45
50
55
60
65
70
75
80
85
Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul
Pri
ces
2004-05 2005-06 2006-07 2007-08
Funds Utilization Pattern Ginning
Price movement & seasonality
Months
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
USA Sowing Growth Harvest
China Sowing Growth Harvest
Pak Sowing Growth Harvest
India Harvest Sowing Growth Harvest
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Off Season
Stocking period
Overview of Cotton SectorOverview of Cotton Sector
Need for Warehouse Receipt FinanceNeed for Warehouse Receipt FinanceEnablers for WRFEnablers for WRF
Kotak Bank’s Model of WRFKotak Bank’s Model of WRF
What is the need for WRF for cotton industry?
• Leverage the strength of stocks by using it as primary collateral
• Risk is de-linked from balance sheet to underlying commodity
• Structured pricing (interest rate) is more attractive than normal WC or STL
• Finance available in tranches aligned with stock build-up schedule
• Repayment schedule aligned with actual usage
• Better price discovery for the borrower as well as main link in the value chain – the farmer
Benefits for the Bank• As opposed to standard credit facilities where exposure is
on the balance sheet WRF helps:
Externalize the credit risk
Commoditize the transaction
Exposure on balance sheet is de-linked
Relevant even to new entities without track records
Win-win situation for borrower & lender as well as the farmer
Overview of Cotton SectorOverview of Cotton Sector
Need for Warehouse Receipt FinanceNeed for Warehouse Receipt Finance
Enablers for WRFEnablers for WRF
Kotak Bank’s Model of WRFKotak Bank’s Model of WRF
Enablers for WRF
• Legal Status of WR
Negotiability of WR
Credibility of WR (especially issued
by private warehouses to be
enhanced)
Secure electronic WRs
• Storage Infrastructure
Accreditation & acceptability of warehouses
• Counter party risk on warehouse
Registration / permission for private warehouses
Regular inspection & quality monitoring by independent body
Enablers for WRF
• Quality Control
Credible mechanism to grade,
measure / weigh
Standardization of quality & quantity of
stocks during storage
• Market Information Availability of real time information on
commodity prices, crop forecasting
Dissemination of information to stakeholders
Price risk management
Enablers for WRF
• Protecting rights of stakeholders Performance guarantees
Reliable insurance cover in the event of property or stock damage
Lien marking & control of stocks
Exit/liquidation guidelines
• Public Private Partnership Private management of infra such
as warehouses
Funds to private parties for development of public infrastructure
Constraints for Cotton WRF
• Limited availability of large warehouses suitable for cotton warehousing
• Shelf life of cotton ranges from 6 months to 1 year
Quality degradation with yellowing of cotton bales
• Lack of sufficient local infrastructure to ascertain quality of cotton bales & staple length
Requires lab testing that may delay funding after delivery
Opportunities Exist too…
• Price fluctuation
20% price variation within a year.
• Quality of cotton Production of long staple cotton has increased from 39%
in 2005 to 77% in 2008
Reduced chances of mixing staple lengths in the bales
• Funding opportunity based on underlying commodity Consolidation of ginners has not resulted in improvement
in balance sheet Easier to avail WRF on basis of cotton stocks Mills have only exploited the WRF facilities to a limited
extent
Overview of Cotton SectorOverview of Cotton Sector
Need for Warehouse Receipt FinanceNeed for Warehouse Receipt Finance
Enablers for WRFEnablers for WRF
Kotak Bank’s Model of WRFKotak Bank’s Model of WRF
Kotak Bank’s Model
Borrower
CM
Sales / Credit
Monitoring
Kotak Bank
2.CMA checks
quality & quantity of stock.
3. Disbursement document set faxed /couriered by RM
4. Kotak Bank on
receipt of the same Transfer fund to
the borrower
s account.
1.Traders/Farmers deposit commodity in Kotak
approved warehouse in consultation with RM
Demat Warehouse Receipts
• Limitations of physical WRs
Risk of forgery / loss / theft
Handling physical certificates
• Benefits of Demat WRs
Convenience in pledge - benefit to producers, warehouses & banks
Convenient settlement on commodity exchanges
Risks of using paper avoided
However the cost of dematting and the additional warehousing costs of a dematerialised commodity is deterrent for the product.