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G. Srinivasan

NEW DELHI, March 17

THE price insurance scheme for coffee growers, currently on the anvil, will make the Coffee Board the principal to the transaction and retail banks such as Canara Bank, which originally fashioned such a risk management strategy, become an agent.

Official sources told Business Line here that the Coffee Board proposal of July 2002 called for access to risk management instruments for coffee growers to provide protection against volatility of coffee prices and the consequences of uncertainty. The original proposal sought to enable Canara Bank to take the role of the principal or lead transaction manager (LTM), while the Coffee Board acted as a facilitator and the Commodity Risk Management Group (CRMG) of the World Bank as an "honest broker" and technical advisor.

This proposal also envisaged that after completion of the willingness-to-pay survey, Canara Bank would determine the demand for risk management instruments and then purchase them in the global markets. It would act as principal to the transaction, but would buy only in line with orders from customers, thus taking no risks.

But the apex bank, the RBI, invoked Section 8 of the Banking Regulatory Act that precludes banks from trading in "goods". Since banks are precluded from retailing derivatives, various alternatives were examined and assessed by members of CRMG during a visit to Bangalore last month and by a steering group set up to consider alternatives. The sources said from the preliminary rounds of talks with the alternative stakeholders such as cooperatives (COMARK), Coffee Futures Exchange of India Ltd, Curers and Exporters, it became obvious that there was little possibility of any one of these alternative entities acting as principals— at least for the pilot project.

As per the new proposal, the Coffee Board would be the principal to the transaction and retail banks such as Canara Bank become an agent.

The sources said the new proposal would be put up for the consideration of the RBI at a meeting to be held in Mumbai on March 21 in which the Additional Secretary, Ministry of Commerce, in charge of plantation industry, Mr L.V.Saptharishi, the Coffee Board Chairperson, Ms Lakshmi Venkatachalam, would meet the RBI Deputy Governor, Mr Vepa Kamesam, and the Executive Director, RBI.

The sources said under the revised proposal, the retail banks have clear incentives to take part— the use of price insurance by their customers raises the quality of their loan portfolios and

Simultaneously, the additional borrowing by their customers for the price insurance expands their portfolios without additional costs. It also allows the participating banks an opportunity to use the insurance to attract new customers. The sources, however, pointed out that while these gains have considerable monetary value, the ability to charge high transaction costs was likely to be circumscribed by the initially high cost of the insurance contract itself, encountering some purchaser resistance to high charges.

Under the new proposal, the Coffee Board need not have to manage the transactions on behalf individual growers or aggregate below the level of retail banks. This is of particular importance because it eliminates the needs for a new infrastructure within the Coffee Board.

Again, the Coffee Board need not subsidise the premium that had already been removed from the previous project structure, the sources noted.

Uncertain prices foster risks not only for growers but also for banks that potentially lend to these growers. Hence the banks too charge high interest rates to growers and some might spurn to provide credit at all. Therefore, it was crucial that a risk management strategy was devised for the coffee growers by taking due advantage of the extant global derivative markets for commodities, the sources added

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