For the first time ever in the history of food procurement, storage, movement and distribution by state agencies, India has faced an unprecedented situation of hibernating food stocks worth Rs 20,000 crores in Punjab. The stocks were mostly funded using cash credit taken from a consortium of public sector banks [PSBs].
In an equally unprecedented move, the Reserve Bank of India [RBI] – the regulator of banks – has directed concerned PSBs to declare the mentioned loan as non-performing assets [NPAs] and accordingly make a provision of 7.5% during the quarter ending March 31, 2016 and another 7.5% during Qr ending June 30, 2016 for now.
That adds to Rs 3000 crores [15% of Rs 20,000 crores] and will correspondingly erode bottom line of concerned banks already reeling under the debilitating effect of mounting NPAs [around 14% of gross advances of PSBs] and diktat of the apex bank to clean up their balance sheets by March 31, 2017 by making requisite provisions.
A loan taken by the state government [Punjab in the instant case] is invariably backed by sovereign guarantee; hence, there is ‘zero’ chance of such a loan going in default as the guarantor shall always pay up. Then, why has the RBI taken a contrary position which is implicit in its directive to PSBs for declaring the same as NPAs.
The stance taken by governor, Raghuram Rajan opens up dangerous possibilities. The ball won’t stop at just Punjab which of course accounts for a predominant share [40%] of total food credit [around Rs 100,000 crores annually]; it may well extend to other states. Thus, in whichever state a situation of default in repayment arises, PSBs will be required to make provision. That in turn, will erode their capital.
Eventually, Union Government will have to foot the bill via recapitalization. The existing requirement for capital infusion [Rs 200,000 crores over next 4 years till 2018-19 to meet Basle – III norms] is such that it is even forced to contemplate holding back payment of a part of salary hike of its employees consequent to 7th Pay Commission recommendations in order to keep fiscal deficit under control.
The position will only worsen in view of nearly 330 million people spread over 250 districts in 10 states reeling under the devastating effect of unprecedented drought. This will render millions of farmers unable to pay back crop loans and states pitching for loan waiver running in to tens of thousands of crores. The political establishment at the center will readily oblige by directing PSBs to pay for it.
And, if we add to this NPAs resulting from sheer inefficiency, incompetence of state agencies/corporations and bureaucrat-politician aided “pilferage” [sans this, disappearance of stocks on such a massive scale is inconceivable], PSBs could become terminally sick. Alternatively, center’s fiscal consolidation road-map will be thrown completely out of gear if it decides to salvage them.
Moody Investor Service [MIS] has recently identified the unsustainable NPAs/stressed assets of PSBs as the biggest risk to sovereign risk of India having the potential to derail India’s growth story [MIS has a ‘positive’ outlook on its ‘Baa3’ rating on India, which is just a notch above the junk grade]. The situation would go out of control if yet another hole is dug on their balance sheets.
Rajan’s out of the box decision may have been prompted by his desire to force PSBs into disciplinary mode [using the same logic that prompted him to ask them not to camouflage NPAs in respect of borrowings by corporate sector] and be more circumspect in extending loan to state agencies. But, this is impractical and un-workable.
Considering that food procurement operations by state agencies are fundamentally to cater to PDS needs under National Food Security Act [NFSA]/targeted PDS [TPDS] for reaching out food to majority of poor [with a strong underpinning of ‘social welfare’], banks may not be able to enforce discipline even if commercial considerations or RBI pressure drives them not to give such loans.
The proof of pudding is in eating. In the follow up to the apex bank directive when, PSBs declared their intent not to give food loans to Punjab government for its ensuing procurement operations, the chief minister took up the matter with prime minister, N Modi and the latter promised to do the needful. In short, credit lines will not be choked.
The solution to such endemic problems needs to be found at the source itself. The state authorities must chase persons responsible for disappearance of the stocks [or the inflated bills towards handling, storage and distribution costs if one goes by interpretation of state politicians and bureaucrats] and hold them accountable.
If, the issue cannot be sorted out then, state government should be made to pay back to PSBs from its own budget.
This is the only way to spare latter the ignominy of rising NPAs. More importantly, this will ensure that in future, state agencies will be more careful in conducting their operations to avoid inefficiencies and pilferage. It will set a good precedent for other states to follow suit.
However, a lasting solution would be possible only when the states reduce their intervention in food procurement and distribution operations to the bare minimum. We need to be clear that the very idea of state involvement inevitably brings in the evils of corruption and nepotism as officials and politicians look for opportunities to fill their personal coffers all at the cost of exchequer.
This in turn, would require that the government takes urgent steps to move towards a system of making direct transfer of food subsidy to the beneficiaries in their bank accounts authenticated with Aadhaar number. Under this dispensation, the consumer will buy food at the market price even as the subsidy [excess of market price over the target albeit subsidized price] is credited to his account.
The proposed arrangement will obviate the necessity of the government having to actually procure and distribute food, a function best left to private entities [public agencies may also get involved but purely as ‘commercial’ units requiring no financial support from the state]. In this scenario, PSBs won’t be under compulsion or extraneous pressure and can take independent decisions based on commercial considerations.
Modi should avoid looking for escape routes and crack the whip now or else he would risk denting his credibility as a reformist.