Pun­jab De­nies Mis­use of Funds

The Economic Times - - Front Page - OP­PO­SI­TION GOES ON THE OF­FEN­SIVE

The Pun­jab state govern­ment is­sued a re­sponse to the ET re­port on Fri­day re­gard­ing banks hav­ing to make pro­vi­sions against loans to fund its food­pro­cure­ment pro­gramme. It de­nied any mis­use of funds.

Ahead of their meet­ing with the Re­serve Bank of In­dia of­fi­cials, the lenders are con­cerned that small banks would be hit se­verely due to the pro­vi­sion­ing man­dated be­cause of the Pun­jab govern­ment’s in­abil­ity to bridge the short­fall be­tween the amount of food­grain that should have been bought with bank funds and the ac­tual stock, said sev­eral peo­ple aware of the mat­ter.

“Loans to FCI (Food Cor­po­ra­tion of In­dia) have been di­rected lend­ing since it was based on the al­lo­ca­tion made by the nodal bank and based on the di­rec­tion given by RBI and the cen­tral govern­ment,” said a banker who did not want to be iden­ti­fied. “We are caught in the cross­fire be­tween the state and the cen­tral govern­ment.” This seemed to be borne out by the state govern­ment’s re­sponse.

“The mat­ter re­gard­ing the out­stand­ings/re­ceiv­ables per­tain­ing to the food credit ac­count of the state is al­ready un­der dis­cus­sion with GoI (govern­ment of In­dia),” it said. “A joint com­mit­tee of GoI and state govern­ment has been look­ing into the gamut of is­sues on this ac­count, and the mat­ter is be­ing de­lib­er­ated upon so as to set­tle the claim of the FCI/GoP (govern­ment of Pun­jab).”

Pun­jab has tra­di­tion­ally been sup­ply­ing about 40% of the to­tal stocks to­ward the cen­tral pool and is by far the largest con­trib­u­tor to it, the state said.

“In the said news item, it has been sought to be high­lighted that food stocks of Pun­jab have ‘dis­ap­peared’ and that there is a gap be­tween the avail­able food stocks in the state and the amount it owes the banks,” the govern­ment said. “The said as­ser­tion is wholly in­cor­rect, as the food­grains pro­cured over the years have been duly ac­counted for and handed over to the FCI, through well-doc­u­mented trans­ac­tions, and the same are duly au­dited.”

Banks pro­vide loans to FCI on the ba­sis of or­ders from RBI de­pend­ing on the size of the bank, in con­sul­ta­tion with the cen­tral govern­ment. RBI has al­ready re­jected the banks’ plea that the loans should be re­garded as sov­er­eign debt but it’s not clear how the reg­u­la­tor will re­spond at next week’s meet­ing.


The state said it doesn’t have any­thing to do with the cen­tral bank’s in­struc­tion on pro­vi­sion­ing. “As far as the is­sue of pro­vi­sion­ing norms on banks are con­cerned, it is sub­mit­ted that the same are as per RBI reg­u­la­tory di­rec­tions, and state govern­ment has no com­ments to of­fer on this,” the state said. The reg­u­la­tor di­rected banks to set aside 15% as pro­vi­sions af­ter it came to light that the stocks that the Pun­jab govern­ment said are in it ware­houses were not ad­e­quate to cover the loan amount. The amount of loans that could be at risk is about .₹ 12,000 crore while some bankers put it higher at .₹ 20,000 crore. Although th­ese will con­tinue to be clas­si­fied as stan­dard loans, RBI has told the banks to set aside 7.5% of their earn­ings in the March quar­ter and an­other 7.5% in the June quar­ter against them.

This came as a rude shock to the banks, al­ready go­ing through a painful bad-loan cleanup ex­er­cise, which were un­der the im­pres­sion that loans to any state will be treated as sov­er­eign debt. The bank­ing reg­u­la­tor’s ac­tions put a ques­tion mark on this faith. Bankers say this could com­pletely change the way lenders look at loans to states or any state-backed en­ti­ties in the fu­ture.

“Till now the lend­ing rates for most states were slightly marked up above the cen­tral govern­ment yields,” said an­other banker who did not want to be iden­ti­fied. “From now on, prob­a­bly the risk could be priced based on a state’s fi­nan­cials and any in­sti­tu­tion’s fi­nan­cial ca­pa­bil­i­ties.”

State Bank of In­dia, which leads the syn­di­cate of banks, has called for a meet­ing on April 18 to dis­cuss the is­sue. The de­vel­op­ment could also cause po­lit­i­cal dis­com­fort to the Parkash Singh Badal govern­ment whose pop­u­lar­ity is wan­ing due to ris­ing drug-re­lated is­sues and law­less­ness. Aam Aadmi Party and Congress have raised the is­sue as the state heads to polls in 2017.

State Bank of In­dia has called for a meet­ing on April 18 to dis­cuss the is­sue

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