Grain procurement: Banks to settle Punjab food credit on yearly basis

Loan amount to be settled every year at an interest rate not less than base rate.

Written by George Mathew | Mumbai | Updated: October 20, 2016 12:59 am

Banks will provide loans to poll-bound Punjab — which accounts for close to 40 per cent of food credit — for food grain procurement on the condition that the loan amount will be settled every year at an interest rate not less than the base rate, said a top banking source.

“We have started disbursing credit to Punjab for this season from October 1. The loan amount will have to be settled by the end of the year. Then only we will disburse loans for the next year. There’s no question of keeping it a legacy issue anymore,” said a senior official of a state owned bank who is involved in the loan negotiations. “The interest rate will not be less than the base rate. We can’t issue loans below the base rate.”

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The state government led by the SAD-BJP alliance had earlier faced flak for the delay in release of the loans on many occasions because of the mismatch between the value of physical stocks of food grain and the loans used for procuring food grains. The central bank had recently approved the restructuring of close to Rs 30,000 crore of such legacy loans at an attractive term and tenure.

State Bank of India, which has a base rate of 9.30 per cent, is the biggest lender for Punjab foodgrain procurement. If there is a shortfall in repayment, the state and Central government will have to chip in with funds. “We won’t be checking the godowns to inspect if goods procured under bank loans are there or not. The repayment gap will be settled by the governments. They will have to negotiate,” said the bank official.

“When the next year’s season procurement season comes, this year’s loans will have to be fully settled. That’s the condition,” he said.

The Reserve Bank, in consultation with banks, has approved a cash credit of Rs 26,000 crore for food grain procurement this season. Punjab Mandi Board vice chairman Ravinder Singh Cheema had gone on record saying that “the RBI has given its approval for the Rs 26,000 crore of cash credit limit for procuring paddy from Punjab”. “Now, the state government will seek approval of the Centre by sending the RBI’s approval letter for the release of funds for the purchase of paddy,” Cheema was quoted as saying by wire agencies.

Paddy procurement in Punjab commenced from October 1 and the state is expecting procurement of 150 lakh tonnes of crop. The new arrangement has been worked out after the Reserve Bank and banks found a mismatch of close to Rs 12,000 food credit to Punjab earlier this year. The RBI then told banks to set aside 15 per cent as provisions when it was discovered that the Punjab government warehouses did not have enough food grain stocks to cover the loan amount. Punjab accounts for close to Rs 1,00,000 crore of food credit. Banks which are struggling in the face of surging bad loans had taken a hit of over Rs 1,500 crore due to the provisioning.

“This is a legacy issue which happened over several years. This amount will have to be settled,” bankers said.

While banks extend the credit to Food Corporation of India (FCI), food grain stocks are under the State government control. FCI depends on an annual cash credit limit of close to Rs 55,000 crore from state-owned banks for procurement of rice and wheat from farmers which in turn is distributed to states for their Public Distribution System. FCI avails of these loans against the value of food grains stock held with the corporation.