ICICI bank takes Rs.150 crore hit on farm house loan

ET dtd 19.01.2007 The Country's second largest bank, ICICI bank, has taken a hit on loans given against warehouse receipts - a security which acts as evidence that a specific commodity is kept in a warehouse. Constituting a slice of the bank's farm lending portfolio, this is one of the new businesses that private sector banks like ICICI have been doing in the past couple of years. According to sources, the fraud, which was unearthed in the quarter ended December, is said to be between Rs.100 crore and Rs.150 crore. Unlike loans against demat shares where the presence of depositories acts as a comfort to the bank, in case of warehouse receipt financing, banks hire collateral managers who check the quality and quantity of the stock against which loan is disbursed. The fraud happened since some of the collateral managers colluded with the warehouses to issue receipts which showed inflated or non-existent stocks. This is beleived to have happened in four states- Maharashtra, Madhya Pradesh, Rajasthan and West Bengal. The total portfolio of warehouse receipt finacing of the bank is at around Rs.1,600 crore which is around 13% of total agri portfolio of Rs.12,313 crore. Total advances of the bank as on September 30,2006 were Rs.1,55,403 crore. Public sector banks like State Bank of India, Punjab National Bank and Canara Bank have been traditional players in this market, along with some old, southern private sector banks. In the last few years, new private sector banks have also been offering the product. Traditionallly, commodities are stored in state and central warehouses. However, in recent years, a string of private warehouses has also come up. In case of private warehouses, banks appoint collateral managers. These mangers have expertise in bulk commodities. These managers certify the goods, monitor the movement of goods, mark interest in the books of warehouses - the lien of the bank, among others. In some cases, private warehouse players also act as collateral managers. Bank keep cost-cutting in mind when they hire mangers. Banks also appoint management and collection agents to help identify borrowers for warehouse financing. In some cases, these agents also store the receipts on behalf of the bank. This, according to bankers, is one of the major loop-holes in the system. Sources said that in Maharashtra, one of the state warehouses was involved in the fraud, while in other states, the management and collection agent were involved. In some cases, the bank found that the quantity mentioned in the receipts was not matching with what was in the warehouse. ICICI Bank officials discovered the fraud in the course of a routine audit. The Reserve Bank of India has already been appraised of the matter. The bank has been able to recover a part of the money. The bank has access to guarantees, land and also cash as collateral from these agents. It has also taken over the control of the commodities in the warehouses. The interest rate in financing of warehouse receipts is between 8.5% and 13%. Other than farmers, traders and companies use this financing route. In case of loans to farmers, the financing is treated as priority sector lending. Margins by banks for this financing range anywhere between 25% and 60% depending on how volatile the commodity is. Also, the financing tenure for the product range from 90 days to one year, depending on the product.