Warehouse Receipts

India should use warehouse receipts to make it more attractive for banks to lend to the agricultural sector, to reduce the cost of public support for agricultural marketing, to reduce transaction costs and to improve price-risk management.

Outside of the ports, the Central and the State Governments dominate the warehousing industry, both as client and as service provider. Warehousing facilities owned by the central and the state Governments account for about 66 million tons of warehousing capacity. About 46 million tons of capacity is owned or leased by the Food Corporation of India and the State Food and Civil Supplies Corporations. The storage capacity that can be made available by state-owned warehousing corporations is about 20 million tons.

While Government warehouses have mainly served the public sector, they constitute a major asset that can be used to further the employment of warehouse receipts. Government warehouses are present across the country. They have developed homogeneous storage and quality practices, and their warehouse receipts are accepted by banks.

Warehouse Receipts (WR) and pledge finance are means that can prevent farmers from making distress sales. It would allow farmers to place their material in warehouses and raise finances. WR as tradable instruments, would

a) Increase liquidity
b) Allow participants to hold material
c)Facilitate integration with future market exchanges and reduce dependence on local markets
Currently, WRs are transferable, through endorsement, in some states. Full negotiability would increase liquidity.

Pledge finance, allows a person to pledge his product at a warehouse and get loans (up to 75% of the value of produce). The instrument for pledge finance is the warehouse receipt, which should be bankable.

Issues:
1) Banks would finance only if the WR is issued by an established authority such as CWC or SWC.
2) Most CWC and SWC warehouses are located at district centers, far away from farm lands
3) Most of the CWC and SWC are occupied by input material (fertilizers, etc.) and PDS procurements. What is left available is used mostly by large traders
4) The center has set up a “grameen bhandaran yojana” program for construction of rural godowns by entrepreneurs. These are located near farm lands. These warehouses have defined guidelines, which makes them eligible for pledge finance, provided that the material quality is certified

Commercial banks normally honor receipts made by CWC or SWC. Private receipts (as in case of rural private godowns) are not sufficient collaterals, unless a credible accreditation process is put in place.

In the absence of quality certification of material, banks can and do provide "lock and key" financing, wherein the material remains in banks possession. However, this can be used by large farmers only since a typical godown will have a capacity of 100-150 tons

In MP and Karnataka, the states have made certain reforms under which private warehouses are licensed to issue warehouse receipts. Thus rural godowns are benefiting producers, though it is still early days and the penetration is not large. The licensing authority is SWC and for other states to implement this, they also need to take similar regulatory measures. Random regular checks (audits) are conducted by SWC in MP on rural godowns licensed to issue WR receipts. There are guidelines on storage and fumigation

The center is considering amendments to the Central Warehousing Act. Amendments in the act have been proposed. The bill is expected to be presented to parliament shortly. Key features:
1) An authority to regulate and accredit processes in warehouses.
2) There will also be an advisory committee
(These bodies will be purely regulatory and outside the CWC)
3) It is expected to enable CWC to license warehouses to issue bankable WR

At state level there are similar warehousing acts, which need to be amended to allow SWC to play the same role.