RBI Re­jects Banks’ De­mand to De­fer Pro­vi­sion­ing

Banks wanted six-month re­lief, but reg­u­la­tor has asked them to set aside 15% of to­tal ex­po­sure from the earn­ings in March and June quar­ters

The Economic Times - - Economy: Macro, Micro & More -

MC Go­vard­hana Rangan & Saloni Shukla

Mum­bai: The Re­serve Bank of In­dia (RBI) has re­jected the de­mand of banks to de­fer its pro­vi­sion­ing direc­tive on the Pun­jab food­grain fund­ing row. The RBI had or­dered lenders to mark a sub­stan­tial chunk of loans ex­tended to Pun­jab as po­ten­tial non-per­form­ing as­sets af­ter it came to light that the food­grain stocks in the govern­ment ware­houses were prob­a­bly not ad­e­quate to cover the loan amount. The banks were told to set aside funds against po­ten­tial de­faults.

The or­der jolted banks, which were al­ready go­ing through a painful bad-loan cle- an-up ex­er­cise. Banks have tra­di­tion­ally as­sumed loans to state govern­ments to be sov­er­eign debt in no dan­ger of de­fault.

Banks that had knocked the RBI’s doors for a six-month pro­vi­sion­ing re­lief have now been left dis­ap­pointed. “RBI does not want banks to post­pone the prob­lem and asked us to pro­vide 15% of our to­tal ex­po­sure,” a banker said on the con­di­tion of anonymity.

The amount of loans that could be at risk is about .₹ 12,000 crore — some bankers put it at .₹ 20,000 crore. Although th­ese will con­tinue to be clas­si­fied as stan­dard loans, the cen­tral bank has told the banks to set aside 7.5% against the out­stand­ing amounts from their earn­ings in the March quar­ter and an­other 7.5% in the June quar­ter, an­other banker said. Small banks are ex­pected to be the worst hit due to the fresh pro­vi­sion­ing re­quired be­cause of the Pun­jab govern­ment's al­leged in­abil­ity to bridge the short­fall be­tween the amount of food­grains that should have been bought with bank funds and the ac­tual stock.

In an an­a­lyst call post its an­nual re­sults, HDFC Bank man­age­ment said it has a to­tal ex­po­sure of .₹ 2,000 crore to the Pun­jab govern­ment for pro­cure­ment of food­grains. The bank has made a pro­vi­sion of .₹ 150 crore in the March quar­ter and an­a­lysts be­lieve that an equiv­a­lent amount is ex­pected to be pro­vi­sioned in June quar­ter as well. The bank has drawn down on its float­ing re­serves to meet the ad­di­tional pro­vi­sion­ing re­quire­ments.

Food cred­its are loans ex­tended to the Food Cor­po­ra­tion of In­dia, which is the nodal agency for procur­ing and dis­tribut­ing food­grains within the country. As of March18, out­stand­ing food credit given by sched­uled com­mer­cial banks to­taled .₹ 1.05 lakh crore. Pun­jab’s agri econ­omy, which is al­ready floun­der­ing due to two con­sec­u­tive droughts, is ex­pected to need as much as .₹ 40,000 crore in loans. Pun­jab is the big­gest buyer of food­grains among states.

The amount of loans that could be at risk is es­ti­mated to be in the range of 12,000 crore

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