Mumbai: The government is likely to cushion public sector banks’ Rs3,600 crore provisioning requirement for farm loans that they have waived, by paying interest for the delayed reimbursement of such loans.
List of hopefuls: A file photo of Vijaya Bank officers in Mandya, Karnataka, putting up a list of farmers whose loans were waived. Photograph: Hemant Mishra / Mint
State-owned banks need to make such provisions because they will have to wait until July 2011 for full reimbursement of farm loans waived.
The Reserve Bank of India (RBI) doesn’t want the lenders to treat the loans as “performing” assets unless provisions are made on their balance sheets.
Finance minister P. Chidambaram, who met bankers on Wednesday, assured them that the government will pay interest on delayed payments to offset the provisioning requirement, said a banker who attended the meeting but did not want to be identified. If this is not done, a substantial portion of the banks’ combined June quarter profit of Rs5,350 crore will be wiped out.
Under a directive by the Union government, lenders waived Rs71,700 crore of farm loans this year, of which public sector banks’ share was Rs30,640 crore. RBI wants banks to provide for the “loss” in the net present value of these loans because they will be paid by the government over a period of more than three years. Net present value is the difference between the present value of cash inflows and outflows.
The central bank has assumed that 32% of the due amount will be received by September 2008, 19% by July 2009, 39% by July 2010 and the remaining 10% by 2011. The discount rate for arriving at the present value of these cash flows should be 9.56%, which was the yield to maturity of the 364-day government of India treasury bill prevailing on 30 July, the date of the RBI circular.
The government will have to pay the banks 9.56% interest to take care of their provisioning requirement. This will not widen the government’s fiscal deficit because the actual farm loan waiver package will be less than Rs71,700 crore envisaged, said a finance ministry official who did not want to be named.