Foodgrain procurement: Banks to tighten norms for cash credithttps://indianexpress.com/article/business/banking-and-finance/foodgrain-procurement-banks-to-tighten-norms-for-cash-credit-2758101/

Foodgrain procurement: Banks to tighten norms for cash credit

Banks, which suffered losses and reported huge non-performing assets (NPAs) in the December quarter, are expected to resume cash credit only after resolution of the ongoing issue.

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The RBI had asked banks to set aside 15 per cent as provisions when it was discovered that the Punjab government warehouses did not have enough foodgrain stocks to cover the loan amount.

Banks which are in a bind over the Reserve Bank directive to make provisioning for Rs 12,000-20,000 crore cash credit extended for foodgrain procurement are likely to tighten the lending process.

Currently, banks are not involved in any verification of physical stocks for which the cash credit is used. “Banks don’t conduct any inspection or verification of stocks. This situation is likely to change,” said a banking source. Bankers are meeting on Monday to discuss the issue of provisioning of 15 per cent on the cash credit extended to the Punjab government. The RBI had asked banks to set aside 15 per cent as provisions when it was discovered that the Punjab government warehouses did not have enough foodgrain stocks to cover the loan amount.

Banks, which suffered losses and reported huge non-performing assets (NPAs) in the December quarter, are expected to resume cash credit only after resolution of the ongoing issue. “Banks will release funds only after they are satisfied about the stocks warehouses and provisioning of the previous shortfall,” said a bank official.

According to a banker who was involved in the food credit business, banks are totally in the dark of foodgrain stocks in the godowns. While banks extend the credit to Food Corporation of India (FCI), foodgrain stocks are under the State government control. The interest which is normally charged at the Base rate.

“Banks should verify whether the required stocks are in the godowns. If provisioning has to be made by banks, the interest rate charged will also go up,” he said. While State and Centre loans are considered sovereign borrowings, that status has taken a hit with the Punjab food credit saga.

FCI depends on an annual cash credit limit of around Rs 55,000 crore public sector banks for procurement of rice and wheat from the farmers which in turn is distributed to states for the Public Distribution System. FCI avail these loans against the value of foodgrains stock held with the corporation. On the other hand, the Centre’s outstanding dues to FCI shot up from Rs 7,377 crore five years ago to Rs 56,114 crore in fiscal 2015.

Meanwhile, a Punjab government statement said all payments are released by FCI directly to the bank without recourse to the state, after receipt of stocks and as per the specification fixed by the Centre. These deliveries are dependent on the schedule fixed by FCI from time to time as per demand in various parts of the country, it said in the release.

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The food credit issue has now added to the stress of banks. Rating firm Crisil had said that weak assets of public sector banks are set to balloon to Rs 710,000 crore — which is 11.3 per cent of the loan book — by March 2017. Crisil recently downgraded its ratings on the debt instruments of eight PSU banks and revised its outlook on five others to ‘negative’ from ‘stable’.