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Management
Presentation to FICCI
New Delhi
17th July 2004
Agenda
z Current Status of
z Warehouse receipts
z Issues before Lenders
z Exchange physical settlements
z ‘Collateral Management’ concept
z Role and Functions of Collateral manager
z Risks and mitigants
Efficient commodity markets
z Multiple buyers and multiple sellers
z Price discovery platform
z Price dissemination
z Transparent clearing and reliable settlement
z Spot and Futures markets
z Commodity based credit
z Commodity based tradable warrants
z Policy environment
z Market information support
z Recognition of trader
z State as facilitator and regulator
z Stable and low interest rates
z No controls on stocking, movement and prices
z Legal framework
z Contractual rights of parties protected
z Facilitate trading in warehouse receipts
z Institutional framework
z Sound banking system
z Futures exchanges
z Price stability
z Network of warehouses
z Collateral Managers
Deposit commodities
Farmer/ Bank Finance
Farmer/Trader
Trader
Warehouse
Warehouse11
Warehouse
Deposit receipt
Coll
Collateral
ateralManager
Manager
commodities
Lender
Lender
22 33 44 55
Warehouse
receipt
Commodity
CommodityExchange
Exchange
Clients Vendors
Warehouses
Lenders Transporters
Logistics players
Commodity C & F agents
exchanges
Grading , assaying
Farmers & Certifying firms State
Traders Management
Collateral Warehouse
Accrediting Agency
Processors Procurement
Depository Agency Agencies
Distributors
z Bilateral arrangement
z No disposal plan
Risks and concerns for Lenders
z Lower credit rating of assets
z Larger capital adequacy
z Impaired assets – even where credit risk is not
the issue
z 90 day NPA norm makes the going tougher
z Curtailed credit flow for borrowers – especially
SME and Agro sectors
z Non fulfillment of sectoral lending
Present task of NCDEX in physical delivery
Specify/evolve commodity specific norms for
accrediting warehouses
z Financial soundness
Importers
Lender’s concerns addressed
z Price risk
z Hedge price risk on commodity exchanges
z Credit risk
z Collateral manager assist in effective credit risk
management and due diligence
z Operational/Performance risks
z Offloaded to the professional Collateral Manager
z Legal / litigation risks
z Reduced ; Collateral Manager ensures proper
documentation, adequate insurance cover etc.
Structured Commodity Based Financing
z Structured form of financing with the objective of
transferring risk from entity to a commodity
z Soya loans; CPO loans
z Secured exposure on borrowing entity wherein
security is commodity
Collateral
manager
Finance
Commodity
Lender can hedge his
price risk on NCDEX
Commodity risk
Lender
CBF will imply greater finance for the borrower and less risk to bank
Advantages of CBF + CM
Traders
z Access to markets and better infrastructure
Processors z Reliance on market mechanism-reduced
dependence on government
Distributors
z Better price, staying power and lower
Exporters borrowing costs
Importers
z Finance readily available at lower cost
z Larger level of operations
Collateral manager-benefits
Clients
z Improved supply chain
Lenders z Quality, quantity and weight checks
Commodity z Inventory / commodity based
exchanges
borrowing at better terms
Farmers
z Inbound and outbound logistics
Traders
support
Processors z Improved MIS - better inventory
management
Distributors
z Domestic and overseas logistics
Exporters
z Better coverage of insurable risks
Importers
Risks and mitigants for the Collateral
Manager
z Legal backing to accreditation
z Work with reputed rating agencies
z Negotiability of Warehouse receipts
z Law under drafting
z Electronic holding of balances
z Operational risk management in rating enhancement
structures
z Monitoring and inspection mechanism
z Pioneering concept- market acceptance
z Need for lenders and exchanges to expand business