Punjab food credit issue: a small but niggling worry for banks 

Even as the Centre is working with the RBI, banks and various other government agencies to ensure that the issue of irregularity in food credit accounts of the Punjab government are satisfactorily resolved, leading banks seem to be facing some pressure from such loans.

In a recent post-results media interaction, Jairam Sridharan, CFO at Axis Bank, said the bank had to make a provision of ₹105 crore for the food credit extended to the Punjab government. According to the bank, the RBI had stipulated a provision of 7.5 per cent on such loans, which implies that the bank has about ₹1,400-crore exposure to these loans, less than 1 per cent of its total loans.

The total food credit at the system level at about ₹1 lakh crore forms just a little over 1 per cent of the total bank credit and the irregularity in food credit (cash credit limit) extended to the Punjab government is said to be around ₹12,000 crore.

While banks have bigger fish to fry, with certain stressed corporate accounts individually running into thousands of crore of rupees, it is nonetheless an added burden for banks having to make provisions for such loans, otherwise considered sovereign.

For Axis Bank, the additional provisioning for these loans is about 10 per cent of the total provisions the bank made during the March quarter. Sridharan had said the bank would have to make a similar provision in the June quarter as well.

Why the worry Banks provide loans to Food Corporation of India and State government agencies for procurement of foodgrains. The FCI was set up under the Food Corporations Act 1964. The Corporation is the main agency responsible for the execution of food policies of the Centre. The functions of FCI primarily relate to the purchase, storage, movement, distribution and sale of foodgrains on behalf of the Centre.

FCI’s key source of finance, apart from unsecured short-term loans from various banks, is a cash credit limit that is provided by a consortium of 66 banks led by SBI. As on February 15, 2016, the cash credit limit sanctioned was to the tune of ₹54,495 crore. The consortium includes 19 nationalised banks and 13 private banks. The cash credit is secured against hypothecation of stock of foodgrains held by FCI and also guarantee provided by the government. Hence, this is seen as very-low-risk lending by banks.

Banks’ worry thus, stems from the fact that the RBI has now asked them to make provision for these loans. According to various reports, the State has been unable to account for the money disbursed by a consortium of banks led by SBI towards foodgrain procurement for two years — 2012-13 and 2013-14.

The other concern is that banks that have been charging nominal rate of interest on such loans may have to increase rates to factor in the risk of lending.

Spread reduced FCI gets short-term loans from various scheduled commercial banks, normally at base rate — the floor lending rate. On the other hand, the interest rate charged by the consortium on the cash credit is calculated on the average base rate of five banks having highest share in the consortium and a spread (mark-up) of 55 basis points is added to it. According to the 2014-15 annual report of FCI, during 2014-15, the spread was negotiated with banks and it was reduced by 10 basis points.

In 2014-15, the rate of interest for cash credit ranged between 10.73 per cent and 10.83 per cent. In 2015-16, rates have been on a downtrend, falling to 10 per cent (since February).

If banks have to make provisions on these loans, it can lead to increase in rates charged by banks on such loans. The average lending rate on non-food loans (as of December 2015) is upwards of 11 per cent.

Bank lending to the non-food credit segment has also been on the rise. After a fall of 22 per cent in 2014-15, total bank food credit has grown 46 per cent in 2015-16.