Centre working to resolve Punjab foodgrain issue
Minister of State for Finance, Jayant Sinha, has said that the government is working with banks, regulators and other agencies to resolve the issue of missing foodgrains in Punjab. Although he did not mention the value of the missing foodgrains, reports claim that Rs.20,000 crore worth of foodgrains is missing from state go-downs. The Punjab government, however, denies the claims of missing foodgrains.
The process of foodgrains procurement
The RBI at the start of the financial year clears a cash credit limit (CCL) for lending by banks to Food Corporation of India (FCI). The FCI procures foodgrains from various procurement agencies of the state government which in turn procures grains from farmers. The state procurement agencies store the foodgrains on behalf of the FCI at their storage facilities.
Food credit exposure of banks
Loans advanced to FCI (Food Corporation of India) are called as food credit by banks. The total food credit in the country stands at Rs.1.05 lakh crore against a total credit of Rs.72 lakh crores.
RBI asks bank to provision for Punjab loans
The Reserve Bank of India asked banks to declare their loans advanced to the Punjab government for foodgrain procurement as bad loans. The RBI's diktat came after it was discovered that the foodgrain stock in the warehouses in Punjab were insufficient to cover the previous loans. The loan amount at risk stood between Rs.12,000 crore to Rs.20,000 crore.
Banks petition RBI against provisioning
The RBI's directive for provisioning in the Jan-Mar'16 and Apr-Jun'16 quarter came as a rude shock to banks who are already facing challenges in adhering to RBI's instruction of clearing bad loans by Mar'17. The earnings of Q3 (Oct-Dec'15) already took a hit because of this cleanup exercise. Now, the lenders feared that new provisioning would severely hit the small banks.
Risk with zero-risk loans
According to the banks, lending to state governments comes under 'zero-risk' loans and hence, provisioning on such loans not only questions the trust but also changes the way bankers look at loans to states or state-backed agencies.
State-run banks to freeze lending to Punjab
State-run banks led by State Bank of India decided to stop lending to the Punjab government because of the mounting pressure of bad loans. The decision came after a meeting of the state-run banks. The move could severely impact Punjab's economy as the procurement season is about to begin and the state government, the biggest buyer, would not have funds for procurement from farmers.
The missing foodgrains issue escalates
The problem became more complicated as Punjab Chief Minister Prakash Singh Badal met Prime Minister Modi over the issue. Mr Badal asked for a cash credit limit of Rs.20,094 crores to ensure timely payment to the farmers in the coming season. With the Punjab assembly elections in 2017, the opposition parties criticised the government and asked for a court-monitored CAG audit.