A case for reforms in warehousing regulation

V Shunmugam | Updated on: Mar 15, 2022
Improving the value chain

Improving the value chain | Photo Credit: VIJAY SONEJI

This will drive more private investments into the private warehousing space which is vital for enhancing farmers’ income

Improving access to storage and finance have been vital cogs in the government’s objective to doubling farmers income by 2022-23.

While on the one hand access to WDRA accredited warehouses are expected to provide easy access to funds, the electronic Negotiable Warehouse Receipts (e-NWRs) issued by the accredited Warehouse Service Providers (WSPs) will improve the marketability of the underlying graded/standardised, quality certified farm goods.

A robust regulated warehousing ecosystem under WDRA will reduce storage losses in the agricultural economy, reduce unwarranted movement of commodities while arbitraging markets/time and promote standardised storage practices across the supply chain. The formal financial sector, especially the banks with priority sector lending targets will find e-NWRs issued under the WDRA norms more trustworthy to lend against. The trading of e-NWRs on electronic platforms on the other hand will foster the ease of transfer/sale/disposal of stocks at right prices by the farmers in the most cost-effective manner.

Despite the policy aspirations, the progress of regulated warehousing sector has been sluggish, owing to the cumbersome compliance process. Most entities that have taken up the accreditation so far are small WSPs or a few national level service providers limited to the purpose such as providing warehouse services to commodity derivative markets.

The organised warehousing industry in India representing about 10-15 per cent, is owned and operated predominantly by the national level warehousing services providers. Following the same scientific storage norms of WDRA or at times, exceeding them, most of the national level storage providers manage their stocks through central systems and processes that are set up to operate seamlessly and monitored remotely. Ensuring the compliance to the WDRA regime rather than by data/process based compliance at the entity level as in the banking sector and the securities markets, is proving uneconomical.

Scales are achieved by these national level service providers through providing storage and collateral management services through data based risk analysis and control. Apart from storage services, these national level players also provide collateral management of commodities, securitised for funding by various financial institutions including banks to the extent of about ₹20,000 crore in the previous year compared with ₹800 crore that are financed on an average through the e-NWRs issued by the WDRA accredited WSPs in the last three financial years.

Finance matters

This shows that not only accredited warehousing but also the bank funded e-NWRs have a long way to go in terms of meeting the growing financing needs of the agricultural commodities supply chain players.

Given the total value of collaterals managed, one might think that these players being not under the WDRA accreditation mechanism would be exposing the lenders to higher level of risks. With no such eyeball grabbing headlines regarding the loss of collaterals in the last decade or so, the organised entities expanded their storage and collateral management services.

A credible number that is available to indicate the amount of losses that are compensated as insurance claims is ₹8.50 crore which is 11 per cent of total premium of ₹77.31 crore paid by the national level players during the last three financial years representing a trivial percent of the value of total stored quantity/managed collaterals.

This is possible because of the continuous onsite monitoring and controls implemented by WSPs. Why insurance? Unlike the warehouses under WDRA regime, insurance is the only defense for the national players in mitigating risks associated with collateral managed goods (in addition to strict operational controls and the regular onsite monitoring) and is an unwritten norm in collateral management followed by the national level warehouse service providers who manage commodity collaterals worth about ₹25,000 crore on an average.

There is a case for accreditation of national level players at the entity level, similar to the banking\securities markets, to bring the national players under the accredited regime.

The central entity such as the warehousing company shall be mandated to manage the compliances of all their warehouses managed by them at the risk of facing a penalty or cancellation of entity level licensing for (economic and technical) non-compliances observed during scheduled/unscheduled regulatory inspection of the entity or the branch.

This could even make entrepreneurs out of the existing WDRA accredited individual warehousemen as it provides them with the opportunity to scale up operations without much of increase in compliance costs. Similarly, provision of penal powers to WDRA would help it build up a corpus that may act as the first line of defense in addition to the security deposits, followed by insurance against the value of commodities under collateral management. This can be in addition to guarantees and security deposits already mandated by the authority for various entities.

There shall also be a guarantee similar to deposit insurance (bank depositors) to the extent of say ₹10 lakh to the small-scale farmers/traders/processors to encourage collateralisation of commodities to finance their capital needs and to enhance their holding power and the policy intentions of doubling farmers’ income.

This shall be provided by ‘Commodity Insurance Corporation (CIC)’ — a proposed government entity — at a small fee collected from the WSPs. CIC honing its commodities expertise shall expand its services to provide insurance against all risks plaguing warehousing industry, on commercial basis with set processes, documentation and time frame making insurance a trustworthy risk management tool for financing commodity collaterals.

It will go a long way to empower WDRA in connecting farmers and the value chain to the world of finance, driving private investments in warehousing, bringing in transparency on the level of storage, reducing wastages in foodgrains, and enhancing farmer’s income.

The writer is with the National Institute of Securities Markets. Views expressed are personal

Published on March 15, 2022
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