Warehousing is a
bad word if you are a small or medium-rung trader in India. The chances
are that both you and the warehouse owner will be under the scanner
and checked repeatedly by banks and other agencies before being certified
for business. This is because the risk perception of the commodities
market across India has heightened following a scam that has made many
sit up and take notice, especially in Mumbai that is home to some of
the biggest exchanges.
Most of the warehouses
had undersized or substandard stocks. Yet receipts were issued
and loans sanctioned
largest bank ICICI Bank has already taken a hit on loans given against
warehouse receipts (WR) — a pledge security which acts as evidence
that a specific commodity is kept in a warehouse.
Sources told Tehelka
that the fraud, unearthed in the quarter ended December 2006, is in
the region of Rs 500 crore.
ICICI Bank has officially
admitted that the loss is close to Rs 100 crore, but sources in the
commodities market say that the figure is easily double since more names
continued to haunt the markets as late as March-end this year. A few
public sector banks were also affected. ICICI Bank’s total portfolio
of warehouse receipt financing is at around Rs 1,600 crore, which is
around 13 percent of the total agri-portfolio of Rs 12,313 crore.
ICICI Bank and other
banks work closely with India’s largest agriculture commodities
exchange, the National Commodity and Derivatives Exchange (NCDEX), to
enhance their presence in WR finance. In fact, this is one of the new
businesses that constitute a slice of the farm-lending portfolios of
private sector banks like ICICI Bank, Rabobank and hdfc and public sector
banks like State Bank of India in the past couple of years.
assesses the quality of goods tendered and checks its specifications
on the warehouse receipt. But in this case, nothing was done. A group
of traders and bank officials colluded to dupe the banks. We have made
more than 20 arrests, including 11 traders and bank officials and have
sealed properties. The chargesheet has been filed in court,” says
sub-inspector Wagh Chawre of Maharashtra Police’s Kolhapur Crime
Branch, who investigated the case.
commodities market in Mumbai is a volatile place. We are on high
alert when it comes to this market’
ACP Sadanand Date, Economic Offences Wing
commodities are stored in state and Central government warehouses. However,
in recent years a string of private warehouses has also come up. In
case of private warehouses, banks appoint collateral managers. These
managers, who have expertise in bulk commodities, certify the goods
and monitor their movement, and mark interest in the books of warehouses
— the lien of the bank, among others. In some cases, private warehouse
players also act as collateral managers. But the banks often resort
to cost-cutting while hiring managers.
Banks also appoint
management and collection agents to help identify borrowers for warehouse
financing. In some cases, these agents also store the receipts on behalf
of the bank. Bankers admit this is as one of the major loopholes in
Sources said that
in Maharashtra, one of the state government warehouses was involved
in the fraud, while in other states, management and collection agents
were involved. In most cases, the quantity mentioned in the receipts
did not match what was in the warehouse.
officials discovered the fraud in the course of a routine audit. The
Reserve Bank of India has already been apprised of the matter. The bank
has been able to recover a part of the money. It has access to guarantees,
land and also cash as collateral from these agents, and has also taken
over the control of the commodities in the warehouses,” the sources
The interest rate
in financing of warehouse receipts is between 8.5 percent-13 percent.
Unlike loans against dematerialised shares where the presence of depositories
acts as a comfort to the bank, in case of WR financing, banks hire collateral
managers who check the quality and quantity of the stock against which
the loan is disbursed. “The fraud happened since some of the collateral
managers colluded with the warehouses to issue WRs which showed inflated
or non-existent stocks. Warehouse owners in as many as four states —
Maharashtra, Madhya Pradesh, Rajasthan and West Bengal were involved,”
WR financing is
a commodities-based financial instrument that brings more interest revenue
to the financiers. It gives farmers the option of holding back their
produce if the prices are low and get up to 80 percent funding of the
value of their produce from banks. A WR guarantees the existence of
a given quantity and quality of a commodity in storage for safekeeping,
often used in cash and futures transactions.
by the Kolhapur District Crime Branch reveal the presence of a significant
number of small and medium-scale warehouses.
Warehousing is big
business. For the record, WRs from NCDEX have doubled in one year by
Rs 5,000 crore to Rs 10,000 crore in 2005-06. And what’s more,
banks are lending against WRs at an attractive rate of 8 percent-10
percent. “We are being extra cautious and putting more stringent
norms in place,” quips Narendra Gupta, chief of strategy, NCDEX.
and traders colluded with warehouse owners to get bogus warehouse
receipts to defraud banks
revealed the bulk of the warehouses not having the required stocks of
wheat and rice. Some had substandard stocks that shocked the investigators.
In normal cases, banks do their own due diligence before issuing loans
against WRs but somehow the effort was not made. “The case was
pursued and investigated by the Kolhapur District Crime Branch. We have
not heard of Mumbai warehouses involved in this case,” additional
commissioner of police (economic offences wing), Sadanand Date told
NCDEX is aware
of the issue and its implications on the markets. ‘‘The
onus lies more on the banks. Their collateral managers need to be more
vigilant,” adds Gupta.
There are goods
worth Rs 500 crore-Rs 1,000 crore at NCDEX warehouses at any given point
of time with over 1 lakh metric tonnes of physical delivery happening
every month. It is five times the number with other warehouses, owned
by private players and state governments. “Hopefully, the swift
action against the erring traders and warehouse owners will send a strong
message to those planning similar rackets,” adds Gupta.
“We are trying
to put into place a foolproof system with an extra controller on the
ground so that there are more checks and balances for these godowns,”
says Hari Prasad, managing director of National Collateral Management
Services Limited (NCMSL), a subsidiary of NCDEX which controls nearly
500-600 godowns across Rajasthan and Madhya Pradesh.
was the same way Big Bull Harshad Mehta raised money against
says a police
Top police officials
in Mumbai feel that the scam was hushed up to prevent further shocks
in the markets. “On the face of it, no big names have come up.
But we are investigating as to whether the money was routed back to
NCDEX. This should be taken as an alarm call. Let us not forget that
this was the same way Big Bull Harshad Mehta used to raise money against
bank securities,” adds one top cop.
that ranged in the region of Rs 4,500 crore was unearthed by sleuths
from the Securities and Exchange Board of India and the finance ministry
way back in 1992.
A look at the volumes
exposes the gravity of the situation. NCDEX records a daily turnover
of around Rs 3,000 crore. The total margin deposits with NCDEX at a
given point of time is around Rs 1,000 crore. Out of a total margin
deposit of Rs 1,000 crore, around Rs 300 crore-Rs 400 crore is in the
form of cash deposits. If bank funds to the tune of Rs 500 crore, siphoned
off through deliberate and well-planned fraud in the WR financing system,
has found its place in the margin deposits with NCDEX, as soon as the
fraud is blown such money will either be forfeited or will be used towards
meeting the default and scam liabilities. In such a case, the entire
NCDEX market may collapse, because the major chunk of NCDEX cash margin
deposit (ranging around Rs 300 crore-Rs 400 crore) will be completely
wiped out in the process.
“We are keeping
a close watch on the commodities market,” says Date, adding: “It
is important to put checks in place immediately. The commodities market
is an important place for top-end financial transactions, and today
the futures exchanges are increasingly looking towards farmers’
participation for their success and to drive the volume turnover.”
As funds seamlessly
flow from one market to the other and the Indian commodities market
begins to integrate with the global market, stock market analysts feel
that the risk perception is beginning to heighten.
trade volumes are set to expand rapidly. Demand for a wide variety of
commodities covering food, fibre, metals and energy will surely expand,”
says noted market analyst Hemen Kapadia.
He should know.
An inter-ministerial task force headed by RCA Jain, additional secretary
in the finance ministry, has targeted Rs 7,000 crore worth of pledge
financing by 2006-07. But the recent scam can surely put the clock back.
“It is not something the markets wanted when the government was
keen to push the banks to lend money against WRs,” says Rajesh
K. Srivastava, director, Rabo India Finance Private Limited.
Analysts say that
the problem should not be viewed in isolation as merely a problem of
non-performing assets of Rs 300 crore. Rather, it should be viewed in
a wider perspective. Sums up market analyst Suman Kapila: “This
should be a wake-up call for NCDEX while handling physical deliveries
and WR financing to prevent culprits gain major market share.”