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Harish Damodaran
Mamuni Das

New Delhi , Feb. 3

IN what would give a huge boost to commodity futures trading, the Government is all set to allow banks to trade in commodity derivatives.

The Reserve Bank of India, according to sources, has given its nod to amend Sections 6 and 8 of the Banking Regulation Act, 1949, which prohibit banks from dealing in commodities.

The proposed amendment to the Act, enabling banks to deal with commodities and their derivatives, is likely to feature in the forthcoming Union Budget.

The move is expected to provide a further fillip to trading in commodity futures in the country.

In value terms, the total one-way turnover in commodity futures (excluding spot trading) has increased from about Rs 35,000 crore in 2001-02 to Rs 1,00,000 crore in 2002-03 and Rs 1,40,000 crore in 2003-04.

During the first half of the current fiscal, total trading is estimated to have already crossed Rs 1,70,000 crore. Daily volumes across the country's national and regional commodity exchanges are now in the region of Rs 4,500-5,000 crore, with trading being done mainly by commodity and stock-brokers, agro-processors, high net worth individuals and corporates.

On the other hand, banks, mutual funds, foreign institutional investors and primary dealers are restricted from participating in commodity futures trading.

In the case of banks, Section 6 of the Banking Regulation Act lists the businesses that banks can engage in, while Section 8 expressly states that no bank shall "directly or indirectly deal in the buying or selling or bartering of goods, except in connection with the realisation of security given to or held by it, or engage in any trade, or buy, sell or barter goods for others otherwise than in connection with bills of exchange received for collection or negotiation". Goods, in turn, mean "every kind of movable property", barring those instruments mentioned in Section 6 (including bullion and specie).

The prohibition in dealing with goods (except for collateral purposes) has been interpreted as a ban on banks to trade in commodity derivatives. The RBI, the sources said, has approved necessary amendments to Section 6 and 8 and forwarded the same to the Finance Ministry.

A simultaneous move was also underway, they added, to permit mutual funds and primary dealers to enter the segment, which would, in any case, require no legislative amendment, but only a change in the relevant regulations of the Securities and Exchange Board of India.

The case for allowing banks entry into commodity futures trading has been argued not only to boost liquidity and turnover volumes, but also to provide them with a protective cover against default on agricultural loans. In the new arrangement, banks would lend to farmers or cooperatives and simultaneously encourage them to sell into futures contracts. This would help reduce the risk of farmers defaulting on their loans in the event of a fall in spot commodity prices.

Warehouse Regulation Act being drafted

THE Food Ministry is in the process of drafting a Warehouse Development & Regulation Act to promote warehouse receipts-based lending and commodity derivative transactions.

The proposed legislation, sought to be introduced in the Budget session, would basically enable the creation of a regulatory authority for accreditation of warehouses and setting the relevant standards to be made applicable for scientific grading, packing, storage, preservation and certification of commodities at the warehouses.

Officials said while technically warehouse receipts can be dematerialised and held with a depository as in the case of shares, the difference though is that the underlying commodities, unlike shares, are prone to physical and quality deterioration over time.

"The proposed warehouse authority would grant accreditation to only those warehouses meeting the rigorous grading and storage standards laid down under the Act for various commodities. This would ensure that the warehouse receipts issued by them are tradable and can be used as negotiable collateral," they added.

While banks do resort to pledge financing against warehouse receipts now, this is, however, largely restricted to only those instruments issued by the Central Warehousing Corporation and the various State Government-promoted Warehousing Corporations, in which the former also holds a stake.

The new Act would create a framework for accreditation of warehouses in both the public as well as private sectors.

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