Banks cautioned on commodity loans

The Reserve Bank of India has advised banks to exercise caution while extending advances to ensure that bank...

The Reserve Bank of India RBI has advised banks to exercise caution while extending advances to ensure that bank finance is not used for hoarding. Banks are required to review their advances to traders in agricultural commodities to ensure that bank finances are not used for hoarding and forward the first such review to the Reserve Bank by May 15, 2008, to carry out supervisory review of banks8217; exposure to the commodity sector, the RBI said while unveiling the Annual policy statement.

RBI governor Y V Reddy8217;s announcement that the central bank will carry out a supervisory review of banks8217; exposure to the commodity sector has been welcomed by banks. They feel that it is basically to discourage the excessive hoarding of foodgrains by commodity traders and benefit the small farmers who approach banks for short-term loans to sell their crop at commodity exchanges.

Canara Bank chairman and managing director M B N Rao said that the RBI8217;s move is meant to stop excessive hoarding. But Rao maintained that the move will not have 8220;any impact on my bank8217;s exposure to the commodity sector8221; as Canara Bank lends mostly to small farmers for short-term durations. Rao hoped that RBI8217;s move will help curb the excessive hoarding of foodgrains at commodity exchanges.

Bank of Maharashtra chairman and managing director M D Mallya said that the 8220;RBI will ensure that banks should not lend for hoarding purposes; rather they should lend to commodity traders for economic activities. As we do take into account our all lendings on the front, I don8217;t think the RBI8217;s step will affect the exposure of my bank8217;s exposure to the commodity sector.8221; The prudential guidelines for specific off-balance sheet exposures of banks will be reviewed. The Reserve Bank will carry out supervisory review of banks8217; exposure to the commodity sector. Consolidated supervision of financial conglomerates has been proposed. The RBI will set up a working group for a supervisory framework for special purpose vehicles/ trusts.

Commenting on the issue, Devendra Vora, a leading trader, said, 8220;Banks will have to submit reviews of commodity advances to the RBI by May 15 and I think all commercial banks may tighten their advances to the commodity sector, mainly to traders, processors and commodity crushers at least for the time being. It is just to prevent hoarding of essential commodities at the time when prices are on the rise.8221;

Banks offer commodity loan mainly to big traders, producers and commodity processors, including flour millers, dal mills, oilseeds crushers and ginners especially for cotton. 8220;With the rising prices of major essential commodities such as rice, wheat, oilseeds, and pulses, banks will be more careful about commodity loans. I believe banks will also review loans against warehouse receipt,8221; added another trader.