Warehouse Receipt Financing

Price Risk Management- For one and for all

National Multi Commodity Exchange of India (NMCE) that pioneered the national online commodity trading business in the country has once again proven to be an ideal platform for price risk management through its transparent and credible trading system.

With the extremely successful model of Warehouse Receipt financing, even the sharp fall in the Rubber prices over the past few days has had no impact on the banks which finance 80 -90% loans to the borrowers against the warehouse receipt.

Globally we were facing a sharp rise in the Rubber prices for the past few weeks mainly due to torrential rainfalls and floods hitting the largest producing nations like Thailand, Malaysia and Indonesia. The international cues and the rise in rubber consumption in India saw the rubber prices rise to Rs.153/kg. But, the current price crash in rubber saw these prices to dip to Rs.132/kg.

The 10-14 % drop in these prices could have had a serious impact on the banks finance that had lend loans to the farmers at the peak price, but because of the credible system of forward sale contract at NMCE, the risk of the banks is eliminated. The Warehouse Receipts, against which the loans are lent to the farmers/cooperative societies act as a guarantee for these banks to recover their loan from the exchange on the date of expiry of the contract instead of borrowers.

This unique Warehouse Receipt financing mechanism has been one of the tenets of NMCE that helps in price risk management for the entire ecosystem. The producers  who  take the benefits of price realization by locking the best prices on the exchange can take the benefits of the Central Warehouse Corporation Receipts and get a loan from the banks against this. The banks can stay assured of recovering their loans through the exchange thereby, making the entire process a hassle-free and effective tool for Price Risk Management.