Grain procurement: Centre to raise FCI funding

To replace present bank credit arrangement with RBI advance for same amount, at less cost; should free some of banks' loanables

The Food Corporation of India will see a big lessening of its dependence on banks for financing its procurement operations. The government has decided to raise by five times, to about Rs 50,000 crore, a 'ways and means advance' (WMA) it sanctions for this purpose. This is almost equal to the sum FCI borrows from a clutch of public sector banks every year.

Sanction for the new WMA, to be raised from the Reserve Bank of India (RBI), will be cleared by the government through Parliament in its first supplementary budget, due in July. From Budget 2011-12, FCI has been getting Rs 10,000 crore as WMA advance. It has a credit limit of Rs 54,495 crore with a consortium led by State Bank of India. The new WMA will cancel this out.

FCI's cost will come down substantially from the move. Banks lend to it at a variable preferential rate, currently 10.51 per cent. The government takes any WMA from RBI at about one per cent more than the latter's repo rate, presently 6.5 per cent. The difference will be about two per cent for FCI.

"At the end of the year, we expect FCI will possibly need no more than another Rs 20,000 crore from the banks as short-term credit," said a government official.

As an experiment the corporation floated a tender for a one-month loan of a similar sum on April 13.

FCI was set up by the central government in 1964 and runs the world's largest grain procurement operation. It buys wheat, rice and other crops from farmers at prices pre-announced every year. These minimum support prices are the government's means to provide an income support to farmers. After buying these, FCI sells to state governments, for disbursal through the Public Distribution System.

The difference between the price FCI buys the grain and sells at subsidised prices to states is the Centre's subsidy. In 2016-17, this allotted sum is Rs 134,835 crore. Of this, 76 per cent is for FCI's operations. Yet, it is still a drop of almost Rs 5,000 crore from the revised estimate of Rs 139,419 crore for 2015-16.

Saugata Bhattacharya, chief economist at Axis Bank, agreed the change will reduce the cost of borrowing for FCI. "For banks, this will free up some deposits for additional non-food credit and potentially also free up some capital by reducing credit risk."

RBI has been giving banks the stick to provide adequate capital to cover their exposure in all sectors. This is applicable for food credit, too, but does not apply to FCI. State governments Punjab do their own procurement, independent of FCI, since it offers political mileage. To finance it, they raise credit from banks, too. With that money, the grain they buy from farmers are in turn sold to FCI. As a recent RBI audit (on Punjab) found, the grains are often not there in granaries, though the purchases from farmers have been shown by state government entities.

If FCI cuts its borrowing, banks will be able to cut their capital allocation against food credit, which so far was seen as a risk-free operation. With plenty of slack on their credit portfolio, with an option for easy loan erased, they'll will have to work harder to make up in their non-food credit.