Warehouse Receipt Financing in Cotton by: Mr. B.S. Sivakumar, Executive VP & Business Head – Agri Business Group

Warehouse Receipt Financing in Cotton

by:

Mr. B.S. Sivakumar, Executive VP &Business Head – Agri Business Group

Overview of Cotton SectorOverview of Cotton Sector

Need for Warehouse Receipt FinanceNeed for Warehouse Receipt Finance

Enablers for WRFEnablers for WRF

Kotak Bank’s Model of WRFKotak Bank’s Model of WRF





Contribution of Cotton to Economy

• Produced in 130 countries & traded in as many as 170 countries

• India is the 2nd largest producer after China

• Largest employer in India

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

State % ProductionGujarat 36%Maharashtra 20%AP 15%Punjab 7%MP 7%Haryana 5%Loose lint 4%Rajasthan 3%Karnataka 3%Tamil Nadu 2%Others 1%GRAND TOTAL 100%

Positive Cotton Scenario

0

50

100

150

200

250

300

350

Lak

h B

ales

2005 2006 2007 2008 2009

Production

0

100

200

300

400

500

600K

gs P

er H

ecta

re

2005 2006 2007 2008 2009

Yield

• 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

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

Million

s of

480

lb B

ales

2005 2006 2007 2008 2009*

World Cotton Production

China India US Pakistan Others

40

45

50

55

60

65

70

75

80

85

Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul

Pri

ces

2004-05 2005-06 2006-07 2007-08

Funds Utilization Pattern Ginning

Price movement & seasonality

Months

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

USA Sowing Growth Harvest

China Sowing Growth Harvest

Pak Sowing Growth Harvest

India Harvest Sowing Growth Harvest

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Off Season

Stocking period


Need for Warehouse Receipt FinanceNeed for Warehouse Receipt FinanceEnablers for WRFEnablers for WRF


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

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





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

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

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

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

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





Kotak Bank’s Model

Borrower

CM

Sales / Credit

Monitoring

Kotak Bank

2.CMA checks

quality & quantity of stock.

3. Disbursement document set faxed /couriered by RM

4. Kotak Bank on

receipt of the same Transfer fund to

the borrower

s account.

1.Traders/Farmers deposit commodity in Kotak

approved warehouse in consultation with RM

THANK YOU

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.

Documents

Warehouse Receipt Financing in Cotton by: Mr. B.S. Sivakumar, Executive VP & Business Head – Agri Business Group