Banks May Shut Door On Punjab Food Loans
Lenders led by State Bank of India to meet today to assess situation, plan to lobby regulator this week against provisioning
MC Govardhana Rangan & Sangita Mehta
Mumbai: A consortium of more than 30 banks led by State Bank of India is poised to slam the doors on lending to Punjab government’s food purchases this season as they await a settlement on seemingly missing stocks worth as much as .₹ 20,000 crore, said two people aware of the matter. This follows the central bank telling lenders to set aside money against loans to the tune of .₹ 12,000 or more, treating these as non-performing assets even though such credit is generally held to be sovereign debt and thus in no danger of default.
The decision being contemplated by the banks could disrupt an agricultural economy already on its knees after two consecutive droughts as Punjab is expected to need as much as .₹ 40,000 crore in loans as the biggest buyer of foodgrain among all Indian states, said the executives, who didn’t want to be named.
Punjab accounts for 40% of food loans, about .₹ 1 lakh crore in the year to March.
“We will not lend this season unless the problem is resolved,” said one of the bankers.
“We believe that prospects of better monsoon this year hold significant potential to perk up rural India,” said Abhay Laijawala, managing director and head of research at Deutsche Bank. “We believe that the ongoing equity rally in India will continue in medium term.”
After two consecutive drought years, the India Meteorological Department forecast an above-average monsoon last week, buoying expectations of a revival in the rural economy that will provide a boost to growth.
But fourth-quarter earnings could reverse some of the recent gains. About 52% of poll participants said the Sensex could sink by 3-5% in the event of weak results, while 30% are predicting a 5-10% decline.
“The Q4 earnings for Indian corporate sector could remain modest, weighed down by the sluggish domestic and global demand growth,” said Anand Radhakrishnan, chief investment officer at Franklin Templeton Asset Management. The Sensex and the Nifty have gained about 12-13% in the last one-and-half months since February 29, reversing losses in the first two months of 2016.
A revival in foreign fund flows into emerging markets lifted shares in the region. Added to this, the government’s decision to stick to its fiscal deficit in the February budget encouraged hopes of a rate cut, aiding sentiment in the Indian markets. Sure enough, the Reserve Bank of India lowered in- terest rates and announced a series of measures to ease liquidity on April 5.
RATE CUT HOPES
About 75% of those surveyed expect the RBI to cut rates by 25 basis points while the rest are betting on a 50 basis point cut this year. A basis point is 0.01 percentage point.
The rupee is likely to trade in the range of 6668 against the dollar, said 47% of poll participants.
Among sectoral picks, 21% of the participants showed a preference for automobiles. Capital goods and fast-moving consumer goods (FMCG) were among the others favoured. They said they would avoid sectors such as metals and pharmaceuticals. While the domestic economy is showing signs of stabilising, investors may need to keep a watch on external factors that could dent high expectations. Possible action by the US Federal Reserve, a referendum on Britain’s membership of the European Union and China’s growth trajectory will keep investors on edge, participants said.
“The global worries are still not behind us, they remain very much on the horizon,” said Vikas Khemani, president and CEO, Edelweiss Securities. “But the good news is that the domestic macros have started playing out.”
Analysts are also advising caution because stock valuations are no longer cheap. The Sensex is currently trading at 15.7 times its oneyear forward price to earnings (P/E) ratio. This is just slightly below its long-period average of 16.8 times.