commodtity finance.ppt

8/14/2019 COMMODTITY FINANCE.ppt

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Commodity Based Finance(Monitoring and Follow up)

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Inherent Risks of the product

Perishability of agri Commodity

Dependency Primarily on Collateral under lock & Key Volatility of Prices (Margin call)

Funding on Forged/ Fake Warehouse receipt (WR)

Government Regulations

Operational risk

Collateral Manager (Third Party agency) Failure

Credit risk (Overdue)

Liquidity risk in case of Niche commodity

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Selection of commodity

Price volatility

GovernmentRegulations

Touch and feelNiche

Shelf LifeSelection

ofCommodity

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Warehousing of Commodity

IDEAL CAPACITY AND DIMENSIONS Capacity :

Small sized godowns :Capacity of less than 1000 MT

Medium sized godowns:Capacity above 1000 MT upto 5000 MT.

Large sized godowns:

Capacity of 5000 MT and above.

Height - road fed godown is 5.6m , rail fed godown is 6.35m

Stacking: size for both 2500 MT and 5000 MT godown is 9.15m X 6.1m

X 4.57m

Plinth Height - shall be generally kept about 80 cm above the finishedground level.

Flooring - damp proof, rigid, durable and free from any cracks andcrevices. Slide 4 of 20


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Warehousing of Commodity (Contd.)

Walls: 5.60 m high for road-fed and 6.35 m for rail-fed godownsfrom the floor level, 34 cm thick, plastered with cement mortar.In seismic areas, criteria for earthquake resistant designs ofstructures shall be followed.

Roof - single span structural steel or tubular trusses. Materialmay be corrugated asbestos sheets or galvanized corrugatedsheets, steel sheets or corrugated aluminum sheets

Door - The doors shall normally be steel rolling shutters. Size -not less than 2.45 m X 1.83 m.

Ventilators: longitudinal walls two steel ventilators, fixed 15

cm below the top edge of the wall

Drainage - cast iron or asbestos cement pipes of diameter notless than 10 cm shall be provided to drain off the rain waterfrom the roofs of main godown and platform.

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Stock Monitoring

Quarterly Inspection to be done by Bank Staff for monitoring the StockQuality , Quantity, Stacking, Warehouse infrastructure etc as part ofops/credit.

Inspection report to be tracked in case any discrepancy observed :Discrepancy to be categorized into various risk (High / Medium/ low)

categories:

1. Physical Stock tally with Bank Date: (Yes/ No)

2. Security Arrangement as per agreed terms: (Yes/ No)

3. Overall conditions of the godown: (Good/ Satisfactory / NeedsImprovement)

4. Comments on why godown condition needs improvement:1. Stacking/Stack Card Related Improvement2. Spillage In The Godown3. Fire Extinguisher4. Other Bank Stocks5. Cleanliness6. Godown Related Improvement

7. Excess Utilization Of Godown Capacity Storage Slide 6 of 20


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Volatility of Prices

Recent Fluctuation in prices of Cotton

115975 117863

153403 164276 169142

124733 121399104535

94759 109143

0

20000

40000

60000

80000

100000

120000

140000

160000

180000

AveragePrice/MT

Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11

Average price for Cotton for first fortnight (month wise)

Source NCDEX site- 28.5 mm Cotton Kadi.

Price Cap can be initiated in case the price hike for the commodity is more than10% for the month.In above example we need to Cap the Funding rate in the month of Feb as theprice hike is more than 10% for the month.No Cap Price fell by 40% in the next 4 months. ( Resulting in margin calls /

Loss incase borrower does not repay) Slide 8 of 20


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Arriving at Max Commodity Funding Cap

Monthly Cotton Price (Rs. / MT)

76803

131099

0

20000

40000

60000

80000

100000

120000

140000

160000

180000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Price(Rs.)/MT

2010

2011

Average 2010

Average 2011

Based on the average prices available at various sources, Cap can be arrived at.E.g. 1. Below mentioned are the cotton prices available at CCI since Jan 2010.

The average price for the year 2011(till July 2011) is arrived at Rs. 131099/MT.Keeping the margin of 10% approx for further fluctuation, we can arrive at MaxPrice Cap of Rs. 120000/ MT.

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E.g. 2. Below mentioned are the Guar Seed prices available at NCDEX since Jan2010 ( Bikaner market).

The average price for the year 2011(till August 2011) is arrived at Rs. 32537/MT.

Keeping the margin of 10% approx for further fluctuation, we can arrive at MaxPrice Cap of Rs. 30000/ MT.

Monthly prices for Guar Seed (Rs. / MT)

22716

32537

0

5000

10000

15000

20000

25000

30000

35000

4000045000

50000

Jan Feb

Mar

April

May

June

July

Augu

st Sep Oc

tNo

vDe

c

Pr

ice(Rs./MT)

2010

2011

Average 2010

Average 2011

Arriving at Max Commodity Funding Cap

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Keeping Margin % at Commodity Level as price fluctuationbuffer. ( Margin can range from 25 to 40%)

Weekly prices and margin monitoring of all commodities.

Controlling the Product Cap, Commodity Cap, CommodityMargin, Raising of the margin calls.

Emergency Margin call can be raised in case high fluctuation inprices.

In case price rising is projected to continue in near future, PriceCap can be put at commodity level.

E.g. In case of Cotton, Cap could be initiated in month ofFebruary onwards at Rs. 120000 to avoid the risk of over pricingof Commodity

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Monitoring of Volatility of Prices


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Sectoral research Monthly Outlook published

with commodity exposures and pricefluctuations.

Content of the Outlook: Exposure trend of the CBF portfolio

Details of Top 5 borrowers, Top 5 mandis.

Details analysis of Top 5 Commodities.

Commodity Exposure

Variety wise Price trends ( in local market as well asExchanges)

Average pricing of the Commodity (Market price viz-a-viz Banks funding rate)

Market outlook (News).

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Monitoring of Volatility of Prices (Contd)


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Funding on Forged/ Fake/ Improper WR

Concept -

Improper WR Wrong Commodity, Quantity, Quality,

Price, etc.

Forged WR Tampered WR

Fake WR - False WR generated with intention of Fraud.

Third party Agency (Collateral Manager) to visit thewarehouse and physically verify all the details on theWR.

i.e. Quantity of goods,

Quality of goods,

Physical presence of goods as per the WR.

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Concerns: Government Warehouses:

Funding Done based on warehouse manager report. Said to Content Clause Large quantity funding ( Capacity can be cross checked at CWC/

SWC site)

Unusual single large WR ( > 3 Cr.)- Bank official visit mandatory

WR generated for a commodity of non production / non consumptioncenters Eg. Basmati in Sangli, Pepper in Bhubaneswar, etc.

Special Care for commodities which are liquid. ( edible oil/ menthaoil)

Special care for Commodity with various varieties. (Rice)

Additional Due Diligence on borrower in case of Cold Storage.

Funding on Forged/ Fake/ Improper WR

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Regulatory risk/Government Regulations

Funding of Sensitive / Non Sensitive (Essential /Non Essential) Commodity.

Essential Commodities Act, 1955: Restrictions like

licensing requirement stock limits

movement restrictions States impose Temporary restrictions on Price increase.( e.g.

Wheat, pulses and edible oils, edible oilseeds and rice)

Compliance to The Warehousing (Developmentand Regulation) Act, 2007 - WarehousingDevelopment and Regulatory Authority

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k


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Operation Risk

Stock Insurance:

Fire Burglary

Third party agency (Collateral Manager) to provide

the insurance of the total stock to be funded.

Monthly monitoring of utilization and expiry ofInsurance

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C ll l M M i i


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Collateral Manager Monitoring

Empanelment of reputed, experienced CM.

Annual review of the company performance in terms offinancials and stock under management.

Adequate Fidelity resource and Stock Insurance

Monitoring of CM portfolio quarterly basis.

Diversification of portfolio to different CMs. Weekly portfolio analysis report to capture the exposure of CMs.

( Individual exposure should not ideally be more than 30% oftotal exposures)

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O d k


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Overdue Tracking

Close Monitoring of Overdue accounts

Immediate inspection.

Communication to borrower in case of Overdue:

(T is the day on which account has turned overdue)

Overdue Letter (T)

Overdue reminder Letter (T+7)

Liquidation Letter (T+15)

Auction process( T+30)

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THANK YOU

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commodtity finance.ppt

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