Warehouse Receipt and Collateral Management

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Information about Warehouse Receipt and Collateral Management
Education

Published on February 19, 2014

Author: dearasthana

Source: slideshare.net

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This slide will teach you about the collateral management and warehouse receipt.

WAREHOUSING AND COLLATERAL MANAGEMENT Dr. A. K. Asthana Director Institute of Cooperative Management, Bhopal, India dearasthana@gmail.com 1

• Production of most of agriculture goods is seasonal though their consumption is through out the year. • This phenomenon lead to necessity of warehouse and warehousing • for physical storage of goods from time of production to time of final consumption. 2

• Certain development in India • WTO, Food Security Act 2013, 100% FDI in retail sector and passage of WDRA Act 2007, emphasis of bank loan to agriculture sector under priority sector scheme give importance to warehouse and warehousing. 3

Warehouse • Warehouse is a physical location to receive the produce from point of production in bulk with facility to break down bulk material, reassemble into combination according to particular order and transport to the point of final consumption center. 4

• Warehouse is scientifically designed structure to protect the quality and quantity of goods stored. 5

Warehousing • Warehousing is defined as combination of multiple functions that involves responsibility of safeguarding the quality and quantity of goods stored. • Warehousing involves the technique like use of chemicals, fumigation, sunlight and aeration to protect the goods from damage 6

• . involves technical aspect related designing safe and sound structure. • It also involves record keeping of goods while receiving inside warehouse and at time of delivery from the warehouse. 7

Function of Warehouse • Receive the produce/material • Store them properly ( stacking, space between two stack, height of stack, use of plate in the ground) • Protect the goods from damage, pilferage and deterioration in quality 8

• • • • • Mixing and repacking the material Delivery of goods to right place Arranging transportation Keep of record of receipt and despatch Arranging finance ( pledge finance/Finance on NWR) • Price stabilization and market intelligence 9

Classification of Warehouse a. General warehouse for storage of any type of goods b. Special Commodity for storage of speical goods like wool cotton spices, petroleum product c. Cold storage: for fruit and vegetable at specific temperature 10

On the basis of Ownership a. Private warehouse: owned byprivate person, exporters, big business houses, for keeping own goods , rental basis also, 18 million tones capacity b. Public warehouse: Owned by govt or public sector like Food Corporation of India ( capaicty 32 million tones), Central Warehouse Corporation ( capacity 10 million tones 11

c. Cooperative warehouse: Owned by state cooperative marketing federation and primary cooperative marketing societes ( capacity 15 million tones) • Bonded warehouse: Owned by Custom house , located nea sea port or air port, goods stored till custom clearance 12

Warehouse Receipt • a document to state the ownership of the goods • warrant issued by warehouse to a person who deposits his goods • document of title of goods as per the Sale of Goods Act, 1930. 13

Element of Warehouse receipt • Warehouse receipt Serial number • Name of warehouse and its location license number • Date of issue of receipt and duration of storage • Name of commodity, its quantity, quality and grading And standarization 14

• • • • • Private mark of depositor on goods Rate of storage and Other charges Approximate value of goods stored. Insurance Details Whether warehouse receipt is negotiable or non-negotiable 15

• Shelf life of goods • Signature of warehouseman or his authorised agent 16

Type of Warehouse receipts • Non-negotiable warehouse receipt • Negotiable warehouse receipt 17

• Non-negotiability of warehouse receipt • means warehouse receipt cannot be transfer from one person to another person by endorsement • can not be transferred between member of commodity trade • depositor of goods is entitled to take delivery of the goods. 18

• arrangement was not conducive for development of agri-business and future trading of commodity. 19

• Negotiable warehouse receipt • initiative for making warehouse receipt negotiable came when Govt introduced Warehousing development and Regulation bill 2005 • Warehousing development and regulation Act was passed in 2007 20

• goods covered by a negotiable warehouses receipt can be transferred by an endorsement • person to whom warehouse receipt is endorsed acquires a title to the goods • 115 agriculture commodity and 26 horticulture commodity has been notified for issuance of negotiable warehouse receipt. 21

• Warehouse registered with Warehousing Development and Regulation Authority can issue NWR • At end of March 2013, 332 warehouses can issue negotiable warehouse receipt. Warehouse receipt is secured document. It is printed in the security press of Govt of India. 22

• Warehouse receipt reflect the value of commodity deposited at market rate • This make warehouse receipt a tradable warrant or instrument. • So it can be used to raise loan from the bank. 23

• Different banks have different guideline for providing loan against warehouse receipt. • Amount of loan depends on the nature of commodity, its market price and minimum support price. Interest charge also depends on the norms of particular bank for particular commodity. 24

Financing System on Warehouse • Two type of financing system in the bank: • Hypothecation/Pledge of Goods • Warehouse Receipt System: 25

• Hypothecation/Pledge of Goods • system is prevalent for small and private warehouse where the entire warehouse is occupied with commodity belonging to single entity. • commodity of warehouse is pledged/hypothecated as security for taking loan. Once load repaid , owner take possesion 26

• Storage Receipt • closely associated with pledge financing. • method of finance for private godown or private license warehouse. • receipts are issued by collateral manager of an agency known to the bank 27

• bank give load to depositor only if the collateral manager approves the stock through the storage receipt. 28

Warehouse Receipt System: • warehouse man of licensed warehouse or accredited warehouse issue warehouse receipt. • warehouse receipt become the basis for giving loan by the banks 29

• Depositor endorsed this warehouse receipt in favour of bank and take loan against the commodity. • Once bank received loan from the buyer, commodity can be released. • ----- 30

Collateral Management and Its Functions • In banking parlance, collateral means security. • In case of warehouse based financing, collateral is commodity stored in the warehouse. 31

• Collateral is the only security which provide protection against the financing done by the financial institution in case warehouse finance. • So apart from maintaining the quantity and quality of collateral, collateral management also involves mitigation of risk associated with price fluctuation of commodity. 32

• collateral management deals with the following 1 Storage and preservation of commodity Scientific storage and preservation is first step towards maintaining the quality and quantity of collateral. 2 Testing and Certification Timely testing of collateral helps to identify the quality related problems and mitigating them 33

3 Market Intelligence for Price Risk Management • Collateral in the warehouse is subjected to market risk due to price fluctuation • needed to develop a model for price prediction. • model includes input of spot market price, future market price, arrival of commodity in market and market trends. 34

4 Price Risk Hedging Price risk associated with collateral due to price fluctuation is minimized by participating in future market. using suitable derivatives like hedging. 5 Developing Market Linkage Fixing buying and selling arrangement between buyers and sellers is also useful technique to protect the collateral from sudden price fall. 35

6 Insurance 7 Stock documentation and Information Repository Collateral management also insure efficient and risk free physical delivery of the commodity ----- 36

• Now warehouses are linked with commodity exchanges like NMCE, NCDEX, MCX, ICEX etc. • Specialised collateral management agency like National Bulk Handling Corporation Ltd. (NHBC) and National Collateral Management Service Limited(NCMSL) provide these services. • ----- 37

Dematerialisation of Warehouse receipt and Linkage with Future Trading Physical form of warehouse receipt has following disadvantage 1. Chances of theft and mutilation 2. Chances of forgery 3. Difficulty in splitting the quantity mentioned in WR If depositor wants to disposed off part of commodity then he had difficulty. 38

4 . Difficult in transferring if the transferor and transferee are two different location Future contracts are settled in exchange either in cash or in physical delivery In case future contract is settled in physical delivery, then clearing house will receive warehouse receipt from the seller and will handover to the buyer after settlement of payment 39

• In case of national level commodity exchange buyer and seller operates from different geographical location so warehouse receipt need to be delivered from one geographical location to another geographical location causing cost and inefficiency in the system. 40

• When warehouse was linked with commodity exchange, then delivery of commodity with efficiency became important. • Concept of dematerialisation of warehouse receipt was developed to support settlement of trade on exchange and efficient physical delivery of commodity. 41

• For this purpose the warehouse receipt was converted into electronic form and kept in depository. NSDL and CDSL two depository participants • The same is transacted online without signature. This overcomes the limitation of physical warehouse receipt. 42

• Now in India future market of commodity specially agriculture commodity is well established. • During 2011 – 12 volume of future trading of agriculture commodity was around 5000 lakh tones and value was Rs 22 lakh crore. 43

• Multi Commodity Exchange (MCX), National Commodity and Derivatives Exchange Ltd (NCDEX), National Multi Commodity Exchange(NMCE), and Indian Commodity Exchange(ICEX) are some of the national level commodity exchanges who deals in commodities future including agriculture commodity future. 44

• For example, NSDL has agreement with NCDEX and MCX for transaction of dematerialized warehouse receipt. Dematerialised warehouse receipt give impetus to linkage between warehouse and future trading of agriculture commodity 45

Dematerialised warehouse receipt has following advantage 1. Ease of settlement of trade 2. With good network of warehouses delivery can be made anywhere. This will encourage hedger to participate in the future market. 3. Better integration of spot market and future market increasing market efficiency 4. Better information on crop fundamental like stock position helps in stabilising market in volatility 46

Use of this Info for Extension Professional • Extension professional need to impress upon farmers that only good production of agriculture commodity will not fetch them better price. • Bumper harvesting creates another problem of warehousing, transportation and market linkage 47

• So farmers need to tackle post harvest problem like warehousing , future market, pledge finance, avoid distress sell, grading and standardisation of agriculture commodity. • Extension professional should guide the farmers 48

• There two type of market for their product, spot market and future market. • Not to sell in distress but take advantage of warehouses to store their goods till they find suitable price • What are the private, government and cooperative warehouse near their production centre 49

• How to take benefit of negotiable warehouse receipt • How to take finance on NWR • How to settle their sale when NWR is hypothecated in bank 50

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