Bank aggregators can lift farmers' 'futures'

Farmers can benefit in a big way from futures markets if laws are changed to allow banks to function as aggregators, top market players and experts said after Prime Minister Narendra Modi declared that commodities exchanges would be just a costly ornament if they do not help growers.
“The true measure of success is the impact in villages, not the impact in Dalal Street or Lutyens Delhi,“ the PM said at the inauguration of National Institute of Securities Markets campus at Patalganga in Maharashtra. “By that yardstick, we have a long way to go. Our stock markets need to raise capital in innovative ways for projects in agriculture. Our commodity markets must become useful to our farmers, not just avenues for speculation.“

Modi has asked market regulator Sebi to work for closer linkage between spot markets like the electronic National Agricultural Market and derivatives markets to benefit farmers.“Integrating all the APMC mandis on an e-platform is a great idea but will take time,“ said Motilal Oswal, chairman at Motilal Oswal Financial Services. “It is imperative to allow banks to play the role of aggregators for these markets (commodity futures) to enable farmers to get actual benefits from them.“

Allowing banks to function as aggregators, as rubber producer societies in Kerala are on behalf of rubber farmers, will require an amendment to the Banking Regulation Act.

“Banks will not speculate on agri futures, but simply hedge the price risk faced by a farmer, to whom it lends, on the bourse,“ said Anil Mishra, managing director of National MultiCommodity Exchange (NMCE).

If, for instance, a bank gives a crop loan to 10 farmers of, say , `100 each, for a total of one tonne. The bank, as an aggregator, hedges the produce by selling the 1 tonne at `1,000 on the exchange. If the price of the commodity falls to a cumulative `900 at harvest, the loss incurred by the farmers on the spot market is offset by the `100 gained on the exchange where the bank has sold for `1,000.That `100 is credited to the accounts of the farmers, and the bank too does not get hit by loan defaults or NPAs.

The corollary is also true. If the price rises instead to `1,100 by harvest time, the farmers together sell at `1,100 on the spot market. The bank takes a `100 knock on the exchange at square off but debits the `100 to the 10 farmers' accounts. In this case also the farmer is hedged and the bank does not suffer any loss.

R Venkataraman, MD at diversified financing company India Infoline Finance (IIFL), says reforms at APMC level and “considering“ the use of a mandi as a subbroker to use the commodity futures on behalf of farmers might be done. Atul Chaturvedi, CEO at Adani Wilmar, which is known for its Fortune brand of vegetable oils, says a “complementing but equally important move“ to banks functioning as aggregators is to reform APMC laws in various states to allow farmers to sell directly to buyers.

“Apart from benefits to a few traders, neither farmers nor buyers benefit from the former selling in APMCs, where costs esca late due to multiple middlemen,“ he said.

Chaturvedi says the eNAM project, which aims to link all the APMCs on a national electronic platform, would enable exchanges derive more efficient and transparent settle ment prices of futures contracts. Currently , commodity exchanges like NCDEX, NMCE and MCX conduct polls from among spot market traders to arrive at settlement price of fu tures contracts. But Nilesh Shah, MD at Kotak AMC, warns that before increasing taxes, the government should “plug loopholes“ such as bonus stripping (to offset capital gains), conversion of interest income to LTCG through listed debentures and no tax on sale of business by listed entity.