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Managing thousands of tonnes of wheat, rice and pulses is a complex but lucrative business. As a commodity boom takes root in the country and the futures market gradually develops, demand is increasing for collateral management or managing large stocks of grains and pulses and other agri-commodities. Now, India’s largest private commercial bank, ICICI Bank, is eyeing that business.
ICICI Bank is planning to set up an independent collateral management company, according to sources. While an official spokesperson of ICICI Bank denied that any such move is afoot, three officials in the group, on condition of anonymity, independently confirmed to BW that they were aware of the plan.
Currently, there are two companies that are engaged in the business — National Collateral Management Services (NCMSL), promoted by the National Commodities and Derivatives Exchange (NCDEX); and National Bulk Handling Corporation (NBHC), promoted by Financial Technologies, which is also the promoter of Multi-Commodity Exchange (MCX). Several banks hold stakes in both the companies.
ICICI Bank earlier had an indirect interest in NCMSL through its shareholding in NCDEX, an electronic multi-commodity exchange it helped promote with a few other banks. It gradually sold off all its shares in the exchange. Last year, it sold a 7 per cent stake in the unlisted NCDEX to Goldman Sachs. It sold its remaining 8 per cent holding to Intercontinental Exchange, which trades energy derivatives.
Collateral managers set up or lease warehouses where farmers and traders can store produce for which they get an acknowledgement specifying the quantity and grade of the commodity. The acknowledgement or a warehouse receipt is an assurance that a certain amount of a particular commodity of a certain standard is in the custody of the warehouse manager and can be traded or pledged to raise loans. Warehouse receipt (WR) financing, where banks lend money against the collateral acknowledged in the WRs, is a nascent, albeit fast-growing business. ICICI Bank itself has a significant WR finance portfolio. Media reports have pegged it at about Rs 1,600 crore, though it could not be independently ascertained.
In 2006, the bank had burnt its fingers when it was hit by a fraud and is estimated to have lost about Rs 200 crore. It had made a provision of Rs 93 crore in that year anticipating that it would not be able to recoup all the losses. It had discontinued the business for a while but restarted last year with tighter controls and processes.
Collateral management is a tricky business because most agri-commodities are perishable and have to be stored well. The warehouse receipt is a guarantee of the quantity as well as quality of the goods stored in the godowns. The electronic commodity derivatives exchanges are new in India and their credibility rests on being able to deliver goods of quality and quantity standards promised in contracts. That depends on the quality, security and efficient management of warehouses.
(Businessworld issue 29 April-05 May 2008)