‘RBI norms, PSBs reluctance affecting commodity financing’

Commodities financing, mainly for agriculture products, faces a few problems in the country with public sector banks being reluctant and the Reserve Bank of India (RBI) not allowing external commercial borrowings (ECBs) to service agricultural firms, according to one of the firms involved in such financing.

“Medium-size companies are mainly affected by regulations that are in the way of financing their needs. This is particularly affecting the procurement of agricultural commodities. In turn, this is affecting farmers too,” said Sunoor Kaul, Co-founder, Origo Commodities Pvt Ltd.

For example, if a starch company wants to buy maize and needs money for such procurement, it has to infuse equity or offer collateral. “These problems exist in most developing nations, including India. But in developed countries, such procurement is funded with banks looking into the contract for sale of starch and the cash that will be generated from it,” Kaul said.

Offering collateral

In India, on the other hand, the medium-size enterprises will have to offer their land or property as collateral or open fixed deposits to the tune of 30-40 per cent of the loan required.

“This is a big issue that is preventing such medium and small companies from growing. If they want to introduce any new product and buy a certain commodity, it can raise its capacity only by offering collateral or builds in large amounts of investments,” the Origo Commodities co-founder said.

In particular, trade finance solutions are available to large companies with a turnover of ₹2,000 crore and above. Financial institutions (FIs) look only for such companies to take risks in lending. “For small and medium companies, the FIs don’t provide such facilities. As a result, they have to take the conventional route, which is regulated. There is a huge problem with this,” Kaul said.

Two instruments

Origo Commodities, which operates in 12 States, offers two instruments to finance trade. One is procurement finance, and the other is structured trade.

“Both are globally accepted products. In procurement finance, Origo purchases the raw material for a company and supplies it at a specified credit period,” he said.

For example, if a spinning mill needs pressed and baled cotton to export yarn, Origo will buy the cotton for the mills and supply it. The commodities lending firm will then sign an agreement offering credit to the mill - say 60 days if the yarn buyer agrees to settle by that period - and get back the payment.

“A ginner (who supplies cotton) will need money in 2-3 days. Mills face constraints in paying at such a short period. So we buy and make the payment in two days,” Kaul said.

Bill discounting

A disadvantage here for the mill, for example, is that any huge company approaching banks for such funding would have got bill discounting but small and medium companies don’t get such a facility.

In structured trade, a company can buy raw material it would require for one year during the peak arrival period, “when the right quality is available at the right price”. But the company may not have the required money to buy that much volume.

For example, if a company needs to buy paddy worth ₹100 crore, it might not have that amount at its immediate disposal. Probably, it would be able to pay Rs eight crore every month over the following 12 months to pay for the paddy.

Risk in spreading buys

“But there is a risk in spreading out such purchases. One, the right quality may not be available throughout the following months. Two, the prices might rise as arrivals begin to decrease. It is where we step in to buy the paddy or whatever raw material a company needs for one year and keep it with us,” the Origo Commodities co-founder said.

In this case, Origo keeps the produce in a warehouse near the company’s production unit and supplies it every month against what the firm could pay.

“Over the years, we have executed procurement finance to the tune of ₹350-400 crore and structured finance to tune of ₹150 crore. This year, we hope to do ₹450 crore worth structured financing and ₹150 crore procurement financing only in the small and medium enterprise (SME) sector. Next year, we will double this,” Kaul said.

Origo Commodities has been expanding its business of commodity financing - mainly dry commodities such as grains, oilseeds and cotton - and is now looking to multiply it by helping the SME sector.

Banks and non-banking financial companies (NBFCs) are partners with Origo in financing SMEs.

“Right now, private banks and NBFCs, who are our partners, are allowing us to finance SMEs in agriculture. We convert their instruments for trade finance. We have not seen the participation of public sector banks (PSBs) to be able to fund us for commodity finances,” Kaul said.

Lack of interest in PSBs

Currently, Origo buys commodities and gets funds based on its receivables and physical stocks. “We are surprised that we have not seen PSBs showing interest because we are servicing the same sector they are servicing. Somehow, they are far from it,” he said.

“It is one support that is obviously needed for commodity financing. The other issue is there is a big gap in how regulations are defined. We cannot avail of ECB from global lenders. We cannot take the ECB for working capital. We can get it only for capital expenditure because we are an agri-trading company,” he said.

Many international funding companies are ready to offer finance, but the Reserve Bank of India (RBI) regulations prevent access to it. “External funding agencies can only offer guarantees for the money we can take from local banks,” Kaul said.

Benefits for small firms

As a result, the fund that can be raised in 30-40 days takes 6-12 months since they have to get the guarantees from the funding firms abroad. “If banks can fund commodity finance and RBI permits ECB for working capital, many small firms whose turnover range between ₹2 crore and ₹100 will benefit.

“These firms need capacity building but are underserved by banks. Agriculture firms can get funds for setting up silos or mills but not for trade support. In that regard, ECB should be allowed for agriculture firms,” the Origo Commodities co-founder said.

Even the International Finance Corporation funds SMEs with assets of $15 million and below, Kaul said, adding that the RBI should amend the ECB norms allowing agriculture companies to serve its clients. “ECBs are allowed even for micro-finance companies but not for agriculture firms, which prevents SMEs from growing,” he said.

$100 billion potential

Private banks such as YES, HDFC and CSB banks and NBFCs such as Northern Ark have understood the business and have funded to the tune of ₹200 crore, he said.

“The potential for financing is $100 billion. This is only private trade that is constrained by private lending at high interest. It is ironic that nobody wants to tap this,” Kaul said.

The $100 billion potential means banks can finance to the tune of $20-30 billion, which ultimately goes in paying farmers quickly, the co-founder of Origo Commodities which operate.

Banking sources in Mumbai said that warehouses' reluctance to register with the Warehousing Development and Regulatory Authority is one of the reasons why there are problems with commodity finance. Till now, only 1,804 warehouses have registered.

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