Mumbai: The government is likely to cushion public sector banks’ Rs3,600 crore provision requirement for farm loans that they have waived by paying interest on delayed reimbursement of such loans.
State-owned banks, which make up about 70% of the Indian banking industry’s assets, need to make such provisions because they will have to wait until July 2011 for full reimbursement of farm loans waived. Since the government is not reimbursing them of the money up front, the banking regulator doesn’t want the lenders to treat the loans as “performing” assets unless the provisions are made on their balance sheets.
The issue came up for discussion at a bankers’ meet with finance minister P Chidambaram on Wednesday and the minister assured them that the government will pay interest on delayed payments to take care of the provision requirement, said a banker who attended the meeting but does not want to be identified.
If this is not done, a substantial portion of their 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.
The Reserve Bank of India 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 the date of the RBI circular—30 July.
The government will have to pay the banks 9.56% interest to take care of their provision requirement.
This will not add to the burden of the government and widen its fiscal deficit since the actual firm loan waiver package will be less than Rs71,700 crore as has been envisaged, said a finance ministry official who does not want to be named.