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Ware house receipt financing as a means of financing the agricultural value chain. Its challenges and way forward

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Nairobi, 16th July, 2014. Presentation by Wangwe Richard (Agriculture Finance) on Day 2 of the Fin4Ag conference

Nairobi, 16th July, 2014. Presentation by Wangwe Richard (Agriculture Finance) on Day 2 of the Fin4Ag conference

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  • 1. Ware house receipt financing as a means of financing the agricultural value chain Its challenges and way forward Wangwe Richard Agriculture Finance
  • 2. 2 Simple Warehousing Ilustraion Farmer/TraderBank Quality Assaying of Commodity Pledging WH receipt WH Receipt Financing Third Party / Own Warehouse Appointment of Collateral Manager Deposit Commodity 1 6 2 3 4 5
  • 3. The Concept • System of establishing a market where participants in the grain trade are organized to perform their roles openly and transparently • A harmonized system of trade that is free and fair among the various actors along the entire value chain • Allows efficiency arising from recognized trading rules, use of contracts that are enforceable and arbitration
  • 4. 4 Warehousing in East Africa has Multiple Dimensions…  Post harvest liquidity & better price realisation for farmers.  A sine-qua-non for efficient commercial trade in agro-commodities.  Backbone to commodity exchange – Futures & Spot.  To boost Agro & food processing industry PRODUCE VALUE
  • 5. 5 Post harvest liquidity… A Major Challenge • Limited access to price & market information • Present agro produce marketing system is inefficient & fragmented • Warehouses, their management & receipts issued by them do not enjoy market confidence • Despite being one of the oldest lending products, warehouse receipt funding has been a “no-no” for banks • Higher margins & interest rates do not leave viable option for farmers
  • 6. 6 Commodity funding, Major Challenge and Inhibiting issues Warehouse Facilities •Unreliable performance of warehousemen - fraud & mismanagement • High charges levied to farmers/traders Warehouse Receipts (WR) • Negotiability of warehouse receipts •Non-uniformity of WRs •Electronic and •Manual Collateral Management Services • Responsibility not understood properly •Few quality service providers •Cost of services
  • 7. 7 Risk Management Issues • Price knowledge • Low offtake capacity due to lack of adequate working capital • Non-acceptance of WR: Tradability without physical delivery Commodity Related issues •Poor Quality Standards/Lack of standardization • Co-mingling / Fungibility risks • Unnecessarily Long Marketing Chain and Surpluses at harvest periods Other issues • Double-financing of stocks • Contract defaults •Mutual suspicion and distrust among players along the chain Commodity funding, Major Challenge and Inhibiting issues
  • 8. 8 The concept of Collateral Management Services and benefits to the Banking sector as a major enabler to Agriculture finance • “ Collateral ” as understood in Indian banking parlance is “secondary source of payment obligations” • “Collateral” in the present context is an asset / 3rd party commitment accepted by the Collateral Taker (Bank) to secure an obligation of the Collateral Provider • “Collateral Management (CM)” involves managing the collateral on behalf of the collateral taker. CM transactions are intended to protect against performance risk of counter party • Banks have traditionally been assets based lenders –with hardly any knowledge of asset financed • Reach of Banks, pvt. sector Banks in particular, coupled with lack of domain expertise • Banks, Public & Private, under pressure to expand agri credit portfolio, sound collateral management therefore to become major enabler
  • 9. 9 What Collateral Managers do ?.... • Identify various inherent and external risks associated with collateral and mitigate these risks with integrated risk management system • Audit , Accredit & Provide storage facilities for commodity funding • Quality and Quantity assurance for both lender and borrower, backs the same with guarantees and insurance • Arrange quality certification and quality protection services • Manage storage facilities adhering to operational standards for minimizing loss and risks • Provides services for total control on stock • In-bound and outbound logistics support • Advisory and Inventory Management services • Collateral status reporting on periodical basis • Facilitating disposal of collateral, as and when required End to end commodity management solutions & risk management practices targeted to minimize collateral risk and maximize returns to counter party
  • 10. 10 Warehousing Prerequisites • Collateral Manager with proven track record, adequate financial strength & domain knowledge • Storage facility audit to determine suitability for stored commodity • Quality and quantity determination for proper valuation • Leasing arrangement for legal management control over commodity • Proper lien noting • Proper documentation including secure warehouse receipt, insurance coverage , etc • Access , Security and administrative staff to establish control on pledged stock
  • 11. 11 Warehousing...Benefits • Lender • Very convenient and cost effective lending mechanism • More opportunities for expansion of lending portfolio with secure collateral for borrowers like millers , processors , exporters • Stock management by domain experts • Regular update on stock health & commodity care • Make free from any inclinations or prejudices about stock funding • Assurance of quality and quantity to ease the funding process
  • 12. 12 • Borrower • No service location limitations • No extra cost involved in logistics, warehousing & handling • Convenient and low cost solution for working capital • Collateral remain in assurance circle and remain fully usable • Credit without hassling production process at processing locations • No additional cost involved in reducing risk perception • Make free from administrative and transactional procedures Field Warehousing...Benefits
  • 13. 13 CM Arrangements with Banks • Collateral Manager responsibilities • Storage facility audit for structural integrity • Commodity quality testing and certification • Issuing warehouse receipt with commodity value and quality grade • Marking of pledge / lien • Risk Management of collateral • Collateral Manager’s liability • For anthropogenic damage CM is liable with provision for standard deduction • Stock management • Basic Risk Mitigation practices • Full stock value insurance and security arrangements • Know Your Customer (KYC) process as stipulated • Fidelity guarantee to cover employee related liability • Stock released only after delivery order from bank
  • 14. Some Issues Raised by Value-Chain Stakeholders • The role of regulators – in regulation and confidence building in the WRS – standards, performance bonds, insurance • Markets – how are the markets determined • Bulking centres – distance, sensitization, etc • Warehouse standards and collateral integrity – capacity, skill and integrity of the warehouse operator • Risk profile of the staple foods value chain – for the banks • Product-buy in by the Banks – based on the new WRS using electronic negotiable receipts • Valuation risks – banks concerned about how market volatility may affect the collateral value of stocks held • Market and price information – for the farmers and banks • Tariffs and other transactional costs – especially for the farmers and traders • Standards of the produce – produce buyers and regulators
  • 15. 15 Thank You Thank you page

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