Although India is a large producer and consumer of many farm items, organised commodity financing business caters for only 10% of demand.
Although India is a large producer and consumer of many farm items, organised commodity financing business caters for only 10% of demand. Sudip Bandyopadhyay, chairman of Inditrade (JRG), a major player that provides funding against commodities, says the actual impact of the MSP hike by the government will depend on the level of procurement by it. In an interview to Banikinkar Pattanayak, he also says allowing institutional and foreign investors to participate in the commodity market will significantly increase its depth. Edited excerpts:
The government has raised minimum support prices (MSPs) of certain crops substantially to ensure farmers get at least 50% profit over costs. How will this move impact the commodity financing market?
Incremental realisation for farmers will help the overall commodity business and thus help commodity financing. However, action on ground by the authorities is very important and mere announcement of the higher MSP will not do the trick. On ground, procurement of commodities at higher MSP will move the commodity market in positive zone and help all areas of business.Though there are concerns being expressed by economists regarding the possibility of higher inflation consequent upon higher MSP, we believe structurally this is a much more palatable step compared to regular farm loan waivers.
Despite India being one of the largest producers and consumers of so many commodities, why isn’t its commodity financing market adequately developed?
Unfortunately, the commodity financing market has been very disorganised with the organised sector catering for only about 10% of the demand. While successive governments have focused on lending to farmers through pre-harvest financing, unfortunately there has been huge gap in the post-harvest financing area. With the private sector gradually stepping in, we hope to see lot more organised sector financing coming in this space.
You provide funding against select farm commodities. How do you propose to scale up this business further?
We avoid essential commodities and commodities that are not listed at the exchanges in India. In other words, we provide funding against commodities like rubber, pepper, cardamom, turmeric, chilli, soyabean/meal, maize, cotton, cumin, castor, coriander, guar seed/gum, among others. Commodities need to be deposited at exchange-accredited warehouses. On such commodities, pledge needs to be created in favour of our NBFC prior to our providing the funding.
The scope for the business and the opportunities for scaling up is significant. Out of the approximate total market size close to Rs 6,00,000 crore of post-harvest financing, bank/institutions cater to about Rs 60,000 crore only. Balance financing is provided by multiple private sources. We believe that we are just scratching surface and the opportunity for growth is significant.
Sebi has allowed options trading in commodities. Has this move changed anything for players like you?
Allowing options trading is definitely a welcome development. Sebi has taken the step in a calibrated manner by allowing only one agri and one non-agri options contract. Over the next few years we expect to see lot more relaxation in this area from Sebi and hopefully many more commodity options will be launched. While there is no immediate benefit for us through the launch of the said options contract, we expect the overall market to benefit significantly eventually, as volume in the market will increase creating incremental depth.
Why isn’t commodity financing market growing at a fast pace?
About 90% market (post-harvest commodity financing) is unorganised and serviced by stockists, traders, money lenders, among others. The market size depends on the commodity arrival during the harvest seasons. Unfortunately, Indian agriculture hasn’t been growing at a rapid pace and thus agri-commodity financing market hasn’t also been growing rapidly. However, with the focus of the government shifting to “doubling of farm income” we expect agricultural growth to get a boost and this will lead to growth in size of commodity financing market as well.
What are your earnings from the commodity business and how is the profitability in this segment compared with your other businesses? What’s your revenue projection for 2018-19 and how does it compare with 2017-18?
Our commodity business has been profitable during the last financial year and we expect to maintain the growth and profitability even during the current fiscal. We expect to more than double our business volume and profit during this segment from the current financial year.
What policy changes are required to realise the full potential of the Indian commodity financing business?
The government and the regulator (Sebi) have been working on improving the agri commodity market. Creation of electronic nation market (E-NAM) for spot trading in agri commodities, linking of mandis, introduction of GST, among others, has helped the markets. Introduction of options trading by Sebi has also the potential of benefiting the market in the long term.
We understand the regulator is working on allowing the institutions and foreign investors to participate in the commodity market in a phased manner in the foreseeable future. This will significantly increase the depth of the market and benefit the participants. Establishment of independent commodity depository and implementation of WRDA (Warehouse Regulation and Development Act), including establishment of warehousing regulator, will help in healthy growth of the markets.