Credit guarantee fund on drawing board for building warehouses

India is looking at setting up a credit guarantee fund to ease flow and reduce cost of capital for creation of warehouses. The proposed fund, under the Warehousing Development and Regulatory Authority (WDRA), is aimed at getting more warehouses into the formal sector.

The government has begun discussions with the industry on setting up a fund for warehousing akin to the credit guarantee fund for small and medium enterprises, said officials. Initial discussions have been held with some banks, they said.

Farmers as well as businesses can store their produce in warehouses registered with the WDRA and seek loans from banks against it. Earlier this year, the Reserve Bank of India increased the limits for bank lending against negotiable warehouse receipts (NWRs) or electronic NWRs to Rs 70 lakh from Rs 50 lakh per borrower to ensure increased flow of credit to farmers against the pledge or hypothecation of agricultural produce, and encourage greater use of NWRs and e-NWRs issued by regulated warehouses as a preferred instrument for farmers availing such finance.

In the past three years, the government has sanctioned 1,550 warehouses under various schemes. It has asked banks that they should finance only against NWRs or e-NWRs, as this will encourage more warehouses to seek WDRA registration.

Industry has demanded reduction in the dynamic security deposit (DSD), which is charged by WDRA for registration, by 100 basis points as it has a direct bearing on the cost of capital.

"It is being examined to see if there is a case for reduction of the security deposit and what safeguards are required to protect lenders in that scenario," said an official, who did not wish to be identified.

Security deposit is a percentage of the maximum value of negotiable and non-negotiable warehouse receipts. While the fixed security deposit is maintained for a period of six months beyond the registration period, the dynamic security deposit is updated at the end of each month. At present, DSD is 3% of the maximum value of negotiable and non-negotiable warehouse receipts.