13th October, 2015
Konkan, Taj Lands End, Bandra, Mumbai
Agriculture remains a dominant part of the Indian economy, and sharp swings in commodity prices have a significant impact on a range of agents: from farmers, to traders, to agri-processing units, to exporters and importers, all the way upto the government itself. A hedging mechanism that is accessible to each of these entities is commodity derivatives, which are available either as standardised contracts at exchanges or as custom-made products over-the-counter.
Globally, this market has a significant presence of intermediaries, who are either financial firms or commodity aggregators. These intermediaries offer custom made commodity risk management products to their customers, and use exchange traded products to manage their net portfolio risk. In India too, intermediaries offer products to customers to manage their price risk. However, their link to exchange traded products have been slow to develop. One reason is regulatory constraints: regulators have not enabled their participation in commodity derivatives exchanges.
It is significant that in a circular dated 28th May, 2015, the Reserve Bank of India has “advised banks to encourage large agricultural borrowers such as agricultural commodity processors, traders, millers, aggregators, etc., to hedge their commodity price risk.” This is a new role that has opened up for banks as a financial intermediary with respect to the commodity derivatives market. While they remain constrained on participating in these markets, this circular enables them to become a financial advisor to their customers on the use of commodity derivatives.
This brings new powers and new responsibilities. Pure financial advisory roles are not yet common in India. For banks to develop this new power into robust revenues, there needs to be investment in back-end systems that understand each customer who has commodity price exposure and customise advice on how they can manage this risk best. But this new business has two advantages: of generating revenues from both advisory as well as allowing for an indirect tool to manage the overall bank’s risk to commodity volatility. With the correct focus, both of these can have an impact on the banks balance sheet.
The new responsibility is a heightened awareness on customer protection. This has been a target of global regulatory focus since the 2008 crisis, and has also been reflected in domestic policy. Over the last five years, there have been multiple instances of the insurance regulator penalising banks for mis-selling insurance products. The draft Indian Financial Code provides for customer protection around financial advisory services. For banks, this means that adequate rules, procedures and accountability standards must be in place, so that the borrowers are not mis-guided while hedging their risk.
The objective of this roundtable is to bring together different stakeholders including financial intermediaries, end-user firms and regulators at a common platform to discuss these new business models and concerns. The key questions are:
| 10:00 - 10:10 | Introduction
Susan Thomas, IGIDR Finance Reasearch Group |
| 10:15 - 10:45 | The landscape of risk management for commodities in India
[presentation]
Nidhi Aggarwal, IGIDR Finance Research Group |
| 10:50 - 11:20 | Hedging using exchange traded derivatives: A firm’s perspective
Sumeet Mittal, Louis Dreyfus Commodities |
| 11:25 - 11:55 | Rights and responsibilities: building a robust financial advisory business
[presentation]
Renuka Sane, ISI Delhi |
| 12:00 - 13:00 | Panel discussion
Raj Benahalkar, NCDEX Paul Bloemendal, Ruchi Soya S K Mohanty, SEBI Puneet Pancholy, RBI Muralikrishna Prasad, Axis Bank Susan Thomas, IGIDR FRG |
| 13:00 - 14:00 | Lunch |