Indian banks need to set aside money not only for the loans given to corporations and individual borrowers that have gone bad but also their exposures, guaranteed by the state and central governments, if there is stress. After it was found that the stocks of foodgrains kept in the warehouses of the Punjab government are inadequate to cover the loan against such stocks, the Reserve Bank of India (RBI) has directed banks to set aside 15% of such exposure. The gap could be anywhere between ₹ 12,000 crore and ₹ 20,000 crore. The banks have to make the provision in two stages, 7.5% each, in the March and June quarters, even as their exposure will continue to be classified as standard loans.
Food credit, a pre-emptive credit for procurement, stocking and distribution of foodgrains, is the first charge on bank lending. This means, banks must disburse food credit before giving any other loans. They give such loans to the Food Corp. of India (FCI) as well as various state government agencies. FCI, responsible for the distribution of foodgrains, lends price support operations to safeguard the interests of the farmers and maintains buffer stocks of foodgrains to ensure national food security.
While the State Bank of India, the nation’s largest lender, leads the consortium of banks for disbursing food credit, the RBI assesses the credit limit for each bank, which typically reflects their share in deposits. The banks don’t seem to be meticulous in checking the quantity and quality of foodgrains procured and kept in warehouses as their loans to FCI is guaranteed by the central government, and the respective state governments stand behind the agencies that procure foodgrains on behalf of them. Simply put, their exposure to food credit is guaranteed by the sovereign.
Decades ago, the RBI had constituted a committee consisting of the representatives of banks, government of India, FCI and the central bank to review the consortium arrangement for food credit. In the October 2001 monetary policy review, then RBI governor Bimal Jalan announced that the report had been submitted and the RBI would look into it. What happened to this report is not known.
For the year ended 31 March, out of the overall ₹ 75.3 trillion credit extended by the banking system, outstanding food credit was a little over ₹ 1 trillion and Punjab’s share was around 40%, in sync with the state’s share in the national stock of foodgrains.
Apparently, the missing stocks in Punjab granaries are not a discovery now. This has been the case for years and the state government, FCI as well as the RBI are well aware of this. Till 2014, FCI used to reimburse the state agencies such as Punjab State Civil Supplies Corp. Ltd and Punjab Agro Industries Corp. Ltd for purchasing wheat and paddy from the farmers and these agencies, in turn, paid the banks. For the past two years, FCI has been paying the banks directly against the so-called cash credit limit, a secured line of credit that the Punjab government enjoys from banks for procuring wheat and paddy.
Various theories have been doing the rounds about the missing stocks, ranging from an issue of reconciliation of accounts between FCI and the state government to rampant corruption in some of the foodgrains procurement agencies. Apparently, the cost of transportation of foodgrains to the warehouses has also been a bone of contention between the government and FCI. The government claims that the money taken from banks as loans have indeed been utilized for food procurement and there is no misutilization of funds.
Indian banks’ disappointment with the government and government agencies has not been new. The National Agricultural Co-operative Marketing Federation of India (Nafed), an autonomous body under the Union ministry of agriculture, features in the bank defaulters’ list along with Vijay Mallya’s Kingfisher Airlines Ltd. Nafed, a multi-state co-operative society that promotes co-operative marketing of agricultural produce for the benefit of farmers, owes at least ₹ 1,500 crore to a clutch of banks, including the State Bank and Punjab National Bank. The banks have moved the debt recovery tribunal against Nafed, but recovery seems to be far away.
Even if the banks want to close the tap of food credit to Punjab, they won’t be able to do so as RBI has already authorized a cash credit limit of ₹ 17,523 crore towards the first instalment for procurement of wheat in the state. RBI stepped in a few days after chief minister Parkash Singh Badal met Prime Minister Narendra Modi, seeking his intervention for the immediate release of ₹ 20,094 crore cash credit limit by banks to ensure a smooth wheat procurement operations that have started this month.
Technically, there is no difference between the state and a corporate defaulter. Still, the banks would neither dare to move court against Punjab nor stop lending to the state agencies for foodgrains procurement simply because they will have to do business in the state. In March 2015, collectively all banks had 6,024 offices in Punjab, almost as many as they have in Rajasthan, the biggest branch network among all states in north India. Their non-food loan exposure to various companies and individuals in Punjab was to the tune of close to ₹ 2 trillion in March 2015 and deposit mobilization was around ₹ 2.6 trillion. They cannot afford to jeopardize their Punjab operations.
My understanding is quite a few other states are facing a similar situation in terms of mismatch between the value of stocks kept in warehouses and loans taken against them. This means, the banks will have to provide for more, but they won’t be able to do anything against such states for fear of losing business there.
Currently, the interest rate on food credit is uniform across all states, based on the weighted average of the loan rates of five large banks. The least they can do is raising the interest rate on cash credit for procurement and stocking foodgrains in a state like Punjab, factoring in the risk premium.
Tamal Bandyopadhyay, consulting editor at Mint, is adviser to Bandhan Bank. He is also the author of Sahara: The Untold Story and A Bank for the Buck. His Twitter handle is @tamalbandyo.
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