At the time of harvest farmers should ideally look forward to commanding a good price for his labour. But the reality for most Indian farmers is quite different. Soon after harvest, prices for all commodities are at their lowest. Unfortunately, it is the smaller and marginal farmers who are most likely to succumb to a low price since their need for realisation of funds (to meet household needs, pay off loans etc) is the most acute.

Prices only tend to rise as fresh produce and market arrivals dip with the passage of time. Clearly, the availability of finance at the right time strengthens farmers’ ability to reject the low prices on offer. It is on this assumption that ICICI Bank launched another innovative product, the Warehouse receipt based finance. This allows the farmer the opportunity to take a loan against his produce (stored in a warehouse against a receipt) and avoid a distress sale.

Commodity based finance also works on the same premise and can offer greater protection and inclusion to all farmers in the trading of their produce. National Commodity Development Exchange (NCDEX) was part promoted by ICICI Bank, in order to facilitate the creation of a commodities market with a free and fair pricing mechanism. It would also allow farmers the benefits of hedging their risks. This has led to the practice of holding goods in dematerialised form. Over a period of time this has gained momentum. The commodity exchanges provide a trading platform, market structure, clearing settlement mechanisms and the legal framework to support the same. Most importantly they have the distribution network and brokers to support wide spread derivatives trading. The entire gamut of issues relating to warehouses and warehouse receipts for settlement also becomes more manageable. Settlement on the exchange can be carried out through giving and taking delivery of the commodity represented by the warehouse receipts in demat form, exactly like any other security. A buyer who wants physical delivery can approach the issuer of the security for rematerialisation of the demat commodity balance and then approach the warehouse for actual delivery as per the exchange norms.

In an effort to take these benefits to the small and marginal farmer, ICICI Bank ventured into Commodity Based Finance two years ago after a successful completion of a pilot project in Gujarat and Rajasthan. ICICI Bank is extending loans to the farmers against their demat balance. This initiative has helped the farmers hedge their risk from adverse price movements. At the same time this also ensures better price realisation for their produce on a regulated platform. ICICI Bank also envisages finance against commodity futures of farmers in the near future. This product will help the farmer to book a trade on the exchange with the future receivables from the Exchange escrowed to ICICI Bank who will ensure smooth operations for the farmers. The Bank is also in discussions with the exchanges for rationalisation of the lot sizes to enable greater inclusion of smaller and marginal farmers.