Banks cuts FCI lending rate by 150bps

The consortium of banks that lends food credit to the Food Corporation of India (FCI) has decided to cut the interest rate by 1.5 per cent from the current level.

This follows the government's recent move to allow the FCI to borrow from the capital market by floating government-guaranteed bonds to break the monopoly of the consortium of 61 banks, led by the State Bank of India (SBI).

The consortium has been charging the FCI, on an average, around 10.95 per cent interest despite the gradual drop in general interest rates.

Though the reduction in the interest rate is not sufficient with reference to the market-driven rates, it will still result in a savings of around Rs 300 crores on the overall interest burden of the FCI.

This would ultimately result in a drop in food subsidy.

The FCI normally borrows over Rs 20,000 crores annually for its foodgrain handling operations.

Under pressure from the FCI and the food ministry, the standing committee of the banks' consortium consisting of SBI and four other banks having the highest share in food credit, have decided to reduce the interest rate by 1.5 per cent.

The other banks are Canara Bank, Punjab National Bank, Bank of Baroda and Bank of India.

The committee has also agreed to allow the FCI to tap the capital market for borrowing Rs 5,000 crores in stages. The existing food credit agreement binds the FCI to seek prior permission of this consortium for borrowing money from any other source.

The FCI undertakes procurement, distribution and stocking of foodgrains at no profit no loss basis. The food subsidy, borne by the Central exchequer, absorbs the losses due to difference in the economic cost and the subsidised Central issue price of grains, besides the carrying cost of the food inventory.