1. The Models

A. Farmer Level - Milk Claim Loan

Used in Turkey and now in Gujarat:

Loan made to milk producers who present a document from cooperative they are member of stating they can pay claims to bank in milk; and to producers whose milk claims are paid into bank by cooperative

In India this is called Tripartite Agreement Model:

Bank + Farmer + Milk Union enter tripartite agreement. Bank lends for cattle purchase. Repayment not from farmer directly, but Union deducts from daily milk payment and remits to bank.

• Trip agreement with borrower consult dairy and bank for supply of milk and loan
• Hypothecation to bank in RC book + Insurance

B. Cooperative Level - Receivable Financing

For Milk Unions / Producer Companies who supply to HoReCa, Institutions.

Example: Dairy unit supplies milk to Hotels/Restaurants/Canteens in Chennai. Payment cycle 30-45 days. Blocks working capital. Lender like Samunnati offers receivable financing by discounting all receivables from buyers. Repayment through deduction at dairy unit level for payment being made on behalf of aggregators.

C. Infrastructure Level - DIDF

Dairy Processing & Infrastructure Development Fund - Rs 11,184 crore corpus 2018-19 to 2030-31

NABARD raises fund from market and disburse loan to dairy cooperatives with 2.5% interest subvention through NDDB and NCDC

Loans flow: NABARD -> NDDB/ NCDC -> Eligible end borrowers - milk unions, state dairy federations, multi-state cooperatives, milk producer companies, NDDB subsidiaries. Government provides 2.5% interest subvention making DIDF cheaper.

2. Legal Structure - How Security Created?

Milk is movable, perishable, cannot be pledged with possession. So:

Not Pledge: Pledge requires delivery of possession. In Lallan Prasad vs Rehmat Ali (1967) Supreme Court observed pledge is special form of bailment wherein pledger pledges personal property to pledgee as security. If you don't give physical milk to bank, not pledge.

Hypothecation: Bank has charge but possession remains with cooperative. Most dairy loans are hypothecation of receivables.

Assignment of Receivables: Under Transfer of Property Act + Factoring Regulation Act 2011. Milk receivable = actionable claim. Assigned to bank via tripartite agreement. Must give notice to debtor - the Milk Federation.

Escrow: All payments from GCMMF/Union routed to escrow account.

Priority Sector: Advances up to Rs 10 lakh against pledge/hypothecation of agricultural produce including warehouse receipts for period not exceeding 12 months classified as agriculture priority sector.

3. Case Laws - Detailed

CASE 1: Central Bank of India vs Korampallam Milk Producers' Cooperative Society - 19 Oct 2011 - Madras High Court - The Landmark for Milk Receivable

Facts: Bank lent to 9 farmers for cattle purchase only on accepting tripartite agreement - Ex.A.9, whereby 10th defendant Milk Union undertook to pay dues payable to bank under loan. Farmers poured milk to Union, Union to pay bank.

Farmers defaulted, bank sued Union.

Holding: Court held tripartite agreement enforceable. Union cannot say milk was not supplied or no money due. Once Union undertakes to deduct and pay bank, it becomes principal debtor to extent of milk price payable. Union liable.

Principle: This is foundation of milk receivable lending. Without tripartite, bank cannot recover from Union.

CASE 2: Lallan Prasad vs Rehmat Ali (1967) SC + Recent SC 2022 on Pledge

Principle 1: Any form of movable property can be subject matter of pledge.

Principle 2: Supreme Court held Contract Act does not recognize sale of pledged goods by pawnee to self in event of default. As per Sec 176 Contract Act, in default pawnee may bring suit or sell pledged items on giving pawnor reasonable notice of sale.

Application to Dairy: You cannot pledge standing milk in cattle. You must hypothecate future receivables. If you try to sell cattle without notice, sale void.

CASE 3: Supreme Court on Hypothecation as Guarantee - 2023

Supreme Court held Deeds of Hypothecation, particularly clause 5(iii), amounted to contract of guarantee under Sec 126 Contract Act. Allows lender to treat cooperative as guarantor if farmer defaults.

Used to structure DIDF loans: NDDB guarantee + cooperative hypothecation = Financial Creditor status under IBC.

CASE 4: Milk Pool Price Receivable Accounting - Tax Tribunal Case

Facts: Provision of Rs 76 crore for milk purchase/sale account for milk pool price receivable from Gujarat Cooperative Milk Marketing Federation Ltd has been made by union and same credited to respective primary cooperative societies

Holding: Tribunal accepted receivable model. Milk price not final at time of pouring, final price determined later as pool price. Receivable is contingent but valid for financing.

Lesson: Lend on provisional price, keep margin for final pool price adjustment.

CASE 5: NABARD Priority Claim - 2026 (2) TMI 438 - AT - IBC

Holding: NABARD's statutory claim to priority was not waived or forfeited, and entitled to amount kept aside under approved distribution mechanism. Appeal succeeded, rejection set aside.

Application: Under DIDF, NABARD loans have priority over other creditors in liquidation of milk union.

CASE 6: J&K Dairy Cooperative Scheme - Administrative Law

J&K Administrative Council accorded sanction to implementation of Dairy Cooperative scheme for Dairy Cooperative Societies. Under scheme govt shall provide 50% of loan and 20% of share capital to beneficiary cooperative societies.

Shows blended finance: Govt equity + bank debt against milk receivables.

CASE 7: Amul Pattern - Anand Milk Union Limited Success Story

Statement: Anand Milk Union Limited is success story of cooperative venture. Formed in 1946 by group of farmers in Gujarat aiming to prevent exploitation by middlemen and ensure farmers got fair price for milk.

This structure is what makes receivable lending viable - farmer gets remunerative returns, so repayment capacity stable.

4. Risk & Controls Framework for Banks

Best Practice Structure (Used by Samunnati, NDDB):

1. Tripartite Agreement with irrevocable instruction to Union to deduct
2. Assignment letter to Union - Notice under Sec 130 Transfer of Property Act
3. Escrow Account - All receivables from buyers / GCMMF credited to escrow, bank sweeps daily
4. Reconciliation - Milk quantity x Fat/SNF rate = Receivable - deduction
5. NACH mandate on farmer's savings account as fallback