Agriculture, GS-3, Uncategorized

No sanctity for sovereign guarantee

Livemint

Issue

A mismatch between the value of stocks kept in warehouses and loans taken against them.

Context

It has been found that the stocks of foodgrains kept in the warehouses of the Punjab government are inadequate to cover the loan against such stocks, so the Reserve Bank of India (RBI) has directed banks to set aside 15% of such exposure.

Food credit

  • Food credit, a pre-emptive credit for procurement, stocking and distribution of foodgrains, is the first charge on bank lending.
  • This means, banks must disburse food credit before giving any other loans. They give such loans to the Food Corp. of India (FCI) as well as various state government agencies.
  • FCI, responsible for the distribution of foodgrains, lends price support operations to safeguard the interests of the farmers and maintains buffer stocks of foodgrains to ensure national food security.

Backing of sovereign

  • While the State Bank of India, the nation’s largest lender, leads the consortium of banks for disbursing food credit, the RBI assesses the credit limit for each bank, which typically reflects their share in deposits.
  • The banks don’t seem to be meticulous in checking the quantity and quality of foodgrains procured and kept in warehouses as their loans to FCI is guaranteed by the central government, and the respective state governments stand behind the agencies that procure foodgrains on behalf of them.
  • Simply put, their exposure to food credit is guaranteed by the sovereign.

Fear factor

  • Technically, there is no difference between the state and a corporate defaulter (Kingfisher).
  • Still, the banks would neither dare to move court against Punjab nor stop lending to the state agencies for foodgrains procurement simply because they will have to do business in the state.

What can banks do?

  • Currently, the interest rate on food credit is uniform across all states, based on the weighted average of the loan rates of five large banks.
  • The least banks can do is raising the interest rate on cash credit for procurement and stocking foodgrains in a state like Punjab, factoring in the risk premium.

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