Warehouse Receipt Financing in Cotton

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Warehouse Receipt Financing in Cotton
byMr. B.S. Sivakumar, Executive VP Business
Head Agri Business Group
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Overview of Cotton Sector
Need for Warehouse Receipt Finance
Enablers for WRF
Kotak Banks Model of WRF
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Overview of Cotton Sector
Need for Warehouse Receipt Finance
Enablers for WRF
Kotak Banks Model of WRF
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Contribution of Cotton to Economy

• Estimated labor force directly involved in
  production in the world is more than 100 mn

• Produced in 130 countries traded in as many as
  170 countries
• India is the 2nd largest producer after China
• Largest employer in India

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Positive Cotton Scenario

• Estimated output is 322 lakh bales in the year
  2008-09
• Yield per hectare is also estimated to increase
  from 472 KGs in 2005 to 591 KGs in 2009

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Price movement seasonality
Months Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
USA Sowing Sowing Sowing Growth Growth Harvest Harvest Harvest Harvest Harvest
China Sowing Sowing Growth Growth Growth Growth Growth Harvest Harvest Harvest
Pak Sowing Sowing Sowing Growth Growth Harvest Harvest Harvest Harvest
India Harvest Harvest Harvest Sowing Sowing Sowing Sowing Growth Growth Harvest Harvest Harvest
Funds Utilization Pattern
Stocking period
Ginning
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Off Season
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Overview of Cotton Sector
Need for Warehouse Receipt Finance
Enablers for WRF
Kotak Banks Model of WRF
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What is the need for WRF for cotton industry?

• Leverage the strength of stocks by using it as
  primary collateral
• Risk is de-linked from balance sheet to
  underlying commodity
• Structured pricing (interest rate) is more
  attractive than normal WC or STL

• Finance available in tranches aligned with stock
  build-up schedule
• Repayment schedule aligned with actual usage
• Better price discovery for the borrower as well
  as main link in the value chain the farmer

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Benefits for the Bank

• As opposed to standard credit facilities where
  exposure is on the balance sheet WRF helps
• Externalize the credit risk
• Commoditize the transaction
• Exposure on balance sheet is de-linked
• Relevant even to new entities without track
  records

Win-win situation for borrower lender as well
as the farmer
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Overview of Cotton Sector
Need for Warehouse Receipt Finance
Enablers for WRF
Kotak Banks Model of WRF
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Enablers for WRF

• Legal Status of WR
• Negotiability of WR
• Credibility of WR (especially issued by private
  warehouses to be enhanced)
• Secure electronic WRs

• Storage Infrastructure
• Accreditation acceptability of warehouses
• Counter party risk on warehouse
• Registration / permission for private warehouses
• Regular inspection quality monitoring by
  independent body

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Enablers for WRF

• Quality Control
• Credible mechanism to grade, measure / weigh
• Standardization of quality quantity of stocks
  during storage

• Market Information
• Availability of real time information on
  commodity prices, crop forecasting
• Dissemination of information to stakeholders
• Price risk management

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Enablers for WRF

• Protecting rights of stakeholders
• Performance guarantees
• Reliable insurance cover in the event of property
  or stock damage
• Lien marking control of stocks
• Exit/liquidation guidelines

• Public Private Partnership
• Private management of infra such as warehouses
• Funds to private parties for development of
  public infrastructure

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Constraints for Cotton WRF

• Limited availability of large warehouses suitable
  for cotton warehousing
• Shelf life of cotton ranges from 6 months to 1
  year
• Quality degradation with yellowing of cotton
  bales
• Lack of sufficient local infrastructure to
  ascertain quality of cotton bales staple length
• Requires lab testing that may delay funding
  after delivery

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Opportunities Exist too

• Price fluctuation
• 20 price variation within a year.
• Quality of cotton
• Production of long staple cotton has increased
  from 39 in 2005 to 77 in 2008
• Reduced chances of mixing staple lengths in the
  bales
• Funding opportunity based on underlying commodity
• Consolidation of ginners has not resulted in
  improvement in balance sheet
• Easier to avail WRF on basis of cotton stocks
• Mills have only exploited the WRF facilities to a
  limited extent

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Overview of Cotton Sector
Need for Warehouse Receipt Finance
Enablers for WRF
Kotak Banks Model of WRF
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Kotak Banks Model
1.Traders/Farmers deposit commodity in Kotak
approved warehouse in consultation with RM
Borrower
2.CMA checks quality quantity of stock.
4. Kotak Bank on receipt of the same Transfer
fund to the borrowers account.
CM
Kotak Bank
Sales / Credit Monitoring
3. Disbursement document set faxed /couriered by
RM
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THANK YOU
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Demat Warehouse Receipts

• Limitations of physical WRs
• Risk of forgery / loss / theft
• Handling physical certificates
• Benefits of Demat WRs
• Convenience in pledge - benefit to producers,
  warehouses banks
• Convenient settlement on commodity exchanges
• Risks of using paper avoided
• However the cost of dematting and the additional
  warehousing costs of a dematerialised commodity
  is deterrent for the product.