SEBI recently gave the nod for NCDEX and CDSL to launch commodity repository service. In an interview with BusinessLine , Samir Shah, MD & CEO of NCDEX, talks of the changes that will take place with the move.

With a commodity repository, the warehouse receipt will be more trusted and bring down borrowing costs for farmers, he adds.

The exchange is all set to launch its repository service and awaits the final go-ahead from the Warehousing Development and Regulatory Authority (WDRA). Excerpts from the interview:

What is going to change for farmers and other stakeholders in the agri value chain with a commodity repository?

For doubling farmer income, the area that has been ignored is marketing.

Everyone keeps talking of productivity, but we believe that the low hanging fruit is actually marketing.

Improved access to markets and finance, and those kind of things will have a bigger impact on the farmer and the repository will have its own role to play in this context.

A couple of things are likely to change with a commodity repository. One is that it is aimed at building trust in the instrument of warehouse receipt, which is not trusted much now. Hence, it has not developed very well and finance against that instrument has stagnated.

Since banks don’t trust the instrument, they appoint collateral managers. With the appointing of a collateral manager, the cost of lending increases and that defeats the purpose of having a warehouse receipt funding.

So, in general, the warehouse receipt as an instrument has not lived up to its promise and potential. If we can solve that problem, formal sector finance through the warehouse receipt to the farmer will increase substantially. This will solve a huge amount of problems, not just for the farmers but also for the traders.

The second change is that it will digitise the instrument as well, to make it demat.

When NSDL and CDSL came on the scene many years ago, it had a transitory effect on the securities market and the market grew manifold.

We believe that the repositories coming in will have a similar kind of effect on the commodity markets — one, by creating more trust in the instrument, two, by digitising the whole experience, which includes quick disbursement of loans.

Today, for instance, when a farmer takes a loan against a warehouse receipt, it might take three to four weeks from the time he deposits the goods, gets them to a warehouse, gets a warehouse receipt, the warehouse receipt actually gets funded and he gets money into his bank account. We like to bring this from three to four weeks to a few minutes.

If everything is digital and a farmer is identified, say, through Aadhaar, he gets identified in the system, and because there is no physical warehouse receipt, it can be instantaneously created, it can travel through the systems directly to a bank and the bank can look at it and say, ‘Ok, do I have all the information? If I have all the information, then I disburse the loan in minutes.’ So, the idea is to make the process more efficient and to create more trust in the instrument.

The one major difference between equities and commodities that will make the repository job difficult is the quality difference in agri produce. So, how is that challenge going to be addressed by a repository?

That’s where NCDEX’s experience comes into play. We have been running an electronic accounting system inside NCDEX since December 2013 when we launched Comtrack and did away with physical, paper-based warehouse receipts for the NCDEX ecosystem.

So we know how to handle quality, we know the quality issues — how produce deteriorates and how it needs to be processed and captured in the system, how much of tolerance needs to be given, and so on. We do it day in and day out and we do about 75,000 to a lakh tonnes of delivery every month through electronic accounting, through Comtrack.

We have done it quite successfully for our ecosystem; what we are trying to do now is to take it to the broader market.

Will quality testing be given to third-party assayers?

It will be done by third-party assayers. Even in the exchange ecosystem, the exchange doesn’t do the assaying, we take responsibility for assaying, but we are not the ones who do it.

We have a panel of independent assayers that we have empanelled and the quality gets assayed and certified by these assayers.

NCDEX has demonstrated the way of solving the quality issues for its own ecosystem. Our ecosystem is a limited ecosystem, but the principles have been learnt and adopted and now, through the repository, we are trying to apply that to the wider market.

There are more than a lakh warehouses in the country of which NCDEX uses 400.

So, we are a drop in the ocean, in terms of capacity. India has 110 million tonnes of warehousing capacity of which NCDEX’s is two million tonnes. So, we are 2 per cent of the total capacity but this 2 per cent has shown how to crack this problem.

We want to take the learning of this 2 per cent and apply to the remaining 98 per cent through the repository.

The idea of the repository is to help farmers reach out to the one lakh odd warehouses, reach out to the 110 million tonnes of warehouse capacity that is there in the country and bring about a certain amount of transparency, robustness and credibility in the whole ecosystem.

Will the repository bring about a reduction in borrowing costs for the farmer?

Yes, certainly. Banks are now reluctant to lend to farmers on warehouse receipts. So they appoint collateral managers, who charge the bank 1 per cent, and the bank obviously adds that cost and gives it to the borrower, who is the farmer eventually. There are a bunch of costs that are getting layered on to the farmer which make it difficult for the farmer to use this avenue of financing. If this warehouse receipt becomes a credible instrument, and the banks eventually say, ‘Okay we trust this instrument’ it is captured in a demat form in the repository and we are going to lend more.

We are going to give it priority sector status and a whole bunch of things will happen and the cost of borrowing will come down significantly.

But there is also the other risk of price volatility in the period the stock is in the warehouse. How will that be handled?

There are two risks — one is the risk of the instrument itself, which will get taken care of through the repository; then there is the price risk.

For the price risk, our proposition is for the farmers, through the FPOs (farmer producer organisations) or directly if they are large enough, to come on the exchange.

This has happened significantly over the last year-and-a-half by getting farmers to participate and hedge on the exchange.

In the last 12-18 months, 45,000 farmers have actually hedged on the exchange, and benefited significantly in terms of price realisation.

So, we are in the stage where we have proven the concept, and we now want to scale it.

We are now tying up with partners like Nabard, IFFCO, some NGOs, and working with Central and State government bodies to see how we can scale this initiative.

The idea is that farmers should store their goods in a warehouse, take a warehouse receipt, get finance against that receipt, and immediately hedge that on the exchange or sell it if they find the price valuable.

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