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
•
Estimated labor force directly involved in production in the world is more than 100 mn
• Produced in 130 countries & traded in
as many as 170 countries
• India is the
China
2nd
largest producer after
• Largest employer in India
State
Gujarat
Maharashtra
AP
Punjab
MP
Haryana
Loose lint
Rajasthan
Karnataka
Tamil Nadu
Others
GRAND TOTAL
% Production
36%
20%
15%
7%
7%
5%
4%
3%
3%
2%
1%
100%
Positive Cotton Scenario
World Cotton Production
• Estimated output is 322 lakh
bales in the year 2008-09
• Yield per hectare is also
estimated to increase from 472
KGs in 2005 to 591 KGs in 2009
Millions of 480 lb Bales
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
2005
China
Production
US
2008
Pakistan
Others
600
300
250
Kgs Per Hectare
Lakh Bales
India
2007
Yield
350
200
150
100
500
400
300
200
100
50
0
2006
2005
2006
2007
2008
2009
0
2005
2006
2007
2008
2009
2009*
85
80
75
Prices
70
65
Price movement &
seasonality
60
55
50
45
40
Aug
Sep
Oct
Nov
2004-05
Months
Jan
Feb
USA
China
Dec
Feb
2005-06
Mar
Apr
2006-07
Mar
Apr
Sowing
May
Jul
Aug
Growth
Oct
Nov
Dec
Harvest
Growth
Sowing
Stocking period
Mar
Sep
Harvest
Growth
Harvest
Feb
Jul
Jun
Sowing
Jan
Jun
2007-08
May
Sowing
Pak
India
Jan
Harvest
Growth
Harvest
Funds Utilization Pattern
Apr
May
Jun
Jul
Aug
Sep
Off Season
Ginning
Oct
Nov
Dec
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
1.Traders/Farmers deposit
commodity in Kotak approved
warehouse in consultation with
RM
Borrower
4. Kotak
Bank on
receipt of
the same
Transfer
fund to the
borrowers
account.
CM
Kotak Bank
Sales / Credit
Monitoring
3. Disbursement document set
faxed /couriered by RM
2.CMA
checks
quality &
quantity of
stock.
THANK YOU
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.