Commodities Backed Finance Project Report

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Chapter 1
INTRODUCTION
• An Introduction
INTRODUCTION
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Agriculture, the sector engaging about 70 of the Indian population, is proved

to have a great impact over India’s overall economic performance. This is in
spite of its reduced contribution towards the GDP from 60% to 25%. Recent
trends clearly indicate that agriculture is getting highly commercialized and
is going through rational changes globally, mainly due to the liberalization of
the trade in agricultural commodities. To benefit the Indian farmers, the
agriculture system in the country should be totally revitalized. Following
changes need to be incorporated
• Healthy environment
• Smooth channels for transfer of commodities
• Physical infrastructure for marketing activities
• Cash support to commodity producers
Even though the reaping, harvesting and storing of crops is seasonal, the
consumption of the commodities is perpetual, as well as variable in nature.
The market value of the commodities is the lowest at the time of harvesting,
primarily due to an abundant supply. Also, the consumption requirement is
periodic, and not in a bulk at a time. This naturally gives a rise to need of
storing the commodities, thus giving a way to requirement of strong storage
facilities for the producers, in order to hold a portion of the produce. This
would facilitate him to meet his requirements such as fertilizers, seed, etc. by
selling the stored surplus commodities in the market, whenever the market
price is favourable. A need for storage facilities also comes into picture when
there is an inadequacy or unavailability of the transport facilities.
2
This has contrived the Indian Government to come up aggressively with

warehousing facility all over India.
India is currently the largest producer of fruits and vegetables at about 44

Million tons per annum. However, the export of these commodities is
comparatively low. This is mainly due to poor storage and transport facilities,
effectively leading to a large-scale wastage. In order to counter this problem,
a large number of cold chains of controlled atmosphere are being set up.
In addition to these, the Government needs storage facilities in order to

maintain a buffer of reserve stocks to counter the effects of variabilities of
weather and other natural calamities on the agriculture in India.
The producers, processors, transporters as well as the people concerned with

storage of commodities have to develop the storage facilities for a proper
storage of commodities such as food grains, oilseeds, commercial crops like
chilies, vegetables, etc., and the seeds needed for sowing in the following
seasons.
3
Chapter 2
WAREHOUSE
• Functions of the warehouse

• Warehousing in India
• Types of warehouses
• Functions of National Co-operative
Development and Warehousing Board
• Functions of Central Warehousing
Corporation (CWC)
WAREHOUSE
4
Warehouses are the scientific storage structures that are specially constructed
to facilitate the preservation as well as the protection of the commodities. As
far as India is concerned, the Warehousing scheme is an integrated scheme of
scientific storage, rural credit price stabilization and market intelligence.
Overall, the scheme is intended to supplement the efforts of the co-operative
institution.
2.1 Functions of the Warehouse

A warehouse is constructed bearing in mind that it should perform the
following different functions: -
2.1.1 Scientific Storage: A large quantity of the agricultural

commodities may be stored. The commodities must also be
protected against the quantitative as well as qualitative losses
occurring due to unavoidable circumstances such as floods, pests,
etc.
2.1.2 Financing: Another need that a warehouse is expected to meet is

the financial needs of the individual who stores his produce into the
warehouse. This is facilitated by the national banks, which extend
credit to the individual against the security of the warehouse receipt
that is issued to him after he has stored his commodities. A credit of
75 – 80 % of the value of the commodities is generally extended.
2.1.3 Price Stabilization: Warehouses also offer the facility to the

individuals who hold their commodity stocks with them, in the
5
form of providing them with updated market information. They are

informed about the prices prevailing in the markets, as well as
advice them as to when to release their products into the markets.
2.2 Warehousing in India
According to the report submitted by THE ALL INDIA RURAL CREDIT

SURVEY COMMITTEEE of Reserve Bank of India, the Government of
India enacted the agricultural produce, Development and Warehousing
Corporation Act, 1956. In addition to this, the other actions taken in the
concerned field are:
• Establishment of NCDWB (National Co-operative Development and

Warehousing board in 1956.)
• Establishment of Central Warehousing Corporation (CWC) in 1957.
• Establishment of State Warehousing Corporation (SWC) in all the
states, between July 1957 and August 1958
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2.3 Types of Warehouses
The warehouses are classified into various types, based on the following two
parameters:
2.3.1 Types of Warehouses based upon the basis of ownership
2.3.2 Types of Warehouses based upon the basis of commodities

stored
Types of Warehouses on the basis of the ownership
PRIVATE PUBLIC BONDED

Owned by the Owned by Specially constructed near
individual, large Government and seaports and airports and
business house for meant for the storage accept goods for storage till
storage of own goods of goods. payment of customers by
importers. The method of
operation and charges for
storage is regulated by the
Government.
Types of Warehouses on the basis of types of commodities stored
7
GENERAL REFRIGERATED
Storage of fertilizers, cotton, tobacco, Warehouses in which temperature is
food grains, wool, petroleum, etc. maintained as per requirement. Meant
Generally no specific requirements. for perishable commodities such as
Storage items with a longer life span. Vegetables, fruits, fish, beefs and Meat.
The temperature in these Warehouses is
maintained below 3 to 5 degrees.
A very good example of the active warehousing and Cold storaging can
be found in Maharashtra. The Maharashtra Warehousing Co-
operation Act provides for the setting up of the Warehouse to
aid the farmers to store their agriculture produce. Besides, the
warehousing Corporation, the agriculture co-operative societies
provide for the storage facilities to members under provisions of
National Grid of Godowns and Schemes. The scheme also
includes financial assistance up to 50% of the cost of the storage
facilities by the Central and the State Government. This
assistance is rendered in the form of the subsidy.
The Maharashtra State Agricultural Marketing Board undertook the first

initiative in 1990 to promote the use of temperature management technology
by setting a pre-cooling unit and a cold storages facility under co-operative
8
sector. The main aim was to promote the export of fresh fruits and vegetables
from the state. Under the guidance of the Maharashtra State Agricultural
Marketing Board today, Maharashtra is the main exporter of the fresh grapes
from the country and exports nearly 70% of all the vegetables exported from
the country.
Maharashtra State Agricultural Marketing Board also monitors the running of

these cold storages units from time to time reviewed. It also controls the
working of existing pre-cooling and cold storages, and suggests appropriate
storage capacity utilization, improvement in efficiency and financial
viability.
The number of cold storages financed by the Bank is less than the actual
number of units present in the region. But it is found that there is a significant
growth, mainly due to the implementation of the Capital Investment Subsidy
Scheme (CIS) and Interest Subsidy Scheme.
2.4 Functions of National Co-operative Development and

Warehousing Board:
9
To advance loans and grants to State Government for financing co-operative

societies engaged in Marketing processing or storage of
agricultural produce, including contributions to the share capital
of these institutions.
To provide funds to warehousing corporations and the State Government for

financing co-operative societies for the purchase of agriculture
produce on behalf of the Central Government.
2.5 Functions of Central Warehousing Corporation (CWC):
a) To acquire and build godowns and warehouses at the suitable places in

India
b) To run the warehouses for the storage of the agricultural produce,

seeds, fertilizers and notified commodities for individuals, co-
operative societies and other institutions.
c) To act as an agent of the Government for the purchase, sale, storage

and distribution of the above mentioned commodities.
Food grains, sugar and fertilizers occupy about 78% of the total utilized
storage capacity, while the remaining 22% of the storage capacity is
primarily occupied by cement, chemicals an other commodities.
10
The corporation has introduced a scheme called as “FARMERS”. This

scheme circumscribes an extension service at the selected centers to educate
the farmers in the benefits of scientific storage and use of public warehouse.
The Central Warehousing Corporation (CWC) also provides a package of
services such as handling, transportation, safety and security of goods,
insurance, standardization, documentation and other connected service
facilities.
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Chapter 3
RURAL GODOWNS
• Features of Rural Godowns

• Rural Godown Scheme
• Credit Linked Scheme
• Agriculture Produce Market
Committee
RURAL GODOWNS
The Government of India had launched a scheme for the establishment of

NGRG (National Grid of Rural Godown) in the year 1979. The scheme aims
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at the creation of a network of rural godowns in state and union territories,

primarily to take care of the storage requirements of small and marginal
farmers. The objectives of the scheme are as follows:
1. Prevention of distress sale of food grains, other agricultural

commodities, immediately after harvest.
2. Reduction in the quantity and quality losses, arising primarily due to
the storage in substandard places.
3. Creation of employment in the rural areas.
4. Helping the farmers in getting loans against the stored products and
facilitate an easy procurement of the food products by Food
Corporation of India.
3.1 Features of Rural Godowns
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1. The size of the Godown varies from a capacity of 200 tonnes to 1000
tonnes depending upon the produce expected for storage in the village.
2. The cost of construction of the rural godowns is subsidized to the
extent of 50% to be shared equally by the Central and State
Governments. The remaining 50% of the capital is arranged by
implementing agencies such as co-operative marketing society in the
form of a loan from the commercial banks.
3. The State Warehousing Corporation provides all the technical
guidance. Its also provides supervision to the implementing agencies in
the maintenance and management of the rural godowns.
4. The receipt that is issued by the manager of the rural godown on the
basis of stocks is a negotiable instrument. On the basis of the receipt,
the farmers can get a loan from a commercial bank, up to the extent of
the 80% of the value of the produce stored.
3.2 RURAL GODOWN SCHEME (Gramin Bhandaran

Scheme)
14
In spite of being self sufficient in production of the food grains, the farmers
obtains low prices for their produce. The main reason for this being a lack of
sufficient storage facilities forcing the farmers to sell the produce in the peak
of the harvest season. The farmers can expect a pledge loan of around 70 to
75% of the stored produce.
3.3 Credit Linked Assistance:
Subsidy under the scheme is linked to institution available only on such

projects, which are financed, by the Commercial Banks, Cooperative Banks,
Nationalized Banks, and Regional Rural Banks. The composition ca be
shown as:
25% - Government Subsidy Scheme
25% - Own Investment
50% - Banks Loan
A future target of 500 godowns has been fixed with the resulting calculated
amount of subsidy coming out to be around 99 lacs.
3.4 Agriculture Produce Market Committee (APMC)
15
The Agriculture Produce Market Committees are the statutory bodies

established under the provisions of the Maharashtra Agriculture Produce
Marketing Regulation Act 1963.
The Agriculture Produce Market Committees create the infrastructure for the
agricultural markets in the operational areas at the main markets. Presently,
Maharashtra alone has about 256 Agriculture Produce Market Committees ad
572-sub yards.
The APMC market in Navi Mumbai has a total capacity of 6500 MT godown
of which 1500 MT is utilized for various commodities. The godown at the
auction hall has been leased out by the Agriculture Produce Market (APM) to
the Maharashtra State Warehousing Corporation (MSWC).
In spite of all such available facilities, it has been found that there is a low
utilization of Cold Storages and a slothful progress in the field of
Warehousing. The following reasons can be attributed to this:
1) Low capacity utilization of Cold Storage in certain areas mainly due to

high concentration of cold storages in a particular area.
2) Erratic power supply disrupting the working of the Cold Storages.
3) High Electricity bills, leading to reduction in profits.
4) Lack of transportation facilities.
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5) Complicated and time-consuming procedure of depositing and

withdrawing the produce from the warehouses and cold storages.
6) Selling of the produce by the producers at their doorstep in order to

avoid the transportation cost.
7) Lack of regular business for the warehouses, as well as lack of grading

facilities before the storing of the produce.
8) High interest rates for the loan amount and a comparatively shorter
period of repayment of these loans.
9) Pledge loan mostly not provided.
10) The fact that the financial bank generally does not meet the
working capital requirement adequately.
11) Time lags in the releasing of the subsidy amount.
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Chapter 4
COMMODITY BACKED FINANCING
• Existing scenario
• The crux of the situation
• Changing face of Commodity Backed
Financing
COMMODITY BACKED FINANCINING
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4.1 Existing Scenario

Currently, most of the marketing of the commodities takes place through the
private trading in organized markets/mundis. There exist a few restrictions on
the marketing of commodities outside the regulated markets. The present
Indian farmers community is primarily made up of small and marginal
farmers. About 54% of the marketable surplus and distress sale by these
small farmers accounts for about 50% of the marketable surplus.
It is found that the farmers often sell their produce to square off their debts
soon after harvesting. Large price spreads and low price realization due to
imperfections and weak linkages in commodity markets have been
dominating the Indian agriculture over a substantial period.
A sub-optimal credit support from formal banking sector had an adverse

effect on the development of agricultural marketing systems in India. The
informal sector, which includes the commission agents, provides significant
credit to agriculture and wholesale trade but the cost of credit is much high as
compared to the rate at which the banks may provide it. The credit that the
Banks have been providing to the farmers is certainly not substantial. The
lending policies and programmes for financing the agriculture should focus
more on the increasing financial needs of the agriculture marketing. The
input based financing of the agricultural credit would give way to output
based finance, which are certainly more aligned to the market, where
production, processing and marketing become an integrated activity and
financed as a package.
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There have been radical changes in the agricultural sector in the past decade
such as the recasting of important laws governing the sector, the rise in
commodities trading volumes, the setting up of new warehouses, and the
growing share of the organized food retail.
Interestingly, unlike the Green revolution, the government would no longer

be the main driver of the chain. Instead, Government will be functioning just
like an enabler or a catalyst. And a motley group of private companies, co-
operatives, NGOs and farmers will learn to work together for their own self-
interest in order to gradually revamp the Indian agriculture. The scene would
look something as follows:
20
The Indian farmer usually carries a huge load of risk on his shoulders. He
plants his crops not knowing what the harvest will be like, or how much it
will fetch in the market. Many things can go wrong between sowing and
harvesting.
21
There are steps that have been already taken in this respect. Two years ago
National Commodity and Derivative Exchange (NCDEX) was set up. It is
connected to about 6000 trading terminals in 400 Indian towns. Today, 36
commodities – 33 of them agricultural – are traded everyday on this
exchange. That translates in to a daily turnover of around Rs. 2300 crores.
Till now, most of this turnover comes from companies and speculators. The
companies want to hedge what they buy. Day traders and speculators bet on
how much a commodity like wheat might cost three months later. They look
at the spot price; the cost of warehousing the produce, followed by the cost of
capital, and accordingly trades on the futures of these products.
The first thing that this will do is that it will improve that way in which the
farmer decided what to grow. Today he does it on the basis of the past year’s
price. If a particular crop yields good prices, everyone sows it the next year.
The result is that, at the harvest time, there is a glut in the market, resulting in
the price crash of the commodity.
Commodity Futures would serve as a better barometer for consumer demand

when sowing time comes. Here is how it will work:
Let us say that Mandi offers the farmer Rs. 650 for a quintal of wheat, while
the exchange suggests that the prices will climb to Rs 750 in the next three
months. The farmer then decides to wait. In order to hedge this risk, he picks
up a future, thus committing to sell at this price three months down the line.
There would however be skepticism within the farmers as to what would
happen of the prices rise.
22
The solution of this lies in Options. This is how it will work:

In the above case, instead of futures the farmer picks up an option. Three
months down the line, if the prices in the Mandi are still at Rs. 650, the
farmer will sell. On the other hand, if the spot prices move up to Rs. 850, he
can decide no to go ahead with the sale, pay his buyer a small penalty and
take his stock to the Mandi.
Thus the exchanges will fix the mandis, not by competing for procurement
but by helping the farmer to time his visits to the Mandi better.
Presently, National Commodity and Derivative Exchange (NCDEX) is

aggressively holding seminars for traders in large towns, and telling its
brokers in the small towns to do the same. The main barriers here is that the
small farmers cannot afford to pay Rs. 30 lakhs to become the member of the
exchange. They would have to become the clients of the existing members.
Also the minimum trade has to be 10 tonnes. To solve both these problem,
National Commodity and Derivative Exchange (NCDEX) is trying to reach
out through cooperatives, banks and NGOs.
A major hurdle today is that how to get the real time prices across to the
Indian farmer. Today, there are about 10000 – odd information kiosks in the
country. Even if each of them would reach out to five villages, it would cover
about 50000 villages. But India has over 600000 villages. The kiosk
infrastructure will have to be increased by 8 to 9 times to give an adequate
reach.
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Also, before anything is traded, it has to be graded and valued. But there is
no grading infrastructure in the country. Another issue is the cost of
warehousing. Farmers often need money from their harvests immediately to
finance their next crop.
In order to tackle these issues, NCMSL, an offshoot company of the National

Commodity and Derivative Exchange (NCDEX), is setting p its warehouses
all over India. These warehouses will be open to any farmer who wants to
hold his produce after the harvest instead of selling it immediately and sell
later when the prices would be favourable. When the produce would arrive at
the warehouse, it will be graded into one of the three categories: Premium,
Standard or Discounted. If the farmer would be in a need of an urgent money,
then NCMSL would be in a position to give as much as 75% of the value of
the crop as a loan. The stock lying graded, packed and valued in the
warehouse will easily serve as a collateral. Presently, NCMSL can make this
payment within a week’s time. But it is expected that over the time when the
bank and other parts of the jigsaw would fall into pieces, farmer would be in
a position to get their money immediately, without much time delay.
At present, NCMSL has about 100 warehouses across all over the India. By
the end of the year 2007, it has a target of setting about 1000 warehouses.
NCMSL has aggressively being going ahead in this respect, with their higher
authorities themselves touring various states in India, talking personally to
the various warehouse owners and persuading them to sign up with NCMSL,
thus converting their warehouses into NCDEX – accredited warehouses.
NCMSL intends to have a NCDEX – accredited warehouse after every 40
kilometers, all over the country.
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One more important factor is that there has been a radical change in the
consumption pattern of the Indian. Indians today are consuming fewer
cereals, and more vegetables, fruits, meat, fish, eggs and milk. Indian
agriculture is undergoing a change accordingly.
Changes in the consumption pattern of selected foods over 1990 –

2000(Kg/person/year)
CEREALS VEGETABLES FRUITS MILK MEAT EGGS FISH
1990 159.9 53.4 28.2 53.9 4.6 1.2 3.8
2000 153.1 65.9 37.5 64.9 5.0 1.4 4.7
Annual -0.4 2.1 2.9 1.9 0.9 1.9 2.0

Growth
(%)
Source: FAO Food Balance Database
4.2 The Crux of the situation

Agriculture has been one of the focus areas for the Government of India for
quite sometime now, and substantial impetus has been given to it lately,
25
through measures intended to liberalize the sector mainly by providing easy

Finance through institutional sources such as Banks. However even after all
these measures the primary producer still gets only a small share of the
benefits which are meant for him, as most of it gets lost in the long
agricultural value chain mainly comprising of the traders and the middlemen.
Thus Social Justice demands that some rebalancing needs to be done so that
all factors of production are adequately compensated for their efforts.
This rebalancing act can be comprised of the following steps:

• Creation of Superior Infrastructural facilities thereby facilitating
efficient storage, transportation and marketing of the agricultural
produce.
• Development of a Price Stabilization Mechanism
• Reducing the overall cost involved in agricultural production,
processing and marketing activities
Even though the reaping, harvesting and storing of crops is seasonal, the
consumption of the commodities is perpetual, as well as variable in nature.
The market value of the commodities is the lowest at the time of harvesting,
primarily due to an abundant supply. Also, the consumption requirement is
periodic, and not in a bulk at a time. This naturally gives a rise to need of
storing the commodities, thus giving a way to requirement of strong storage
facilities for the producers, in order to hold a portion of the produce. This
would facilitate the farmer to meet his requirements such as fertilizers, seed,
etc. by selling the stored surplus commodities in the market, whenever the
market price is favourable. A need for storage facilities also comes into
26
picture when there is an inadequacy or unavailability of the transport

facilities.
This has led to the Indian Government to come up aggressively with

warehousing facility all over India under the aegis of Central Warehousing
Corporation (CWC) and State Warehousing Corporations (SWC). However
government itself for storage of Grains meant for Public Distribution System
(PDS) utilizes most of the warehouse space in these warehouses. Thus the
farmer/ trader still resorts to either storing the commodities in his own
premises or using the private warehousing facility.
Similarly most of the steps taken by the Government had “Food Security” or
supporting the farmer through minimum support price as the primary
objective, which resulted in greater emphasis to schemes such as PDS, and
the benefits of the other constituents of the value chain are still largely
unaddressed.Also in the case of financing agricultural activities, local
institutions still dominate the scene while institutional finance is perceived to
be something very difficult to be availed off. Thus the only substantial
measure of the Government seems to be the setting up of the “Minimum
Support Price” mechanism, which ensures the bare minimum returns to the
producers, however this alone wont be enough to revitalize the agricultural
sector and an easy availability of Institutional finance for improvement in
infrastructure and marketing facilities is urgently needed.
4.3 Changing face of Commodity Backed Financing.
SBI has been active in Commodity Backed Financing for a long time now,
however most of the products are not in tune with the current market trends
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and are hence losing market share. Also there has been recent developments
such as the setting up of the Commodity Exchanges like Multi Commodity
Exchange (MCX) and National Commodity Derivatives Exchange of India
(NCDEX), which has given rise to newer business opportunities for SBI in
this arena.
Also there has been structural changes in the area of Warehousing with
Warehouse receipts been made negotiable, thereby resulting in better
marketability of warehouse receipts.
Due to these developments the Trade and Services Wing of the SME
department decided to have a revisit their Commodity Backed Financing
Business Portfolio.
The Study
The SBI thus conducted a study analyzing the commodity backed financing
business of the bank. The study included a visit to the Gwalior (Morena) area
in Madhya Pradesh along with several visits to the APMC Navi Mumbai to
understand the ground realities related to this business.
The study focused on the following businesses:

 Warehouse Receipt Financing
 Financing against Receipts of Central Warehousing Corporation
(CWC) / State Warehousing Corporation (SWC) Warehouses.
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 Financing against Receipts of Private Accredited Warehouses.

 Financing against Receipts of Private (Unaccredited)
Warehouses.
 Warehouse Construction Financing
 Meeting the banking requirements of MCX Members such as:

 Clearing and settlement accounts
 Bank Guarantee facility to meet margin requirements.
Funding the Margin requirements for Delivery based trades of
MCX Members.
Given below are the recommendations on the various product offerings of the
bank in the commodity backed financing arena along with new potential for
business in these areas. These recommendations are based on the above study
as well as an analysis of the current product offerings of the bank vis-à-vis that
offered by other banks and also takes the current trends in the industry into
account. The recommendations considers the recent directives from the
regulatory authorities and also the new measures taken by other departments
of the bank which also deal in commodity backed financing area namely,
Agriculture. This will ensure that the recommendations suggested below will
not conflict with the measures taken by the other departments.
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Chapter 5
WAREHOUSE RECEIPT FINANCING
• Financing against CWC/SWC Receipts

• Advances against Accredited Warehouse
• Advances against Warehouse Receipts
issued by Private Warehouses
• Warehouse Construction Financing
WAREHOUSE RECEIPT FINANCING
5.1 Financing against CWC/SWC Receipts
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The business of “Financing against Warehouse receipts” is currently in its

nascent stages, as far as India is concerned. However, it can certainly prove
to be a highly lucrative business with tremendous potential that it possesses,
especially in view of organized trade through multi commodity futures
exchanges as also impending launch of spot trade in agricultural
commodities.
Loan against Warehouse Receipts is basically a self-liquidating loan with the

tenure of the loan not exceeding 12 months (stipulated so as to guard against
depletion in quality/valuation of the underlying goods) and with security
margin of up to 30-40%. This margin is taken to guard against the “Market
Risk” that the bank is subject to, due to unfavorable movement in the prices
of the underlying commodity.
All the major Public as well as Private sector banks have already brought this
business into focus, and have started taking aggressive steps in this direction.
Other Banks with a substantial presence in Morena area of Madhya Pradesh
where a detailed study was conducted are UCO Bank, ICICI Bank, Oriental
Bank of Commerce, Central Bank of India, State Bank of Indore etc.,
SBI currently has a portfolio of around Rs.17 crores in this area. However the
terms at which other banks are extending finance are very much liberal. We
can improve our portfolio if we modify the terms and conditions of our
product and make it more tuned to the current industry trends. Such
modifications will require change in the margin requirements, Rate of
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Interest, Cap on the amount of loan and the period of credit currently offered.
(The detailed terms and conditions are detailed in Annexure 1).
Comparative Analysis of SBI’s offering with respect to other banks
ICICI UCO SBI

Interest Rates 8.5-11% 9% 11% - 14%
Depending on the
amount
Security Margin 25-30% 30% 40%
Major changes in the terms proposed from those at present are as

under:
SR.No. Terms of Finance Existing Proposed Remarks
1 Rate of Interest 11% to 14% 9.75% to 1) Self
11% liquidating
2) Max period
of 12 months
2 Processing Charges
3 Margin 40% 30%
The detailed terms and conditions are detailed in Annexure 1
Risk Assessment and Mitigation:
Risks Identified Ways to Mitigate Risk

Risk Associated with fake warehouse • Random checks will be conducted either before
receipts, or misrepresentation of disbursal of the loan or anytime later to cross
quantity/quality of the commodity check the authenticity of the warehouse receipt
stored. and take stock of the commodities stored in the
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warehouse.
• In case of Private warehouses, a warehouse will
be linked to a particular branch. Only through
this branch Advances will be made to avoid
duplication and difficulties in co-ordination.
Risk Associated with volatility in The security margin that would be initially charged
price movement of the underlying at 30% should be sufficient for mitigating these
commodity risks.
Risks related with the All the commodities stored will be

damage/obsolescence of the stored comprehensively insured to mitigate this risk.
commodities
Default on interest and/or principal The Security Margin of 20-30% should be good
payment (Credit Risk) enough to cover for the probabilities of Credit Risk
5.2 Advances against Accredited Warehouses
This is a new concept gaining prominence with the advent of professional

collateral management companies in the country like
• NBHC - National Bulk Handling Corporation, a Joint Venture

between MCX and the PRB group Australia
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• NCMSL - National Collateral Management Services Limited,

promoted by NCDEX and banks
These institutions provide various services which improves the quality of

warehousing, thereby reducing the risk due to reduction in quantity and
quality of the deposited commodity. Once an agreement is inked with either
or both of these institutions, the Bank can look forward to sanction advances
against receipts of warehouses accredited/franchised by them and treat them
in a very similar manner as it treats for advances against CWC/SWC
warehouses.
Services Offered by these Institutions
• Scientific warehouse maintenance and storage of agri-commodities.

• Arrangement of Bank finance for construction and renovation of
warehouses.
• Installation of “V Sat” terminal, to get information about online
stock of commodity.
• Arrangement of Bank finance for lending against warehouse receipt.
• Logistic assistance.
• Quality certification assistance.
• Training and Awareness programmes.
• Receiving, storage and outturning of commodities
As we can see from above that NBHC only arranges for Bank Finance for
Warehouse Construction and also for financing against the warehouse
receipts and does not provide any financial assistance for the same, with the
34
result, promoter has to depend on Banks for financing of warehouse

construction in order to claim the subsidy available on the same, and also for
getting finance against the warehouse receipts issued by him.
The Bank can develop a customized product in which it will not only finance
the construction of such warehouses but also facilitate easy availability of
finance against warehouse receipts issued by them.
Since these warehouses will be accredited by either NBHC or NCMSL who

would guarantee superior warehousing facility and also protection against
frauds (as one of the terms of the above mentioned agreement), the Bank can
offer finance against receipt from such warehouses at par with central
warehouse/ state warehouse corporations, detailed as per Annexure 1.
5.3 Advances against Warehouse Receipts issued by Private

Warehouses
With the advent of Private Warehouses, there is a good potential in lending
against warehouse receipts of private warehouses, however the modalities of
advances against private warehouse receipts will be different than those
against CWC/SWC warehouse receipts.
1) Quality and Quantity – Margin stipulated for financing is higher at 40%

compared to 30% for CWC/ SWC
35
2) Genuinity of Receipts – (a) Name and specimen signature of authorised

signatory to be held on record.
(b) Only one branch in the centre will be
authorised to finance against private
Warehouses.
(c) Encourage construction of these warehouses
with our finance.
(3) Indemnity/ Guarantee to be obtained from the owner against the losses
the bank may suffer on A/c of management / genuinity of receipts/ Quantity/
Quality / Insurance etc.
(4) This may also be topped up with personal guarantee from proprietor.
The risks that we apprehend in lending to such WR’s are in lending mainly
from the credibility of the owners/ managers, systems and procedures, checks
and balances, safety and safeguard in holding of the stocks.
Depending on the above parameters, the branch will appraise and sanction a
credit limit for advances against receipts of these warehouses and the
warehouses will be assigned to particular branches.
The farmers / traders should not suffer for want of adequate capacity of
Public Sector Warehouse capacity. Till such time at least till the accredited
W.R. capacity increases we may consider financing against private W.R.
36
receipts to traders also subject to a cap of Rs. 100 Lacs as is in Agri Business.
Similar safeguards will be taken against fraudulent use/ mischief.
After the above process, the said branch will accept and approve requests for
advances against warehouse receipts of these Private Warehouses.
Comparative Analysis of SBI’s offering with respect to other banks

ICICI UCO SBI
Security 10% NA 100%
Margin
Interest Rates 8.5-11% 9% 11% - Traders

Depending on 9% - Farmers
the amount
Limit Up-to 1 Upto Rs.20lacs
Upto 10 crores
crore
The new terms and conditions proposed based on the current industry
trends are detailed in Annexure 2
5.4 Warehouse Construction Financing
Warehouse construction activity is flourishing due to availability of subsidy

from NABARD. However, this subsidy is available only if the construction is
undertaken using bank finance. Generally the warehouse construction is
financed as under:
Uses Sources
37
Cost of land 25% - Owners Equity/ Contribution
Cost of Construction 25% - Subsidy
Cost of Necessary Equipments
Remaining by way of Bank

Finance
Working Capital for the immediate
period after Construction
The subsidy is “Back-ended” and the banks’ finance even this portion until
the owner/promoter receives the subsidy.
Other banks are funding the entire subsidy portion, whereas we are funding
just 80% of it making the Warehouse owner to bear the remaining thereby
increasing the quantum of his contribution by another 5%.
Comparative Analysis of SBI with Competitors in Warehouse

Construction Finance Business
ICICI UCO OBC CBI State SBI

Bank of
Indore
Interest 8.5-10.25% 9% 8.75% 8.5% 8.5% 11%
Rates Depending
on the
amount
38
Quantum 75% 75% 75% 75% NA 70%

of Finance
The branches can consider sanction of Term Loan and construction of

warehouses, subject to detailed terms and condition as per the Annexure – 3.
Risk Assessment and Mitigation
Given below in the table are the various risks associated with the product and
the proposed mechanism to mitigate them.
Warehouse Construction Financing

Risks Identified Ways to Mitigate Risk
39
Risk related with title of the land. Detailed verification should be

carried out to ascertain the
ownership of the land selected for
warehouse construction. The Title
investigation report as part of
revised SME documentation should
address these risks adequately.
Risk associated with timely We may stipulate a penalty of
completion of the warehouse additional interest for delays in
construction project completion, so as to act as a
disincentive for delays.
•A comprehensive product
Risk related inadequate business of facilitating easy financing of the
the warehouse resulting in an warehouse receipts of the
increased credit risk probability warehouse whose construction is
financed by the bank.
• A liberal moratorium period of 12
months may be allowed at the
discretion of the local authority
(ZCC, CCC), which should take
care of the slow building up of
volumes.
Risk associated with non- A detailed scrutiny of the necessary
fulfillment of necessary regulatory documents should be carried out
requirements like licenses from before sanctioning the loan so as to
applicable authorities. overcome this difficulty.
40
Risk Associated with default on Verification of the business model

Interest and/or Principal repayment and projected volumes of business
based on scientific and
sophisticated storing facility offered
may be good enough to cover this
risk.
Risk associated with losses Comprehensive insurance policy of
occurring due to Natural the Warehouse in joint names of the
Calamities. Warehouse constructor and SBI
should be taken.
Chapter 6
MULTI COMMODITY EXCHANGE

OF INDIA (MCX)
• About MCX
• Banking requirements of MCX members
• Clearing and settlement account for MCX
members
• Bank guarantee for Margin requirements
41
• Credit assessment of the members

• Financing members for Delivery of
Physical commodities at MCX
• Delivery mechanism at MCX
• Potential
Multi Commodity Exchange of India (MCX)
6.1 About MCX

Multi Commodity Exchange (MCX) has about 920+ trading members across
300+ cities and 4500+ workstations. The average daily turnover is around
900 crores. The total physical delivery from February 04 to December 04 is
given in the following table:
COMMODITY QUANTITY
Gold 397 kgs
Silver 14790 kgs.
Chana 630 tonnes. 6.1.1 Delivery Mechanism
Urad 75 tonnes. at MCX
Pepper 10 tonnes.
MCX has three types of
delivery contracts:
42
• Sellers Option: Only seller has the option to decide about delivery
• Compulsory Delivery: Gold and Silver
• Both options (Cash Settled)
MCX contracts are launched on 16th of every month and expire on 15th of
next month. The delivery period starts from 1st of every month. During this
period the seller or buyer can give his / her intention to give or take delivery.
MCX will match the intentions to arrive to design the delivery positions.
Once the delivery is assigned to a buyer he cannot square off his position
6.1.2 Matching of Delivery

In MCX the delivery matching happens before the expiry date. 3-5 days
before expiry the tendering period starts whereby the sellers’ intentions are
matched with the buyers intentions and deliveries are assigned. Once the
expiry date is over, whatever is the open position, which is Cash settled. In
case of compulsory delivery the delivery is assigned to buyer and if he
refuses then a penalty is charged to him. For the both option delivery there is
no delivery period and the intention matching takes place after the expiry
date.
The delivery is assigned on the first come first basis and also in following
order:
1. Same city
2. Near by City
3. Far away City
6.1.3 Default of Delivery
43
There can be two scenarios when a delivery is in default:
1. If seller after giving intention to deliver fails to deliver

2. If the buyer after assigning delivery refuse to take delivery
In both the cases the settlement will happen on cash basis. There will be a
penalty of 1-3% of contract price depending on the commodity for the
defaulting party. This penalty will be distributed between defaulted party and
the exchange in the ratio of 90:10. Exchange feels that this will be sufficient
to compensate for any loss that has occurred to defaulted party.
6.1.4 Warehousing
The exchange has accredited warehouses in various states depending on the
availability of the commodity. Hence for Rubber Kochin is the center while
for soyabean its Indore. The delivery takes place through the warehouse. The
seller will deposit the commodity with the warehouse on or before the pay-in
date. The warehouse will check it for the quality specification. If it found the
specification to the mark it will accept the material and issue a warehousing
receipt. The warehousing receipt will be transferred in the name of buyer
once buyer pays the money. The buyer will then collect the material on the
production of same receipt.
6.1.5 Quality
In case the buyer has doubts about the quality there will be recertification of
commodity. There will be three samples taken – for exchange, seller and
buyer. The buyer’s sample is tested. If buyer is still not happy then
exchange’s sample is tested. That certification will be final and then buyer
44
has to take delivery. In case the buyer is right the seller has to bear the
charges of recertification and also take back the commodity. In case the
buyer is wrong the certification charges are born by buyer and he has to
accept the delivery.
6.1.6 Quantity
If the quantity of material varies from prescribed in the contract then the
buyer will pay more or less as per the excess or deficit. The excess or deficit
will be priced as:
Price = (Excess or Deficit) * Price / Contract Size
6.1.7 Premium and Discount

Quality of commodity is fixed at the time of launching the contract. But
unlike precious metals it is very difficult to get the commodity of same
specification. Hence exchange allows certain concession in the quality
parameter. Hence there is a tolerance limit allowed in all commodities. So if
the commodity is not of exact quality but fits into tolerance limit it will be
considered as acceptable delivery.
If the quality is better than what is prescribed in the contract then the seller
must be compensated for that. This will be assured by asking buyer to pay a
premium for it. Similarly when the commodity is inferior the buyer will be
compensated by giving him discount over contract price. The premium or
discounted is calculated by the formula provided by exchange in each
contract.
45
The premium and discount is settled in supplementary settlement of

exchange.
6.1.8 Tax and Duties

Exchange feels that uniform tax and duty structure will help the situation.
Seller handles the taxes up to delivery in the warehouse whereas once
delivery is accepted it becomes buyers’ responsibility. If you take delivery
and then keep the material in warehouse and then sell the next month you
will not be required to pay CST.
6.1.9 Buyer’s option

If a delivery is allocated to a buyer on the 1st day of the tender period, on the
immediate succeeding day he is required to inform the Exchange that he is
not willing to lift delivery and wishes to settle the contract as per the Due
Date Rate. In such a case, such buyers are required to settle the contract as
per the Due Date Rate and also to pay a penalty of 1% of the DDR, of which
90% will go to the seller.
In case the buyer intends to take delivery, he is required to make the payment
within 2 working days of the allocation of delivery.
6.1.10 Clearing Agents
46
For the purpose of effecting delivery of gold and silver, every member will
be entitled to appoint a maximum number of two Clearing Agents, who will
be entitled to receive and deliver precious metals on behalf of such member
6.1.11 Intimation about clearing agents

By 5.00 pm on the 2nd day of tender period, the member will be required to
forward name of the Clearing agent, who will visit Group 4 Securities office
for giving or lifting delivery.
6.1.12 Delivery
The seller will be required to deliver gold at Group 4 securities facilities at
specified centers. Such specified centers are Mumbai and Ahmedabad. The
seller has to submit the delivery along with bill made in favor of individual
buyers.
6.1.13 Non-performance by the seller

In case a seller who has submitted tender notice fails to deliver gold on 6th
working day as per schedule stated above, the contract will be closed out as
per the Due Date Rate and a penalty of 1% will be imposed on him, out of
which 90 % will be paid to the buyer, while 10% will be appropriated by the
Exchange
6.1.14 Tolerance Limit

In respect of gold, there will be no tolerance in respect of weight. It must be
imported gold bar of 1 Kg weight.
6.1.15 Quality adjustment
47
The price of gold is on the basis of 995 purity. In case a seller delivers 999
purity, he would get a premium. In such case, the sale proceeds will be
calculated by way of delivery order rate * 999/ 995.
6.2 Banking Requirements of MCX members

Since its inception MCX has grown steadily both in terms of the number of
members as well as the quantum of business transacted through it everyday,
currently the MCX has around 920+ Members and 4500+ workstations
across the country and the daily volumes on the exchange is averaging more
than Rs. 1000 crores. MCX members have a variety of banking requirements
ranging from maintaining a clearing and settlement account for MCX trades
to Bank guarantee facility to meet the daily margin requirements.
Though the SBI group has around 30% stake in MCX only 3% of the MCX
members bank with SBI, the main reasons for this is that SBI has not
developed any product keeping the requirements of MCX members into
focus. Thus the 3% of the members that currently bank with us are basically
using Bank’s existing products to meet their requirements.
Also the terms and conditions offered by SBI is completely out of sync with
the current trends and hence do not attract more MCX members towards
Banking with us.
48
Given the sizable business potential possible from MCX members we

recommend introducing 3 products specially targeting the MCX members.
These products are: -
- Clearing and settlement accounts
- Bank Guarantee for Margin requirements
- Financing Members for Delivery of Physical Commodities at
MCX
We expect that introducing the above products will help the SBI attract more
MCX members to bank with it.
6.3 Clearing and settlement accounts for MCX members

MCX members need to maintain a clearing and settlement account with one
of the banks to settle the margin requirements of all its MCX trades.
We have identified many of the existing members and their sub brokers who
are banking with other banks wish to migrate to our Bank for their
transactions with MCX. There is a good scope for attracting current accounts
and other related new businesses from these Members / Sub brokers.
MCX has appointed our Mumbai Main Branch, M.S. Marg, as their Clearing
Bankers. The clearing arrangement envisages opening of principal account
titled MCX Settlement Account at Mumbai Main Branch. The members’
accounts are opened at different up country branches and their settlement
account is opened at Mumbai Main branch through which MCX and
members settle their trade.
49
MCX will have the authority (backed by suitable Undertaking / Power of

attorney from the Members) to operate / withdraw funds from the Member’s
“Settlement Account” as and when required. The Settlement Account of the
Members would not be available for any other use by the Members except
for transferring surpluses to the respective Client’s (their own) Accounts at
the upcountry branches. Required margins are funded by the Members
through transfer of funds from their Client Accounts to their Settlements
Accounts with Mumbai Branch. Similarly surplus margins are remitted back
to the clients account from settlement account with Mumbai Main Branch.
In view of the foregoing and available business opportunities all the

Branches have been advised to open Current Accounts as and when
approached by the Members of MCX, observing ‘KYC’ norms.
Simultaneously branches should forward one more set of KYC compliant

account opening forms, with necessary backup documentation for opening of
the Member’s ‘Settlement Account” at the Mumbai Main Branch.
6.4 Bank Guarantee for Margin requirements

Multi Commodity Exchange of INDIA Ltd requires its members to deposit
and maintain in their accounts a certain minimum amount of funds for each
open position held. These funds are known as “Margin” and represent a good
faith deposit that serves to provide protection against losses in the market.
The Clearinghouse collects margins directly from each of MCX clearing
members who in turn are responsible for the collection of funds from their
clients. The different types of margins are
50
• Initial Margin – Typically 3-10 % of the contract size depending on the

commodity
• Variation Margin – This margin is collected to avoid any adverse
movement in the commodity prices as per the exchange rules.
• Delivery Margin – This is the Margin required during the delivery
period of the contract and is typically 20-25% of the contract size.
Members of the Exchange can deposit initial margin in cash or may furnish
Fixed deposit or bank guarantees or such other instruments as may be
specified by the Exchange from time to time to fulfill the initial margin
requirement in respect of open positions. Variation margin shall be paid only
in cash or cheque, or by electronically debiting the account of the member of
the exchange with the designated Clearing bank of the Exchange.
6.4.1 The Potential

The total volume of trade on the MCX for the month of April’2005 was Rs
26493 Crores. Taking a modest average Initial margin of 4 %, the total Initial
Margin requirement of the Members of the MCX for the month April’2005
stands at Rs.1060 crores. Hence the potential of Bank Guarantee requirement
of the MCX members has already crossed Rs 1000 crore a month mark, of
these even if we take 25% to be provided in the form of Bank Guarantees by
our branches, the market potential for Bank guarantees business for MCX
Members will stand at Rs 250 Crore a month.
51
This level of business opportunity is big enough for us to venture into this
business, since the current exposure to this business is a paltry Rs. 2 crore.
6.4.2 The Product

For the proposed product, a one-time credit assessment of the member needs
to be carried out by the bank to determine the extent of Bank Guarantees that
can be sanctioned to the member. During this assessment the member will be
rated on various parameters and depending on his score in the Risk Rating
Matrix he may be assigned a suitable Credit Limit.
Also at the time of this assessment the following documents should be

demanded from the members
• Provisional financials for the current financial year - Balance Sheet /

P&L Account/all Schedules
• Audited Balance Sheet / P&L statements with all schedules / audit
report for the previous accounting year.
• Brief profile of the Member / Company - Back ground /Years in
business/ Group Co. details etc
• Brief profile of directors - Name, Age, Qualification, Experience,
Directorships in other companies etc
• Latest Net worth Certificate (as certified by CA) & copy of IT returns
of two major shareholders
• Latest Shareholding pattern of the company
• Latest margin statement of MCX - Details of capital with exchange -
Cash/ Fixed Deposit /Guarantee
52
• Business Plan, covering details of their existing business model - like

business mix, viz., Proprietary, Retail, Corporate, Approximate
Number of registered clients, risk management, exposure management
etc
• Details of existing banking arrangements.
• Bank Guarantees / Other Credit facilities enjoyed from banking
system (other banks)
• Settlement volumes (MTM pay-in/pay-out for last 30-50
settlements)
• Month-wise turnover for last six months
• Status report from MCX
• Certified true copy of MCX Membership Certificate
6.5 Credit assessment of the members
All the MCX members interested in availing of the bank guarantee facility
need to be assessed for their credit worthiness, depending on which
appropriate limits can be sanctioned to each of them.
To facilitate the process of Credit Assessment a Risk Rating Matrix needs to

be developed with important parameters given adequate weightages so that
the result of the matrix decides the limit that should be allotted to a particular
member
Some of the Parameters that can be used are:
53
• Type of Membership of the member – There are three types of

membership of MCX, thus better the membership better should be
the credit standing of the member.
• Size of Business – This can be determined using the number of Sub-
Brokers and other clients of the member.
• Balance sheet analyses of the member for the last 3 years (if
available)
• Assessment of the business model of the member.
• Previous Credit Standing
These are just few of the points we need to consider for the Risk Rating
Matrix. The development of the Risk Rating Matrix was out of the scope of
this project.
6.6 Financing Members for Delivery of Physical Commodities

at MCX
This is yet another new Business opportunity from MCX. Around 3-5% of
the trades on MCX result in Physical Delivery of the commodity on the
expiry of the contracts.
6.6.1 Warehousing at MCX

The exchange has accredited warehouses in various states depending on the
availability of the commodity. For Rubber Cochin is the center while for
soyabean is Indore. The delivery takes place through a warehouse. The seller
will deposit the commodity with the warehouse on or before the pay-in date.
The warehouse will check it for the quality specification. If the quality of the
54
commodity is upto the specification agreed on, it would accept the material
and issue a warehousing receipt. The warehousing receipt will be transferred
in the name of buyer once buyer pays the money. The buyer will then collect
the material on the production of the receipt.
There can be dispute on the basis of quality and quantity of commodity. Bank
will not be responsible for the
6.7 Delivery Mechanism at MCX

MCX has three types of delivery contracts:
• Sellers Option: Only seller has the option to decide about delivery
• Compulsory Delivery: Gold and Silver
• Both options (Cash Settled)
MCX contracts are launched on 16th of every month and expire on 15th of
next month. The delivery period starts from 1st of every month. During this
period the seller or buyer can give his / her intention to give or take delivery.
MCX will match the intentions to arrive at the delivery positions. Once the
delivery is assigned to a buyer he cannot square off his position, otherwise
but through delivery.
6.7.1 Matching of Delivery
In MCX the delivery matching happens before the expiry date. 3-5 days
before expiry the tendering period starts whereby the sellers’ intentions are
matched with the buyers intentions and deliveries are assigned. If a delivery
is allocated to a buyer and he intends to take delivery, he is required to make
55
the payment within 2 working days of the allocation of delivery. SBI can
come in here and finance the payment requirements of the buyer.
1 – MCX Member indicates his willingness to take delivery of the

commodity
2 – MCX seeks the payment requirement from SBI.
3 – SBI makes the payment to MCX.
4 – MCX endorses the Warehouse receipt in favor of SBI
5 – MCX member makes payment to SBI
6 – SBI delivers the warehouse receipt to the MCX Member
56
Incase the MCX Member defaults SBI can make good of the loss by selling
the commodity backed by the warehouse receipt in the open market.
For the above product to be implemented a Tripartite agreement needs to be

inked between
• State Bank of India
• Multi commodity Exchange
• Member of MCX.
According to this agreement SBI will agree to honour the margin

requirement of the MCX member relating to delivery of commodities upto a
fixed limit that is specified separately for each of the MCX member
depending on his credit assessment.
MCX in turn will agree to endorse the Warehouse receipts financed by SBI
in favour of SBI and deliver it to SBI.
In addition to this MCX will also facilitate the liquidation of the warehouse
receipt in case of defaults.
A security margin of around 30-35 % of the value of the contract will be

required from the member and an interest rate of around 8-11 % will be
charged.
57
6.8 Potential
The total physical delivery from February 04 to December 04 is given in the

following table:
COMMODITY QUANTITY
Gold 397 kgs
Silver 14790 kgs.
Chana 630 tonnes.
Urad 75 tonnes.
Pepper 10 tonnes.
Given the above size of delivery there is good scope for our Bank to enter
this arena.
Also the bank is waiting for approval from the RBI for entering into
propriety positions in the commodities derivatives market.
As and when the product rolls out and the RBI grants approval for entering
into propriety positions by the banks, the Commodities desk at the
Treasury department should be ready to take up the responsibility
of recovering any principal that will be at risk due to defaults by
the bank’s customers.
58
Thereby resulting in better price recovery of the goods and resulting smaller
losses on account of NPA.
Chapter 7
CONCLUSION
59
CONCLUSION
Key Recommendations
Based on my study of the various products I recommend the following
changes
Warehouse Receipt Finance
• Downward revision in the interest rates currently charged as these are

not competitive.
• Downward revision in the security margin currently demanded as this
is against the market practice
• Increase in the warehouse wide limit for finance against W.R. of
Private warehouses.
• Advances against Warehouse receipts are classified as “Clean” and
does not accept the warehouse receipt endorsed in its favor as a
primary security. This methodology of the bank needs to be modified
and the warehouse receipt endorsed in its favor should be treated as
Primary Security.
• Mandating the branches to encourage customers to avail of the
Warehouse receipt finance even if they are not current customers of
the bank.
60
Warehouse Construction Finance
• Revision in interest rate that are currently charged

• Offering Comprehensive deal to Warehouse owners availing of
Warehouse Construction finance, whereby the receipts of the
warehouse whose construction is funded by SBI will be readily
financed, thereby increasing the business prospect of the venture and
reducing the probabilities of credit risk.
• Currently only 80% of the subsidy portion is funded by SBI
thereby increasing the owner’s contribution by another 5%. We
recommend financing 90% of the subsidy portion.
MCX Related Business
• I recommend introduction of the following new products specially

targeting the MCX members
- Clearing and settlement accounts
- Bank Guarantee for Margin requirements
- Financing Members for Delivery of Physical
Commodities at MCX
61
• I recommend using the existing Corporate Internet Banking Platform

for the above products and the bank need not wait for implementation
of the Core Banking Solution.
Considering the existing market conditions and the tremendous potential in

the commodities business as presented in the paper, I can certainly conclude
that State Bank of India, with its monumental size, and deepest reach in all
over India, can leverage its strength and capitalize the most to bring about an
enhancement in the commodities sector, as well as contribute towards the
overall agricultural development of the country.
India is a predominantly an agriculture dependent nation, and the

contribution made by State Bank of India in this sector, would lead to a boost
in the country’s Gross Domestic Product, finally leading to the nation’ s
economic enhancement.
To summarize it all, I can be certain enough to say that the steps taken by
State Bank of India would have a substantial impact of the future
Agricultural as well as economic progress of India
62
Annexure 1
Financing against CWC/SWC receipts

TERMS & CONDITIONS
a) To finance traders against the warehouse receipts of
commodities stored by them in CWC/SWC warehouses,
Purpose
& warehouse accredited by MCX by way of demand
loans.
Any trader dealing in commodities.
Eligibility
Demand Loan: 70 % of the value of the warehouse

receipt, valued at the market value OR
Eligible amount of
80% of the minimum support price declared by
finance
State/Central Government, whichever is lower.
Interest Rates (in

percentage) Interest Rate to be
Loan category
Charged
Upto Rs. 2,00,000 0.50% Below SBAR

Effectively 9.75%
Over Rs. 2,00,000 up to 0.25% Below SBAR
Rs.25,00,000 Effectively 10.00 %
63
Over Rs. 25 lacs based on

credit risk assessment 9.75% to 11%
In addition to the above-mentioned Interest rates the

ZCC & CCC will have powers to reduce the interest
rates on loans in the Rs. 2 lacs and above category by
upto 50 bp based on competition and strengths of
proposal.
Nil
Processing charges
30% (minimum) of the value of the warehouse receipt,

valued at the market value OR
Margin 20% (minimum) of the minimum support price declared
by State/Central Government, whichever is higher
Comprehensive Insurance
Insurance cost to be borne by the warehouse receipt
Insurance
owner.
Security
Charge over the deposited warehouse receipt, being
a) Primary endorsed in favour of the bank.
None
b) Collateral
64
Repayment The loan should be liquidated as and when the produce is

sold during the interim period not exceeding 12 months.
None. The loan would be repayable in a maximum

Moratorium period of twelve months. Interest as and when due would
be payable.
1) The Warehouse receipt should be duly endorsed in
the favour of the bank.
2) Depending on the type of commodity the Margin

may vary.
Other terms and 3) The branch should verify the authenticity of the
conditions warehouse receipt and get its lien noted with the
warehouse before disbursal of the loan.
4) The Branch should inspect the commodity before

disbursal takes place and subsequently, every three
months at irregular intervals.
65
Annexure 2
Financing against Warehouse receipts of Private Warehouses

TERMS & CONDITIONS
a) To finance traders against the warehouse receipts of
Purpose commodities stored by them in Private warehouses, by
way of demand loans.
Eligibility Any Trader dealing in Commodities.
Demand Loan: 60 % of the value of the warehouse
receipt, valued at the market value OR
Eligible amount of
70% of the minimum support price declared by State
finance
Government, whichever is lower.
Interest Rates (in Loan category Interest Rate Charged

percentage) Upto Rs. 2,00,000/- 1.00% Below SBAR
Effectively 9.25 %
Over Rs. 2,00,000/- upto
0.5% Below SBAR
Rs. 25 lacs
Effectively 9.75 %
Over Rs. 25 lacs 10.50% to 12.00%
In addition to the above-mentioned Interest rates, the

rates on loans in the Rs.25 lacs and above category by
upto 1%.
66
Processing charges Nil

40% (minimum) of the value of the warehouse receipt,
valued at the market value OR
Margin
30% (minimum) of the minimum support price declared
by State Government
Comprehensive Insurance with Bank’s interest duly
noted.
Insurance
Insurance cost to be borne by the warehouse receipt
owner.
Security
Charge over the deposited warehouse receipt, being
a) Primary endorsed in favor of the bank.
None
b) Collateral
The loan should be liquidated as and when the produce is

Repayment sold during the interim period not exceeding 12 months.
Other terms and a) The Warehouse receipt should be duly endorsed in

conditions the favor of the bank.
b) Depending on the type of commodity the Margin
may vary.
a) The branch should verify the authenticity of the

warehouse receipt before the disbursal of the loan. The
Bank’s charge should be duly noted with the
warehouse before disbursal
67
b) The commodity should be inspected before

disbursal of the loan and once every three months at
irregular intervals thereafter.
Annexure 3
Warehouse Construction Financing
TERMS & CONDITIONS
To finance construction of warehouses and cold storages.
Purpose
Any Trader dealing in Commodities.

Eligibility
Eligible amount of Term Loan: 75 % of the cost of construction of the
68
warehouse.
finance
Loan category Interest Rate Charged

Upto Rs. 5 lacs. 0.25% Below SBAR
Effectively 10.0 %
Over Rs. 5 lacs. upto Rs.
At SBAR
25 lacs
Effectively 10.25 %
Interest Rates (in
Over Rs. 25 lacs upto Rs.
percentage) 0.25% Above SBAR
1 crore.
Effectively 10.50 %
More than 1 crore upto 5 10.50 % - 12.00 %

crores. Depending on the Credit
assessment.
In addition to the above-mentioned Interest rates the

rates on loans in the 1 crore and above category by upto
1%.
Processing charges Nil
25 % of the value of the warehouse construction cost.
Margin
Comprehensive Insurance in the joint names of the

Insurance borrower & Bank.
Insurance cost to be borne by the warehouse constructor.
Security
First Charge over the Warehouse Constructed.
a) Primary
69
None
b) Collateral
The loan should be repaid in Equated Monthly

Repayment installments of upto 84 months.
Moratorium Six months
Annexure 4
Bank Guarantee for MCX Members
Term & Conditions
To meet different margin requirements for trade at
Purpose
commodity exchange
Members of the Multi Commodity Exchange of India
Eligibility
(MCX)
Eligible Depending on the credit assessment of the borrower
amount of not exceeding Rs 25 crores.
finance
Commission Commission to be charged @1.50%
Margin
At least 25% margin should be secured in cash, and
balance amount by other securities, so as to secure the
exposure However, in case of existing customers with
sound means and good track record, and based on
70
value of relationship, collateral security may be waived

at the discretion of the sanctioning authority.
0.25% of the Bank Guarantee amount, subject to a

Processing Fee
maximum of Rs.1 lac.
Other Terms & a) All the members interested in availing of this service
Conditions need to be assessed for their Credit Standing by the
respective Branches. In this process the following
documents should be asked for and scrutinised and
depending on the scores on these parameters in the
Risk Rating Matrix suitable Credit limit should be
fixed.
The required documents (indicative) are:
1) Provisional financials for the current financial
year - Balance Sheet / P&L Account/all Schedules
2) Audited Balance Sheet / P&L statements with all

schedules / audit report for the previous accounting
year.
3) Brief profile of the Member / Company - Back

ground /Years in business/ Group Co. details etc
4) Brief profile of directors - Name, Age,

Qualification, Experience, Directorships in other
companies etc
71
5) Latest Net worth Certificate (as certified by CA)

& copy of IT returns of two major shareholders
6) Latest Shareholding pattern of the company
7) Latest margin statement of MCX - Details of

capital with exchange - Cash/ Fixed Deposit
/Guarantee
8) Business Plan, covering details of their existing

business model - like business mix, viz., Proprietary,
Retail, Corporate, Approximate Number of
registered clients, risk management, exposure
management etc
9) Details of existing banking arrangements.
10) Bank Guarantees / Other Credit facilities

enjoyed from banking system (other banks)
11) Settlement volumes (MTM pay-in/pay-out for

last 30-50 settlements)
12) Month-wise turnover for last six months
13) Status report from MCX
72
14) Certified true copy of MCX Membership

Certificate
BIBLIOGRAPHY
MAGAZINES REFERRED:
• Capital Market
• Business World
• Dalal Street
• Business India
WEBSITES REFERRED:
• www.statebankofindia.com
• www.mcx.com
• www.cwc.com
73
• www.google.com
• www.soople.com
74

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Agriculture, the sector engaging about 70 of the Indian population, is proved

This has contrived the Indian Government to come up aggressively with

India is currently the largest producer of fruits and vegetables at about 44

In addition to these, the Government needs storage facilities in order to

The producers, processors, transporters as well as the people concerned with

• Functions of the warehouse

2.1 Functions of the Warehouse

2.1.1 Scientific Storage: A large quantity of the agricultural

2.1.2 Financing: Another need that a warehouse is expected to meet is

2.1.3 Price Stabilization: Warehouses also offer the facility to the

form of providing them with updated market information. They are

2.2 Warehousing in India

According to the report submitted by THE ALL INDIA RURAL CREDIT

• Establishment of NCDWB (National Co-operative Development and

2.3 Types of Warehouses

2.3.1 Types of Warehouses based upon the basis of ownership

2.3.2 Types of Warehouses based upon the basis of commodities

Types of Warehouses on the basis of the ownership

PRIVATE PUBLIC BONDED

Types of Warehouses on the basis of types of commodities stored

The Maharashtra State Agricultural Marketing Board undertook the first

Maharashtra State Agricultural Marketing Board also monitors the running of

2.4 Functions of National Co-operative Development and

To advance loans and grants to State Government for financing co-operative

To provide funds to warehousing corporations and the State Government for

2.5 Functions of Central Warehousing Corporation (CWC):

a) To acquire and build godowns and warehouses at the suitable places in

b) To run the warehouses for the storage of the agricultural produce,

c) To act as an agent of the Government for the purchase, sale, storage

The corporation has introduced a scheme called as “FARMERS”. This

• Features of Rural Godowns

The Government of India had launched a scheme for the establishment of

at the creation of a network of rural godowns in state and union territories,

1. Prevention of distress sale of food grains, other agricultural

3.1 Features of Rural Godowns

3.2 RURAL GODOWN SCHEME (Gramin Bhandaran

3.3 Credit Linked Assistance:

Subsidy under the scheme is linked to institution available only on such

3.4 Agriculture Produce Market Committee (APMC)

The Agriculture Produce Market Committees are the statutory bodies

1) Low capacity utilization of Cold Storage in certain areas mainly due to

2) Erratic power supply disrupting the working of the Cold Storages.

3) High Electricity bills, leading to reduction in profits.

4) Lack of transportation facilities.

5) Complicated and time-consuming procedure of depositing and

6) Selling of the produce by the producers at their doorstep in order to

7) Lack of regular business for the warehouses, as well as lack of grading

9) Pledge loan mostly not provided.

11) Time lags in the releasing of the subsidy amount.

COMMODITY BACKED FINANCINING

4.1 Existing Scenario

A sub-optimal credit support from formal banking sector had an adverse

Interestingly, unlike the Green revolution, the government would no longer

Commodity Futures would serve as a better barometer for consumer demand

The solution of this lies in Options. This is how it will work:

Presently, National Commodity and Derivative Exchange (NCDEX) is

In order to tackle these issues, NCMSL, an offshoot company of the National

Changes in the consumption pattern of selected foods over 1990 –

CEREALS VEGETABLES FRUITS MILK MEAT EGGS FISH

1990 159.9 53.4 28.2 53.9 4.6 1.2 3.8

2000 153.1 65.9 37.5 64.9 5.0 1.4 4.7

Annual -0.4 2.1 2.9 1.9 0.9 1.9 2.0