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Harish Damodaran

New Delhi, April 30 Abnormal price movements have rendered financing of farm produce against warehouse receipts (WR) a risky proposition. The best example of this is basmati rice, in which banks are reckoned to be having an outstanding WR-based credit exposure of Rs 2,000 crore.

During the recent marketing season from mid-September to December, millers/exporters bought an estimated 45 lakh tonnes of aromatic paddy worth over Rs 10,000 crore.

Of this, around Rs 4,500 crore was said to have been funded via regular bank finance (mainly pre-shipment or packing credit to exporters), Rs 2,500 crore against WRs and the rest through mandi purchases on credit from commission agents.

In WR-based financing, millers obtain credit against WRs issued by accredited warehouse operators who store the paddy bought by them. The receipts serve as collateral conferring the banks legal recourse on the underlying commodity. Banks have been making these loans at 13-15 per cent, as against 9.5 per cent on normal pre-shipment credit and 18 per cent on mandi credit.

Till recently, WR loans – extended up to 75-80 per cent of the produce market value – were considered pretty safe, since millers procured much of their paddy at harvest time when prices normally ruled low. As the season proceeded, market prices would firm up, boosting the value of the warehoused stocks and minimising any risk of default.

For instance, during 2007-08, Pusa Basmati-1 and Pusa-1121 paddy varieties traded at Rs 18,000-19,000 a tonne early in the season and crossed Rs 38,000 towards May-June.

But this time, it has been the opposite. Many millers, expecting a repeat of last year along with huge global appetite for Indian basmati, bought paddy at prices that turned out to be too high. Auction rates for Pusa Basmati-1 touched Rs 24,000 a tonne in mid-November before crashing to Rs 12,000-levels by February-March. Likewise, Pusa-1121 fell from a peak of Rs 35,000 to Rs 18,000-19,000 and traditional HBC-19 from Rs 38,000 to Rs 24,000-25,000.

Two things happened here. The first was the global meltdown which led to a drying up of orders. Secondly, there was an export duty of Rs 8,000 a tonne on basmati rice clamped last May, which, the trade believed, would go once the season took off. The duty did go, but only in late-January – by which time the market sentiment had turned bearish.

“Today, you have a situation where millers prefer to buy basmati cheap from the spot market rather than clear the warehoused stocks bought at higher prices. The proceeds from exports are being used to pay off the mandis and also liquidating the packing credit extended by banks,” trade sources told Business Line.

In the case of regular need-based finance, banks have charge over the cash flows and bills receivables of company, apart from its fixed assets and inventories. Pre-shipment advances are further self-liquidating, i.e. they are to be paid out of export proceeds within 180 days.

“There is no such security when it comes to WR-based loans. At most, the borrower might offer a letter of comfort. That is why banks charge more, though in a rising market (as in last year) there is no problem,” the sources noted.

But that is not so in the present scenario of dipping prices. “There have been no defaults so far, as most loans are to come up for redemption around June. But what do you do when the market value of the stored paddy approaches the loan amount? Moreover, the warehoused paddy cannot be easily disposed of, as it would only depress prices and make spot purchases further attractive”, they pointed out.

The only consolation is that prices have recovered somewhat over last one month. Pusa-1121 is now quoting at Rs 34,000 a tonne, while Pusa Basmati-1 and HBC-19 have also gone up to Rs 15,000-16,000 and Rs 31,000-32,000. “There is some renewed demand for Pusa-1121 from Iran, which has helped raise export prices from a low of $ 875 to $ 1,300 a tonne, cost & freight Dubai. Whether this will sustain remains to be seen”, the sources added.

More Stories on : Banking | Rice | Exports & Imports | Credit Market

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