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
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