Towards Sustainable Regulation of Warehousing : Daily Current Affairs

Relevance: GS-3: Indian Economy, mobilization of resources, issues of buffer stocks and food security.

Relevance: GS-2: Government policies and interventions for development in various sectors

Key Phrases: agricultural commodities, Warehousing Development and Regulatory Authority, Negotiable Warehouse Receipts, warehouse service providers, FCI and CWC, Financial Security Deposit, Depositor’s Guarantee Fund.

Why in News?

Capacities registered with the warehousing authority must increase substantially. Also, focus must be on processes and data.

Context:

The economics of agricultural commodities warehousing is loaded higher on the cost side than the revenue side. It makes private investors edgy with respect to their potential role in contributing to the policy ambition of growth in scientific warehousing capacities.
With increased processing and trading in agricultural commodities, efficiency in the capital can be brought about by the ability of the stakeholders to leverage the capital locked in stored commodities safely and effectively. It warrants that the WDRA (Warehousing Development and Regulatory Authority) registered warehousing capacities increase substantially and that all stored commodities are pledged safely and securely.
The regulated commodity repositories are expected to expand the issuance of eNWRs (Negotiable Warehouse Receipts) against all commodities stored in WDRA registered third-party warehouses and make transparent the storage information, making efficient the mechanism of price discovery in the markets. At the same time, the electronic commodity repositories must make the process trustworthy for both the lenders and borrowers.

India has a total Agri warehousing capacity of around 91 MMT at present to store and conserve such large quantities with state agencies owning 41% of the capacity and the balance distributed among private entrepreneurs, cooperative societies, farmers, etc.
However, these government agencies use 66% (60 MMT) of India’s total agri storage capacity which also includes hired capacity of 23 MMT. The total state-owned storage capacity of 37 MMT is held through three public sector agencies viz. Food Corporation of India (FCI), Central Warehousing Corporation (CWC) and State Warehousing Corporation (SWC).

Optimising Operational Costs

The business of private warehousing is all about optimising operational costs to stay afloat. Compliance with WDRA registration norms shall remain a burden unless the regulatory provisions focus on warehousing processes and ensure compliance based on an optimal mix of generated data and inspections. For example, rather than heavily weighing on staffing levels at the warehouse, which may vary depending on various business and operational factors, it shall look at simply the processes being followed and the recorded data.
The records generated manually or electronically shall remain the audit points ensuring appropriate handling/storage of the commodities and KYC of the depositor. The end to end process footprint of the entities and review of data generated from these processes will make them more cost effective in their compliance.
While a part of the compliance cost arises from the compliance/audit/reporting requirements, a part of the cost also arises from the financial risk management measures taken up by the authority to effectively protect the depositors against any qualitative/quantitative damage to their produce. Mandating all third-party warehouses to be registered will go a long way in providing the scale effect.
Cost efficiency will remain a concern when it becomes mandatory for all third party WSPs (warehouse service providers) to meet the financial security requirements and other compliances. Can this be turned into a win-win? Mandatory logging in of public sector entities such as Food Corporation of India, Central Warehousing Corporation, etc., into the WDRA would better clarify their role in an increasingly liberalising India.

Negotiable Warehouse Receipts

The idea of e-NWRs flows from the Warehousing Development and Regulatory Authority (WDRA), which was set up under the Warehousing (Development and Regulation) Act, 2007. The Act came into force on 26 October 2010 because the government took three years to decide the appointment to the posts of chairperson and two members of the WDRA.
The main objective of the WDRA is to implement Negotiable Warehouse Receipt (NWR)/electronic-Negotiable Warehouse Receipt (e-NWR) system in India so that farmers (as well as businesses) are encouraged not to sell their produce immediately after harvest when prices tend to be the lowest in the year. They can store their produce in WDRA-registered warehouses that have to issue NWR/e-NWR to them. The farmers can seek loans from banks against their NWR/e-NWR. The WDRA regulates negotiability of warehouse receipts so as to improve the trust of depositors and banks in the newly evolving ecosystem.

Role of FCI And CWC

The FCI and CWC shall remain the scientific warehouse service providers to the government of India, and the government remains the legal holder of the eNWRs matching the buffer stock norms. While these norms shall be revisited, keeping in mind the politico-economic conditions from time to time, the excess shall be mandated to be disposed of through an open auction of the eNWRs.
The FCI/CWC shall be the WSP ensuring the quality and quantity of food grains to the government at the time of withdrawal, like any other WDRA registered WSP. However, a fundamental difference exists between the FAQ grade procured by the procurement agencies and the quality standards widely followed by trade. The trade may warrant the existence of fewer but broader user group focussed quality standards acceptable amongst all stakeholders of commodity value chains.
The authority must form the commodity wise advisory group consisting of all the commodity stakeholders with a mandate to define quality standards, grades, and the expiry dates to be adopted across the ecosystem, which should be based on the value chain requirements. Being of a broader storable quality spectrum will ensure that the stakeholders can store most commodities produced in the WDRA registered warehousing ecosystem and provide for a more straightforward valuation and financing of eNWRs.

Periodic Appraisal

How do we ensure that all the eNWRs are safe instruments to be pledged for the borrowers? Periodical appraisal of the data submitted by the registered WSPs, daily stocks data provided to the commodity repositories and an efficient grievance redress mechanism backed by the Financial Security Deposit (FSD).
With 23per cent of the value being the storage charge levied by the WSPs, about 0.5 per cent of the value (average value of stored quantities during the last eight quarters) shall be mandated to be deposited as the FSD. Of the FSD collected,75 per cent shall be kept in the individual WSP account; the rest, 25 per cent, shall be pooled into a common fund —Depositor’s Guarantee Fund (DGF).
Such a fund will also be in line with the long pending demand of the bankers, increasing the financialisation of commodities. Contribution to DGF may be amended depending on the prices and the quantity stored in the past eight quarters. An annual stress test of the warehousing ecosystem could provide direction to the contribution of WSPs to the DGF based on the amount and nature of risks introduced. Such an arrangement would lead to a lower FSD contribution, much less than the current norms.

Way Forward:

As in other regulatory ecosystems, the empowered arbitrators shall decide the merit of a given dispute between the lender/depositor and the WSP. Arbitrators shall know the nuances of warehousing and repository regulations and the commodity and the storage ecosystem. The authority and the commodity repositories shall work together to provide them with initial guidance and updated knowledge.

Source: The Hindu BL

Mains Question:

Q. What is Negotiable Warehouse Receipts? Discuss the role of Warehousing Development and Regulatory Authority towards sustainable regulation of warehousing. Critically analyse.