WDRA, Accreditation of warehouses and NWR financing

Purpose for Warehousing Development Regulation Act and establishment of

Warehousing Development Registration Authority

Prices for commodities are depressed immediately after harvest because most farmers bring
their crops to the market and this excessive supply pushes the prices down. This means that
farmers have to settle for prices that may not be remunerative. If farmers could store their
crops in warehouses till the time they got a better price for their produce, it could help avoid
the distress sales. But farmers don't store their crops because they need money to repay their
loans. This creates a pressure on the farmers to sell their harvest as soon as possible and repay
the loans.

If only there was a way for farmers to access a warehouse which followed transparent practices
and stored the produce scientifically, thereby checking pilferage and spoilage, the farmers
would feel assured about storage. But they would still require money to repay their loans. The
loans from informal sources are costly and would push the farmer to further indebtedness.
What if the warehouses where farmers stored their produce, issued warehouse receipts which
had all the necessary details like quality and quantity of the produce. The farmer then
approached a Bank which offered credit facility against that receipt. The farmer could use this
fund for his consumption needs and inputs for the next season. Meanwhile, he keeps an eye on
the price, and sells the produce, wholly or partly for a price that he thinks is right, and repays
the bank.

While the practice of lending against warehouse receipts is not new to India, it received major
impetus post the enactment of the Warehousing (Development and Regulation) Act of 2007,
which came into force from 2010. It made provisions for the development and regulation of
warehouses, negotiability of warehouse receipts, establishment of a Warehousing
Development and Regulatory Authority and for matters connected therewith or incidental
thereto. The Act allows warehouses registered with the WDRA to issue Negotiable warehouse
receipts (NWR), which are backed by a legal sanction. NWRs permit the transfer of ownership
of an agri commodity deposited by farmers in registered warehouses without having to deliver
it physically and are issued in negotiable form, thereby making them eligible as collateral for
post-harvest loans. They are seen as a key instrument in curbing distress sale by farmers at
peak harvest season, when prices could be at the lowest.

The WDR Act and accompanying rules and regulations stated registration requirements with
the objective of keeping a check on the warehouse service provider. The law made way for a
separate Warehousing Development and Regulatory Authority (WDRA) with an objective to
develop scientific warehousing techniques in India.

Most importantly, the Act introduced a negotiable warehouse receipt system. This bestowed
confidence in banks about the warehousing system in India, ironing out worries about the
underlying collateral. Funding against pledge of warehouse receipts has gained traction among
Banks.

March 7, 2016 Business Today

For instance, a decade ago, loans worth only around Rs 5,000 crore were made to farmers against
warehouse receipts. Currently banking institutions have advances of around Rs 40,000 crore against
such receipts.
 While these numbers look smaller against the gross agri credit target of Rs 8,50,000 crore for the current
fiscal, there is a tremendous scope for such financing in years to come on the back of renewed attention
of policy makers and changing agri dynamics in the country.

Benefits of Warehouse receipt finance

A well developed Warehouse Receipt Finance (WRF) system has the following benefits:

Farmers: As against traditional loans by banks, loans against WR are quick. WFR brings about
better price realization for farmers and facilitates access to institutional credit obviating the
need to approach the informal sector where the rates are very high.

Scientific storage: It is estimated that 25-30 per cent of agricultural produce every year is lost
due to poor storage and frail handling post harvest. Increased usage of WFR will lead to
investments in warehousing infrastructure. Currently, there are 1152 government and private
warehouses in India registered under WDRA(State wise list of warehouses as on 15.03.2017
(www.wdra.nic.in). More accreditation by WDRA will help scientific storage of farm produce
and fix the missing link in the supply chain.

Banks: The average tenor of loan against WHR is around six months which works well with
asset-liability profile of banks. Besides, lending against WHR is safer and more liquid for
banks. Intermediaries like collateral managers make the job easier for banks as far as
underlying collateral is concerned. WRF help banks achieve their priority sector lending
targets in an efficient way.

Economy: WRF can dramatically reduce inter-seasonal price fluctuations. WRF increases
liquidity in the rural economy, helping consumption.

Process for Accreditation and Registration of warehouses

Only a warehouse registered with WDRA can issue negotiable warehouse receipts. The
process involves accreditation before registration with WDRA.

The warehouse should apply to an accreditation agency of its choice for issuance of
an accreditation certificate.
WDRA has appointed 16 accreditation agencies (9 in government sector and 7 in
private sector) for the purpose.
The warehouse should:

be constructed as per BIS/FCI/NABARD/CWC specifications.

be storage-worthy with fool proof security agreements.
have adequate trained staff with expertise and knowledge for the scientific
storage of goods.
have requisite equipment for weighing and quality measures.
have insurance cover for building and stock against fire, flood, theft, burglary,
misappropriation, riots, strikes and terrorism.
have positive net worth certified by a Chartered Accountant or creditworthiness
certificate from a scheduled bank for individual warehouse or for its organisation.

The warehouse should apply for registration to the WDRA along with the
accreditation certificate.
State wise warehouse registration under WDRA Key issues

State wise list of warehouses as on 15.03.2017 (www.wdra.nic.in)

State Nos. Capacity (MT)

Andhra 52 194397
Assam 1 1016
Bihar 5 40564
Gujarat 144 761886
Haryana 19 50375
Jharkhand 1 780
Karnataka 42 221668
Kerala 10 42467
Madhya Pradesh 329 2249031
Maharashtra 117 3357188
Punjab 1 10000
Puducherry 1 2600
Rajasthan 157 1228089
Tamil Nadu 243 316571
Telangana 3 17628
Uttar Pradesh 25 75221
West Bengal 2 22693
Total 1152 8592174

State wise list of warehouses as on 15.03.2017 (www.wdra.nic.in)

Under the current policy, the Food Corporation of India (FCI), through state
government agencies, procures a major chunk of food grains, mostly consisting of rice
and wheat from farmers in mostly Punjab and Haryana. Others states such as
Rajasthan, Madhya Pradesh, Chhattisgarh and Odisha carry out the purchase of food
grains from farmers under a decentralised purchase scheme.

Warehouses in Punjab and Haryana which contribute significantly to the central pool
have only one and nineteen warehouses respectively registered under WDRA and
together constitute just one percent under WDRA.

Though Chattisgarh and Odisha carry out purchases under DCP and have warehouses
no warehouses have been registered under WDRA.

Maharashtra (39%), Madhya Pradesh (26%), Rajasthan (14%) and Gujarat (9%)
together constitute 88% capacity of the overall capacities registered under WDRA.

In a paper titled,

-Issues Limiting the Progress in Negotiable Warehouse Receipt (NWR) Financing in IndiaShalendra,
M.S. Jairath, Enamul Haque and Anu Peter V. CCS-National Institute of Agricultural Marketing,
Jaipur 302 033 Rajasthan

the authors make the following observation while examining the value of pledge
finance in India during 2013-14.

Among the 28 Indian states, only 12 have availed the benefits of pledge finance
scheme for farmers and other stakeholders dealing in agricultural commodities
(Table 1). In these states, the scheme has been popularized by agencies such as
 Central Warehousing Corporation (CWC), State Warehousing Corporation (SWC),
State Agricultural Marketing Departments/ Boards, collateral management service
provider, i.e. National Collateral Management Service Limited and National Bulk
Handling Corporation (NBHC). Some of the states like Punjab, Andhra Pradesh,
Rajasthan and Haryana, have achieved reasonable progress.

One would thus expect that owners of warehouses in states where pledge financing in
terms of number of beneficiaries are higher, would register the warehouses under
WDRA so that the existing beneficiaries can take advantage of financing their stocks
by means of NWR. Thus Andhra, Karnataka and Tamil Nadu with higher beneficiaries
should have more warehouses registered under WDRA. However, only Tamil Nadu
from among these states have a slightly better number of 243 warehouses registered.

Similarly among PACS, which cater to small and marginal farmers in the cooperative
fold, only 112 of them are registered under WDRA.

WDRA accreditation system does not grade warehouses and has a system of issuing
registration for a longer duration of 2 to 3 years with no periodic close monitoring in
between thereby causing information asymmetry. In contrast, National Commodities
Derivatives Exchange (NCDEX) operates a remarkable closed-user-group (CUG) that
attempts to solve the problem of information asymmetry by creating its own inspection,
audit and monitoring mechanism to ensure sanctity of the physical settlement of
commodities traded on its exchange. Alongside this, many collateral management
companies have come up which offer turn-key services of protection to borrowers and
Banks.

Improvements to make WDR Act effective

With a view to make the WDR Act more effective and the NWR system popular a study has
been conducted and a committee constituted. The studies and salient recommendations are
as under:
Study commissioned by the Warehousing Development and Regulatory Authority,
NATIONAL INSTITUTE OF PUBLIC FINANCE AND POLICY (NIPFP) September 1, 2015
wdra.nic.in/Report.pdf

Salient recommendations - NIPFP

Warehousing registration has to be a quick and nimble process in order to facilitate the
current market practices that are helping in market development. For this, registration
related entry barriers must be lower and post registration supervision must be better.
Regulations should ensure that insurance coverage for all aspects of legal liability is
covered. Both the warehousing infrastructure, and the commodity stored within a
warehouse must be insured against structural infirmities, fire, burglary, theft,
employee malfeasance, etc.
WDRA must create a consolidated online database of all NWRs issued, which should
be updated real-time with every NWR transaction or transfer.
It is advisable that the ownership of weighing and quality testing infrastructure is not
made compulsory, provided that other checks are in place. For instance: In case of
presence of weigh-bridges close to the warehouse, it is essential that WSP staff
accompany the depositor to ensure correct measurement of commodities being
deposited. The presence of in-house weighing equipment may not be imperative.
Regulation must require the creation of structured and standardised formats for
reporting information. Lending will improve further once lenders see a market with
greater transparency and information.
An electronic NWR system will enable market participants to use NWRs without
having to worry about fraud and duplication.
There must be a framework for dispute resolution. While greater competition will in
time force WSPs to be more responsive to concerns of consumers, the government has
a role in ensuring consumer protection. Regulated entities must therefore be required
to create a framework for redressing grievances of consumers. WDRA must then
provide a hearing against any unresolved grievances.

Committee for Strengthening Negotiable Warehouse Receipts by the Warehousing

Development and Regulatory Authority in the Country Government of India Department of
Food & Public Distribution (DFPD), New Delhi 18th February 2015 wdra.nic.in/FinalBook.pdf

Salient recommendations GoI, DFPD

Extension of Crop loan scheme with interest subvention to Post Harvest on NWRs
Publicity about Interest Subvention Scheme.
Banks to promote pledge financing of NWRs
Monitoring of Pledge financing by DLBC/SLBC and NABARD/RBI
Review of Insurance Requirements for accreditation and Registration of Warehouses
Robust mechanism for inspection on Registered Warehouses
Introduction of Electronic Negotiable Warehouse Receipt
Simplification of Accreditation/Registration / renewal of Registration Rules
Capacity building and awareness programme in Warehousing Sector
Enabling policies of the States to promote private sector warehousing
Declaring Warehouses as Mandis
Simplifying the procedure for conversion of land use for Warehousing.
Exemption of Stock limit of Commodities in Registered Warehouses
Continuation of Gramin Bhandaran Yojana
Continuation of RIDF/WIF Scheme

Prepared by G K Mandal, DGM Haryana RO 13/09/2017