12 Dec 2017 16:26 IST

Bringing out the store of value in commodities

Arya Collateral integrates farmer-producer organisations, agri-corporations and lenders

Prasanna Rao, 41, and Anand Chandra, 37, were colleagues at ICICI Bank, working in the agri-commodities based finance business, which Prasanna was heading. Both were keen to do something in the post-harvest space and when an opportunity knocked at their doors, they grabbed at it and turned entrepreneurs.

One of the service providers in the agri-commodities space, Arya Collateral Warehousing Services, then part of shipping services company JM Baxi & Co, was working with ICICI Bank.

Prasanna and Anand realised that Arya Collateral was not core to the Baxi group’s operations. The company was making a loss. The two approached the Baxi group to see if they could take over Arya Collateral and run the company, fulfilling their dream of being in the post-harvest space, working with farmers and dealing in agri-commodities. The Baxi group seemed amenable to the idea.

The deal was struck in early 2013 and Prasanna, who is Managing Director of Arya Collateral, and Anand, its Executive Director, took over the operations.

When Prasanna and Anand took over Arya Collateral, it was, says Prasanna, a 40-member team, providing collateral management services and its only client was ICICI Bank.

Collateral services

Today, it has 800 employees, of whom 220 are on the company’s rolls and the rest contract staff. When a bank gives advances on commodities stored in a warehouse, a third party has to take custody of those goods, or be the collateral managers. This is what Arya Collateral was doing. “When we took over, we thought this could be a good vehicle to translate what we had thought into a reality. We slowly grew that business,” says Prasanna, a rural management graduate from Institute of Rural Management, Anand, who had worked with Amul and Coca-Cola, before joining ICICI Bank.

Their idea was to integrate various stakeholders – farmers and farmer producer organisations (FPOs), banks and lending agencies, companies that use large quantities of agri-commodities and traders – on to a single platform and give each one of them the benefit of being able to get a better price. “The idea,” says Prasanna, “was to try and stitch together the entire ecosystem, which could connect the small farmer with the market.”

They started off with forging relationships with banks, expanded from collateral management to professional warehousing as the second pillar of the company. Arya Collateral added a third pillar to the business when it created a risk mitigation fund in case commodity prices fell. The company recently got approval to start a non-banking finance company to finance FPOs, farmers and smaller players in remote areas, against their commodities.

Arya Collateral is now empanelled with 18 banks. It works with clients to pick up commodities from the point of purchase, ensures that they are of the right quality and stores them in warehouses. “We help these corporates procure a million tonnes of produce every season. We work with all the major agriculture corporations. We primarily work on foodgrains and dry commodities, except for potatoes which are stored in cold storage,” says Prasanna.

Arya Collateral’s interventions, he adds, are around commodities that can be stored for more than three months, because it believes there is value in storage of commodities. It has companies such as ITC, Britannia, Cargill, Glencore Grain and LouisDreyfus Commodities as clients.

Value in storage

According to him, banks lend against commodities worth around ₹50,000 crore every year. “Which means,” he says, “there are people storing ₹50,000 crore worth of commodities and waiting for prices to go up and then sell. Or, there are people who want to buy cheap because they are processors and they would use it when the prices go up. There is value in storage. And, that value has never been passed on to farmers.” In a five-year window, says Prasanna, you could always make upwards of 25 per cent.

Of this ₹50,000 crore worth of produce, which translates to about ₹30,000 crore worth of loans, Arya Collateral would manage ₹2,000-3,000 crore worth of commodities. Not all of this belongs to farmers; it is a mix of farmers, end users and agri-corporations.

Farmers sell their produce immediately after harvest as they need the money. Arya Collateral’s objective was to see how it could help them by storing their produce and give them the opportunity to take advantage of time arbitrage in commodity prices. It also helps arrange bank loans for farmers when they store their produce; the interest ranges from 9-12 per cent, significantly lower than the 24-30 per cent they would otherwise pay. The more important part, according to Prasanna, is farmers do not have to sell at low prices.

Arya Collateral works with over 400 farmer producer organisations (FPOs). The company has created a risk fund to mitigate a fall in prices. Not everybody will be affected at the same time and only one will face an adverse situation and the claim would be made on that player. Arya Collateral created a pool of commodities that had an inherent hedge against prices.

The company has pooled in its own funds, some from national and international philanthropies and donor organisations to capitalise this. It has now been able to structure it as a financial guarantee with the support of Dutch banking and financial services company Rabobank. It has rolled it out with a $500,000 fund and hopes to cover 250 FPOs in three years.

Anand, a graduate in agricultural sciences and an MBA from MANAGE with specialisation in agri-business management, says Arya Collateral has around 12 lakh tonnes of storage capacity, spread across 16 States. The company has been doubling storage capacity every year.

New storage facilities

The company has been trying out new storage facilities, including temporary structures. It has collaborated with GrainPro of the US that provides large bags called cocoons, which can hold up to 300 tonnes of small gunny bags filled with commodities. They are all-weather proof and hermetically sealed, which means commodities stored do not need to be fumigated. This will help farm level storage.

Arya Collateral raised about $3 million from Aspada and is looking to raise $10 million (about ₹65 crore) mainly to finance the NBFC. Prasanna and Anand say that Arya Collateral has been profitable from the first full year after they took over the company, with profits increasing every year.

On competition, Prasanna says the place is so large that there is space for a number of players. But, he adds, “we have not seen too many organisations that have the kind of expertise all stitched together.” Going forward, Arya Collateral looks to connect small farmers with large international buyers.

(The article first appeared in The Hindu BusinessLine.)