The National Bulk Handling Corporation Ltd (NBHC) on Monday signed a memorandum of understanding with Bank of India to work together in the area of warehouse-based receipt financing.

K Pothiraj, Bank of India general manager, priority sector advances and Anil Choudhary, managing director and chief executive office of NBHC, signed the agreement.

NBHC, promoted by India's leading commodity bourse the Multi Commodity Exchange, is a company that provides commodity and collateral management services. Bank of India is one of the leading public sector banks in the country.

NBHC Cecure, NBHC's collateral management initiative, currently has ten leading Indian banks as part of its collateral management network. NBHC Cecure works with these banks closely to help farmers and traders get credit for their farm produce.

According to Choudhary, as per the agreement, Bank of India and NBHC will jointly work to provide liquidity to farmers against their produce and thereby enable them to time their sale for optimal returns.

"We see warehouse receipt financing as a great opportunity and we will be an aggressive player in this business," he said in a statement.

He said NBHC's over 1,400 warehouses under collateral management and professional warehousing and Bank of India's network of over 3,000 branches will be a winning combination in reaching out to the maximum number of customers in this segment on an immediate basis.

Addressing the gathering Amit Roy, Senior Manager, Bank of India said the agreement with NBHC will help reach out to many more customers and ensure a better deal for the farm produce-led community, be it farmer or trader.

In the past six months, banks have already lent over Rs 1,000 crore (Rs million) against warehouse receipts issued by NBHC. This is a very high volume and goes to prove NBHC's professional approach, integrity and transparency in dealings, apart from putting in place best practices. Following a set of globally benchmarked practices and standards enables NBHC to deliver low-cost, low-risk and value-enhancing collateral management services.

NBHC has established a meticulous system for storing commodities in all its warehouses across the country. This has increased the confidence level of banks and consequently a number of them, including BOI, have decided to step up lending against warehouse receipts issued by NBHC.

NBHC manages the collateral -- agri commodities -- on behalf of banks and also provides them with regular audit and mark-to-market reports on the conditions and prices of commodities in the market. The bank is therefore assured of both quality and quantity management at the safe and competent hands of NBHC.

Currently, around 97% of bank loans go towards the financing of farming inputs such as seeds, fertilizers, tractors, irrigation, etc, with a mere 3% catering for a farmer's post-harvest needs. NBHC has realized the lacunae in the system and has hence taken steps to create a better post-harvest need opportunity.

Warehouse receipt-based funding has tremendous growth potential. With the priority sector lending norms making it mandatory for banks to advance 18% of loans to agriculture, warehouse-based receipt financing is being considered as the next big opportunity in catering for the agricultural sector.

The Planning Commission has also recently reinforced its commitment to double the farm sector's growth from a low 2% per annum to 4% a year during the 11th Five Year Plan. The government is now keen to break the logjam of low production and productivity of the farming sector by beefing up infrastructure and irrigation sectors simultaneously. Therefore, in the near future agricultural commodities will flow more steadily from farms.

The management of these commodities will prove to be both a challenge and an opportunity for banks and warehousing companies.

Warehouse receipt-based financing refers to funding farm produce as collateral. This enables farmers to cash in on market opportunities and enables them to get fair and best prices for their produce.

This mode of financing is rapidly growing in India and has been largely driven by quality collateral managers such as NBHC, whose capabilities are derived from their association with financial institutions (banks, etc), infrastructure and best human resources. This type of set-up is greatly beneficial for all the players - the farmer is assured of loans with low margin and competitive rates of interest and he gets an opportunity to time his sale; the bank is insulated against bad debt as it can sell the collateral, quantity and quality of which are ensured by the collateral manager.

The collateral manager and banks thus achieve the objectives of growth even as they reach out to a market which comprises two-thirds of India's population.