Warehouse Receipt Financing in Cotton by: Mr. B.S. Sivakumar, Executive VP & Business Head – Agri Business Group

Overview of Cotton Sector Need for Warehouse Receipt Finance Enablers for WRF Kotak Bank’s Model of WRF

Overview of Cotton Sector Need for Warehouse Receipt Finance Enablers for WRF Kotak Bank’s Model of WRF

Contribution of Cotton to Economy Produced in 130 countries & traded in as many as 170 countries India is the 2 nd largest producer after China Largest employer in India Estimated labor force directly involved in production in the world is more than 100 mn

Positive Cotton Scenario Estimated output is 322 lakh bales in the year Yield per hectare is also estimated to increase from 472 KGs in 2005 to 591 KGs in 2009

Funds Utilization Pattern Ginning Price movement & seasonality MonthsJanFebMarAprMayJunJulAugSepOctNovDec USASowingGrowthHarvest ChinaSowingGrowthHarvest PakSowingGrowthHarvest IndiaHarvestSowingGrowthHarvest JanFebMarAprMayJunJulAugSepOctNovDec Off Season Stocking period

Overview of Cotton Sector Need for Warehouse Receipt Finance Enablers for WRF Kotak Bank’s Model of WRF

What is the need for WRF for cotton industry? Leverage the strength of stocks by using it as primary collateral Risk is de-linked from balance sheet to underlying commodity Structured pricing (interest rate) is more attractive than normal WC or STL Finance available in tranches aligned with stock build-up schedule Repayment schedule aligned with actual usage Better price discovery for the borrower as well as main link in the value chain – the farmer

Benefits for the Bank As opposed to standard credit facilities where exposure is on the balance sheet WRF helps:  Externalize the credit risk  Commoditize the transaction  Exposure on balance sheet is de-linked  Relevant even to new entities without track records Win-win situation for borrower & lender as well as the farmer

Overview of Cotton Sector Need for Warehouse Receipt Finance Enablers for WRF Kotak Bank’s Model of WRF

Enablers for WRF Legal Status of WR  Negotiability of WR  Credibility of WR (especially issued by private warehouses to be enhanced)  Secure electronic WRs Storage Infrastructure  Accreditation & acceptability of warehouses Counter party risk on warehouse  Registration / permission for private warehouses  Regular inspection & quality monitoring by independent body

Enablers for WRF Quality Control  Credible mechanism to grade, measure / weigh  Standardization of quality & quantity of stocks during storage Market Information  Availability of real time information on commodity prices, crop forecasting  Dissemination of information to stakeholders  Price risk management

Enablers for WRF Protecting rights of stakeholders  Performance guarantees  Reliable insurance cover in the event of property or stock damage  Lien marking & control of stocks  Exit/liquidation guidelines Public Private Partnership  Private management of infra such as warehouses  Funds to private parties for development of public infrastructure

Constraints for Cotton WRF Limited availability of large warehouses suitable for cotton warehousing Shelf life of cotton ranges from 6 months to 1 year  Quality degradation with yellowing of cotton bales Lack of sufficient local infrastructure to ascertain quality of cotton bales & staple length  Requires lab testing that may delay funding after delivery

Opportunities Exist too… Price fluctuation  20% price variation within a year. Quality of cotton  Production of long staple cotton has increased from 39% in 2005 to 77% in 2008  Reduced chances of mixing staple lengths in the bales Funding opportunity based on underlying commodity  Consolidation of ginners has not resulted in improvement in balance sheet  Easier to avail WRF on basis of cotton stocks  Mills have only exploited the WRF facilities to a limited extent

Overview of Cotton Sector Need for Warehouse Receipt Finance Enablers for WRF Kotak Bank’s Model of WRF

Kotak Bank’s Model Borrower CM Sales / Credit Monitoring Kotak Bank 2.CMA checks quality & quantity of stock. 3. Disbursement document set faxed /couriered by RM 4. Kotak Bank on receipt of the same Transfer fund to the borrowers account. 1.Traders/Farmers deposit commodity in Kotak approved warehouse in consultation with RM

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Demat Warehouse Receipts Limitations of physical WRs  Risk of forgery / loss / theft  Handling physical certificates Benefits of Demat WRs  Convenience in pledge - benefit to producers, warehouses & banks  Convenient settlement on commodity exchanges  Risks of using paper avoided However the cost of dematting and the additional warehousing costs of a dematerialised commodity is deterrent for the product.