THE State Bank of Pakistan is eager to promote the warehouse receipt system to boost agricultural credit, and wants all the roadblocks removed.

SBP Governor Ashraf Mahmood Wathra recently set up an expert committee, comprising bankers and other stakeholders, including farmers’ representatives, to see how the system can be evolved and successfully implemented in the local environment.

Internationally, the warehouse receipt (WHR) system has proved successful in benefiting all agricultural value-chain actors, including farmers, input suppliers, middlemen, traders, millers, exporters and importers, banks, collateral managers and warehousing companies.

“In our context, too, the system can work wonders,” says the head of a local bank familiar with the subject. “In one way or the other, banks have already been offering inventory credit — the core of warehouse receipt system. But in order to make it a real success, the federal and provincial governments will have to do more.”

A missing link in the concept designed for the WHR system and its fuller implementation is that the value-chain actors are confused about the legalities involved at each step. “Right from the time when the SBP had prepared a draft on this subject till today, nothing important has been done to club all legal statutes under one umbrella and provide a comprehensive piece of legislation on the WHR system.”

Federal government officials say the provincial governments were supposed to take a lead in this regard, but that has not happened. They, however, claim that real progress will be made sometime in the next fiscal year.

Meanwhile, “the SBP is likely to come up with a set of guidelines for banks” that would show them how to implement the WHR system while relying on scattered federal and provincial laws governing key aspects of agricultural infrastructure and markets.

The borrowers — farmers and/or commodity processors — and banks will enter into an agreement and the former will place the crops or processed agricultural commodities in standardised warehouses

Bankers say the Pakistan Mercantile Exchange and the SBP have been working closely on trading of warehousing financing receipts. Now the stage is being set for trading of these receipts on the PMEX platform, with bankers and SBP, SECP and PMEX officials narrowing down workable modalities.

The PMEX already has the necessary arrangements in place. “But initially, trading of warehouse financing receipts may remain limited to a few specific commodities, like sugar, wheat and rice,” says a senior executive of a leading local bank. “In fact, the most feasible thing to do is to start this with the sugar industry, which has a developed warehousing system.”

Bankers say the need for simplifying the warehouse receipt financing system was felt when draft guidelines for it was prepared by SBP in 2013 and circulated among banks and other stakeholders.

“Apart from legislative and regulatory issues, the involvement of too many value-chain actors in the system doesn’t seem practical,” insists another local banker. But he says the SBP now wants to accelerate the pace of progress, which means that the above-listed and similar issues will now be addressed speedily.

Under the WHR system, the borrowers, i.e. agriculturists and/or agricultural commodity processors, and banks will enter into an agreement and the former will place the harvested crops or processed agricultural commodities in standardised warehouses.

The warehouses will issue receipts to the borrowers, who, in turn, will offer it to banks to secure loans. Afterwards, the borrowers will sell their crops or processed agricultural commodities to the buyers. But the buyers will pay for it not directly to the seller but to the banks, and only then will the banks release warehousing receipts received from the borrowers.

The buyers will redeem these receipts at the designated warehouses to procure the crops or agricultural goods against which these receipts were issued. Finally, the banks will use the payments received from the buyers to settle the loans earlier obtained by the borrowers against warehousing receipts.

Bankers say unlike simple agricultural lending, the WHR financing system will require the placement of collateral at standardised warehouses, thereby boosting the agricultural warehousing and storage industry which currently suffers from a lack of private sector investment.

According to food ministry officials, of the more than 60m tonnes of annual production of cereals, fruits and vegetables, proper storage facilities are available only for 6m tonnes. Therefore, construction of new storage facilities and upgrading of most existing ones is expected on a big scale. This, will help reduce post-harvest losses in the country, which, according to a SBP report, ranges between 15-18pc for grains and 25-40pc for fruits and vegetables.

On the other hand, the requirement of placing harvested crops at designated warehouses after applying for bank loans and prior to the issuance of receipts by these warehouses will encourage growers to put their harvest in the warehouses, discouraging hoarding of the crops.

This will also put an end to the exploitation of small growers at the hands of middlemen and agricultural commodities’ processors or millers, who make payment for their produce after long delays.

Published in Dawn, Economic & Business, March 2nd , 2015

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