1. Curbing distress sales: Step up lending against warehouse receipts, instructs FinMin

Curbing distress sales: Step up lending against warehouse receipts, instructs FinMin

Warehouse receipts were made negotiable under the Warehouse (Development and Regulation) Act, 2007 and are regulated by the Warehousing Development and Regulatory Authority (WDRA).

By: | New Delhi | Published: June 8, 2015 10:33 AM
Monsoon

Finance ministry has instructed all banks and financial institutions to step up lending against negotiable warehouse receipts (NWRs) in a bid to curb distress sale by farmers. (Reuters)

With the prospect of a bleak monsoon looming in the horizon, the finance ministry has instructed all banks and financial institutions to step up lending against negotiable warehouse receipts (NWRs) in a bid to curb distress sale by farmers.

The NWRs permit the transfer of ownership of an agri commodity deposited by farmers in registered warehouses without having to deliver it physically and are issued in negotiable form, thereby making them eligible as collateral for post-harvest loans. They are seen as a key instrument in curbing distress sale by farmers at peak harvest season, when prices could be at the lowest.

In a missive issued by the department of financial services, banks have been specifically asked to extend pledge finance to goods kept in the registered warehouses against the NWRs issued to farmers. Officials involved in the exercise said the banks and institutions have been asked to specifically ensure three things: set internal target for lending against warehouse receipts, ensure better terms for finance against the NWRs of registered warehouses, and introduce conditions for registration of warehouses for financing.

There are a total of about 390 registered warehouses in the country, including Primary Agriculture Cooperatives Societies’ godowns. The NWRs issued by these warehouses are expected to help farmers in seeking loans from banks to avoid distress sale of agricultural produce and are likely to increase liquidity in the rural areas.

Warehouse receipts were made negotiable under the Warehouse (Development and Regulation) Act, 2007 and are regulated by the Warehousing Development and Regulatory Authority (WDRA).

While a well-developed NWR system can provide focus for development of the entire commodity chain, offering incentives for agri-sector stakeholders like farmers, financiers, traders, processors and public sector buyers, difficulties stemming from the policy and institutional framework have made the introduction of warehouse receipts a difficult task in India.

The progress of a system of farmers availing advance amounts through warehouse receipt has been slow. Since its constitution in 2010, the WDRA has struggled to convince the banks to use negotiable instruments for agricultural funding in any significant scale due to many structural defects in the WDR Act itself. Bankers attribute their reluctance to the fact that the negotiability of the warehouse receipts in the current context of the Act does not give them adequate safety and assurance of repayment.

For instance, the WDRA has not been mandated to regulate the entire warehousing space, which remains a domain of various state warehousing Acts. Even non-negotiable warehouse receipts do not fall under the regulatory ambit of the WDRA. Plus, in case of default, the WDRA does not have the power to insulate the lender of safe return of the borrowed capital. The regulator has no direct control over the actions of the accredited warehouse, which may move stocks around.

Officials say these grey areas are being looked into. “The WDRA has registered 390 warehouses and more warehouses will be registered which will issue negotiable warehouses receipts. The WDRA is organising awareness programmes for the farmers on the benefits of NWRs,” said an official.

The WDRA has also introduced NWR system in the small warehouses or godowns of Primary Agriculture Cooperatives Societies so that the small farmers in rural areas may also avail the benefits of bank loans on these receipts.

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