Banks, including State Bank of India (SBI) and HDFC Bank, expressed concerns after the Reserve Bank of India (RBI) asked lenders to provide for losses on food grain-related loans issued to the government of Punjab.
According to reports, a consortium of 30 banks extended loans of Rs 12,000 crore to fund the Punjab government’s foodgrain procurement programme. However, the RBI told lenders to mark the loans as potential non-performing assets (NPAs) and make provisions for them after Rs 20,000 crore worth of foodgrain went missing from godowns. The central bank has asked lenders to set aside 7.5% of the outstanding amounts from their earnings in the March quarter, and another 7.5% in the June quarter, which could lead to total provisioning of up to Rs 3,000 crore to the account.
Banks, meanwhile, have decided to freeze loans to the state for the time being.
“This should be a one-off,” said Gopal Krishan Kansal, chief general manager, national banking group, SBI, the country’s largest lender. “Ultimately the government is saying that there is some reconciliation issue with the FCI (Food Corporation of India) and the central government, and hopefully they will settle it in this quarter. It is unusual and so far it hasn’t happened as the government always guarantees... We have to see how things pan out and you never know ,(if other states also face issues).”
Historically, banks have never lost money in any component of food credit since the government always stands as the guarantor.
India’s second-largest private lender HDFC Bank has set aside provisions amounting to R150 crore during the January-March quarter and will make an equivalent provision in the April-June period for its exposure to the Punjab foodgrain loan.
“Obviously if there has been a provisioning, which has been mandated by the regulator, there is some concern on that,” said Paresh Sukthankar, deputy managing director of HDFC Bank. “Food credit has an element of FCI and state government exposures. In no component of food credit have banks lost money ever historically.”
On whether the government will pay back, he said: “That’s what I think the entire system will believe.”
Last week, minister of state for finance Jayant Sinha said the government was taking steps to check whether similar situation had spread to other states. “We need a systemic solution to ensure that whatever needs to be resolved across various agencies, can be done in a structured and systemic way. We are working with the RBI as well as with the banks and government agencies to ensure that the matter with respect to food stocks is satisfactorily resolved.”
”No other state government handles as much as the Punjab government. Though other states could face similar situation, the central government will try to resolve it… A freeze on lending could have further impact negatively on the rural growth after two consecutive years of droughts,” a private bank executive said.
“At the core of this decision was the missing stock of food grains worth Rs 20,000 crore from godowns in Punjab, which the state claims to have procured after taking loans from these banks… The freeze on bank lending to the government of Punjab, has blown over with the RBI issuing an authorisation of cash credit limit of Rs 17,523 crore, towards the first instalment for the procurement of wheat during the ongoing rabi season. The liquidity crunch for the government of Punjab has become a perennial problem,” according to a India Ratings and Research report.