RBI approves restructuring of Rs30,000 crore in food credit to Punjab

Banks will convert the cash credit limit worth Rs30,000 crore into a 20-year term loan at a lower interest rate of 8.25%


Food credit is disbursed by banks to the Food Corporation of India (FCI) and various state govt agencies for buying, stocking and distributing food grains. Photo: Mint
Food credit is disbursed by banks to the Food Corporation of India (FCI) and various state govt agencies for buying, stocking and distributing food grains. Photo: Mint

Mumbai: The Reserve Bank of India (RBI) has approved a proposal to restructure around Rs30,000 crore of food credit given to Punjab state agencies, said two bankers with direct knowledge of the development. 

The Rs30,000-crore amount is the mismatch between food stocks available in Punjab warehouses and loans granted over the past decade. 

According to the proposal, a State Bank of India-led (SBI-led) consortium of 68 banks will convert the cash credit limit worth Rs30,000 crore into a 20-year term loan at a lower interest rate of 8.25%. Cash credit is a short-term cash loan to a company and typically attracts higher interest rates. 

However, the central bank has not yet agreed to the banks’ request to write back provisions made against their exposure to the Punjab state procurement agencies. In April, RBI had first asked banks to set aside 15% provisions in two instalments against these missing stocks, which was calculated at Rs12,000 crore at that time. 

Spokespeople for RBI and SBI declined to comment. Emails sent to Punjab government officials were unanswered.

“Restructuring loans given to Punjab procurements is positive for the banking system as they will start accruing income on these loans. But such dispensations should not set a precedent for other states in future,” said Karthik Srinivasan, senior vice-president and co-head of financial sector ratings, Icra Ltd.

Food credit is disbursed by banks to the Food Corporation of India (FCI) and various state government agencies for buying, stocking and distributing food grains. At the end of June, outstanding food credit was about Rs1 trillion, a fraction of the Rs72.9 trillion bank loans. Punjab, the grain bowl of India, has the single highest share among states in food credit. 

While SBI, the country’s largest lender, leads in disbursing food credit, RBI assesses the quantum of credit to be disbursed in each season and the limit for each bank. 

Earlier, FCI, which buys food grains, used to pay the agencies which then repaid their dues. However, from 2014, FCI directly credits the banks for the food grain it purchases against the Punjab government’s line of credit. 

These loans, given to both FCI and procurement agencies, are considered fully secure as it has the backing of the sovereign guarantee. But this episode has challenged those assumptions. 

It comes at a time when the Basel Committee on Banking Supervision is asking whether sovereign risk is truly risk-free and debating changes to the global regulatory framework by increasing the capital requirement on sovereign bonds. 

“This is a very live issue with standard-setting bodies. Even if a low 2% and 5% risk weight respectively on the bank holdings of central and state government securities is assumed, the banking system may be required to hold around Rs6,000 crore of capital on this count alone,” RBI deputy governor S.S. Mundra said at the SBI Banking & Economic Conclave on 30 September. 

“While we are resisting the proposals during negotiations, the state governments have to be extremely cautious as any irresponsible act on their part could have repercussions both for our arguments and also for instruments that can be treated as eligible under LCR (liquidity coverage ratio) framework,” he warned. 

Indian lenders have to set aside 21% of deposits towards government bonds on their books in the form of a statutory liquidity ratio. 

What makes the Punjab issue sensitive for banks is that the state is not exactly in the pink of health economically. It has been in the midst of a liquidity crisis over the past few years and is the highest user of RBI’s ways and means advances (WMA), a type of overdraft facility made available to state and central governments to meet temporary revenue mismatches, according to an India Ratings report. 

While the state’s fiscal deficit as a proportion of its gross state domestic product is likely to be contained at 2.88% for the current fiscal, the quality of deficit has been a concern. About 2.4% of its gross state domestic product goes to finance interest payments, second only to West Bengal.

More From Livemint