Commodities financing, mainly for agriculture products, faces a few problems in the country with public sector banks being reluctant and the Reserve Bank of India (RBI) not allowing external commercial borrowings (ECBs) to service agricultural firms, according to one of the firms involved in such financing.
“Medium-size companies are mainly affected by regulations that are in the way of financing their needs. This is particularly affecting the procurement of agricultural commodities. In turn, this is affecting farmers too,” said Sunoor Kaul, Co-founder, Origo Commodities Pvt. Ltd.
For example, if a starch company wants to buy maize and needs money for such procurement, it has to infuse equity or offer collateral. “These problems exist in most developing nations, including India. But in developed countries, such procurement is funded with banks looking into the contract for sale of starch and the cash that will be generated from it,” Kaul said.
In India, on the other hand, the medium-size enterprises will have to offer their land or property as collateral or open fixed deposits to the tune of 30-40 per cent of the loan required.
“This is a big issue that is preventing such medium and small companies from growing. If they want to introduce any new product and buy a certain commodity, it can raise its capacity only by offering collateral or builds in large amounts of investments,” the Origo Commodities co-founder said.
In particular, trade finance solutions are available to large companies with a turnover of ₹2,000 crore and above. Financial institutions (FIs) look only for such companies to take risks in lending. “For small and medium companies, the FIs don’t provide such facilities. As a result, they have to take the conventional route, which is regulated. There is a huge problem with this,” Kaul said.
Currently, Origo buys commodities and gets funds based on its receivables and physical stocks. “We are surprised that we have not seen PSBs showing interest because we are servicing the same sector they are servicing. Somehow, they are far from it,” he said.
“It is one support that is obviously needed for commodity financing. The other issue is there is a big gap in how regulations are defined. We cannot avail of ECB from global lenders. We cannot take the ECB for working capital. We can get it only for capital expenditure because we are an agri-trading company,” he said.
Many international funding companies are ready to offer finance, but the Reserve Bank of India (RBI) regulations prevent access to it. “External funding agencies can only offer guarantees for the money we can take from local banks,” Kaul said
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