Basmati Rice Exporters NPA Rs. 32,994 Cr (USD 4.4 Billion): A Soul Search and the Truth

I confess, this is a long blog.  To read the gist, kindly go to the  “ Lessons ”.

Once the Grand Trunk Road from Delhi to Chandigarh housed number of Basmati rice mills and bustling export activities happened with greater number of employments.  Now several basmati rice mills are shut in this area. Out of 22 basmati rice exporters, whose default to the Bank is of worth Rs. 32,994 Cr,  7 exporters were among top 10 exporting companies between 2003 to 2008.  India has lost 7 important exporting companies in the last decade. 

One of the India’s oldest basmati rice brands – Pari lost its eminent market position due to tax and other regulatory issues in the late 1990’s. The present issue is not about compliance. The fall or defaulting of REI Agro, one of the largest business houses of basmati rice, began in the year 2013. Till the visible fall, the Equity Research and Credit Rating Companies had always recommended investing in this firm. REI Agro was included among the 50 Top Wilful defaulters by RBI. Further, RBI said that these defaulters amount (Rs 68,607-crore) was technically/prudentially Written Off, till September 30, 2019.

The private equity firm TVS Capital and International Finance Corp (IFC) announced a $25-million (about Rs 124 crore) investment in Dunar Foods in 2012. Hassad Food Company, a wholly-owned subsidiary of Qatar Holding and part of Qatar's sovereign wealth fund, Qatar Investment Authority (QIA), picked up more than 51 per cent stake worth USD 100 Million in Bush Foods (then leading exporter) in 2013.  Singapore-based agricultural processing company Olam International sold its basmati rice milling facility in Haryana to Spanish firm Ebro Foods for $14.5 million in 2013.  The above indicates bustling of investments in the Basmati rice milling. Then what changed this trend?

Canara bank requested Regional Passport Office to stop immigration of Directors of Punjab Basmati Private Limited. A report states, forensic audit of Radikal Food Limited revealed that this company had issues relating to overstated stock statements and diverted the sanctioned credit limit for other purposes. This company used inter and intra firm bogus transactions and disposed the primary security that is hypothecated stocks without depositing the proceeds in the loan accounts. In the complaint, State Bank of India said that the criminal role of bank officials had not been investigated in the staff accountability report. Therefore, the possibility of criminal misconduct on the part of bank officials of consortium members may not be ruled out in the case, it said. There was a money laundering probe on Dunar Foods Ltd, which is one of the defaulted exporter.

Basmati rice exports suppose to destine Iran was diverted to Dubai but payments were remitted from Iran without receiving the goods. Enforcement Directorate and Income Tax pursued the matter from 2016 under Judge MB Shah Special Investigation Team appointed by Supreme Court. All the above clearly indicate that financial and accounting hygiene of Basmati rice export sector was not satisfactory in the past. What about now? Forensic audit on these stressed assets is required for any future mishap in order to protect public finance of bank and exports. 

In the year 2006-07, India exported 15,111 Ton of Basmati rice to Iran. Previously, India never exported more than few thousand tons to Iran. In the year 2009, suddenly basmati rice exports from India grew by 50 – 60% due to the demand from Iran. Initially, the export of basmati rice to Iran increased during the notification period of variety Pusa 1121. The export of basmati rice from India to Iran had roller coaster ride and it needs a careful examination on each issue and its timing.

The payment issue of Basmati rice goes back to 2006-07 and 2007-08, when companies began to export Pusa-1121 in a big way to Iran. The demand of Pusa 1121 variety made importers to pay 20% advance and the balance payment after receiving export documents in 2006 and 2007. From 2008-09 onwards, some exporters stopped insisting for the 20% advance money but accepted commercial term of documents against the payment. In the next stage, basmati rice exporters accepted selling on credit (60 days, 90 days, etc). Later, the importers started discussing quality issues and haircuts on the originally contracted prices. The competition between exporters of Punjab and Haryana started squeezing export profits, diluting the payment period and other terms and conditions in basmati rice exports.  Notably, the entry of some of the non-basmati rice players in basmati rice export changed the fundamental characters of market and its commercial terms.

Chronology of Events

2009

There was a news report about Arsenic residue in Pusa 1121 variety in the year 2009. Quickly the All India Rice Exporters Association (AIREA) had extended an invitation to Iranian organizations to ascertain themselves that the rice exported to their country are not contaminated by heavy metals as reported in sections of the Iranian press.

2011

In Summer 2011, the basmati rice exporters were caught in a payment crisis, with over Rs 2,000 crore worth of receivables piled up against shipments to Iran and Iraq.

2012

After the sanction of US and European Union in 2012 blocked the payment channels through Turkish and Gulf-based banks to Iran, India had agreed to buy about 45 per cent of the $11-billion Iranian oil in rupees. The Basmati rice export payment was routed through UCO Bank then. The play of Geo-economics started at this point. Iran complained that Indian traders lacked business acumen and compared them with the Chinese, who “were flooding the markets of Iran with China-made goods” traded in renminbi, which Iran had accrued by selling around 25-30 million tonnes of crude a year to Beijing. The Indian government was pushing exporters of various goods to liquidate the accumulating rupee position while Iran continuously exporting oil to India. Naturally Indian basmati rice exporters were keen to sell more quantity under such government policy. They never realized the emerging danger.

2013

In November 2013 when the basmati procurement season began, an unconfirmed report floated in the market that Indian rice contained a heavy metal – Cadmium. This had certainly put the negotiating strength of Indian exporters and authorities with Iran in a back foot.

2014

In September 2014, the issue of Genetically Modified Rice was raised by the importing countries.  Between October 2014 to October 2015, Iran stopped issuing import permits in rice.  In the same period, Iran increased the rice import duty from 22% to 40%. It also used the Custom Valuation as an instrument of price negotiation. Iran brought an import monitoring system and made registration of those rice mills mandatory. On the other hand, Iran came with new pesticide residue limits and heavy metal residue limits to raise the temperature of the trade.

2015

When Indian delegation visited Iran in early 2015, Iran played the card of promoting Pakistan Basmati rice in exchange of electricity and allowing Letter of Credit towards Pakistani exporters. The registration of Indian rice mills to supply Iran in relation to brands was cancelled without any opportunity to place their position in early 2015. This was against the principles of natural justice. In December 2015, APEDA became a competent authority to issue consolidated certificate for export of basmati rice to Iran. 

2016

A Notification issued on DA against ECGC on 1^st October 2016.

2017

During August 2017, the market whispers were of Rs. 875 Crore of non-payment and renegotiation of prices were happening.

2018

During July 2018, APEDA had advised to take due care while undertaking export in brands such as Mohsen and Avazah.  In October 2018, the major Iranian Rice Importer – Mohsin had filed bankruptacy.

2020

On 21^st February 2020, APEDA issued a trade advisory stating that the Registration Certificate (RCAC) for exports of Mohsen and Avazah shall not be issued. The Honorable High Court stayed the trade advisory of APEDA dated 21^st February 2020. Now export of Mohsen and Avazah brand could be performed from India. 

Lessons

1. Later in the year 2008, basmati rice market witnessed two important changes. a) The basmati rice definition was changed and new variety Pusa 1121 got included. The higher yield of pusa 1121 variety in comparison with traditional basmati varieties and pusa basmati 1 had increased the production and supply. b) The growing area of Basmati paddy was unofficially further expanded to Madhya Pradesh increased the supply into the market. Number of exporters had set up rice mill in Madhya Pradesh.  The change in area and yield of the trade perceived Basmati rice paddy production rapidly changed the market. It led to commodification of basmati rice. So these new parameters imposed fresh risk on basmati rice market in addition to geopolitical risks.

2. The major reason for accumulation of NPA in Iran exports is that the importers endeavored to negotiate under pretext of quality issues to impose haircuts on the originally contracted prices. Such quality issues never emerged in other export destinations. The non-acceptance of export documents from Bank resulted in non-lifting of containers from port. It eventually forced the exporters to travel Iran and settle the deal in reduced prices even with a loss.  Similar pattern of issues was hovering over export of Buffalo meat, soyameal and tea to Iran.  Lack of institutional memory and an oversight to identify the emerging design from unfolding events were major disappointments in this case. 

Banks were exposed to the risk of pre-shipment credit in this segment of export. The farmer, packing material supplier, transporter and other vendor payments were delayed or defaulted.

2. Under the US Sanction on Iran, UCO Bank managed the escrow account of basmati rice exports. The definition of confirmed letter of credit became a meaningless when UCO Bank obtained a re-confirmation from Iran. Arbitrary claims and raising issues after releasing the cargo was the pattern emerging in the banking channels. Finally, it became a fireball to attract most of these companies into a status of stressed asset.

3. Considering the long experience of ECGC, it could have identified the emerging market trend in Basmati rice exports in relation to change in the definition of basmati rice and notification of new variety – Pusa 1121. The Commercial and Political Credit risks could be owned up by ECGC but the risk relating to non-tariff barriers and quality (SPS and TBT) should be vested with Export Promotion Councils, Commodity Boards and Export Promotion Authorities. The lack of balance between love for export promotion and credit risk was a major reason.  The role of ECGC is critical for the Balance of Payment of India in coming days. If assumed, the uncurbed credit risk will make the banks to suffer in the coming days.

4. Though the issues of non-payment and quality started in mid 2015, why DGFT issued the notification of allowing DA against ECGC only on 1^st October 2016.  Has any basmati rice shipments performed in the period 2015 to 2016 not realized the payment and became NPA? If so, the accountability lies on few hands.

5. The DGFT has issued a prohibiting notification on the exports of empty printed gunny bags with a label of ‘Indian basmati rice’ when exported along with the consignment of basmati rice. If such printed gunny bags are exported from Bangladesh which is the major producer of jute to India’s importing partners either in Basmati rice or other products, what is the strategy to prevent the  mislabeling and the infringements? Notable point is that India is the major supplier of jute seed to Bangladesh and Bangladesh has got significant number of jute mills to supply gunny bags to importing nations! The new economic order in the period of post Covid19 is to be dealt differently in the view of exports of basmati rice to Dubai, based on past experiences.

6.  On the part of APEDA, it has endeavored to protect further non-payment issues in public interest but it has been unsuccessful in short term. It has still numerous options to protect the public finance and exports in co-ordination with ECGC, EIC and DGFT even in this scenario of emerging non-payment issues and court order.