SBI-led consortium shackling Food Corp's quest for cheap credit

An old agreement that binds the Food Corporation of India (FCI) to borrow money only from the State Bank of India (SBI) led consortium of 54 banks is holding up the corporation's move to tap the capital market for relatively cheaper finance.

The FCI's proposal to mop up around Rs 5,000 crore from the capital market by floating government-guaranteed bonds has already been cleared by the Reserve Bank of India (RBI) and the government.

The move would help the FCI save between Rs 300 and Rs 400 crore annually on the interest burden alone. The total food credit requirement of the FCI is around Rs 25,000 crore a year.

At present, the FCI is paying an average interest rate of 10.95 per cent to the SBI and four banks which account for the bulk of the total food credit.

The FCI feels that it could get the money from other sources, including capital market, at far lower interest rates.

When asked to comment on the issue, FCI chairman R M Premkumar pointed out that the credit from this consortium of banks turned out to be relatively cheaper in the past but was no longer so now. The consortium is continuing with the older rates despite the general drop in the interest rates.

"This has forced the FCI to look for other sources of food credit. However, the draconian clause 6 of the 1989 cash credit agreement makes it binding for the FCI to take SBI's prior permission for this purpose," he said in an exclusive interview.

The SBI's share in this consortium is the highest at 25.6 per cent. The share of other four major banks are: Bank of Baroda 6.1 per cent, Bank of India 5.3 per cent, Canara Bank 6.7 per cent and Punjab National Bank 6.9 per cent.

If the FCI got the necessary go-ahead signal, it would offer bonds totaling about Rs 5,000 crore in a phased manner on market-determined interest rates which might be around 6 to 6.5 per cent or even lower.

These bonds are likely to have plus three rating thanks to the government guarantee and could even be made tradable in the market.

It would help to bring down the debt servicing cost from the present around Rs 110 crore per Rs 1,000 crore to merely around Rs 60 crore or so per Rs 1,000 crore.

Since, better debt management would ultimately help to cut down the food subsidy, the government or the finance ministry should intervene in the matter, he indicated. The FCI on its part remains determined to improve its financial management.

In this regard, the corporation is planning to get an insurance cover for its storage and transit losses.

Though, the FCI had already succeeded in bringing down these losses to below one per cent, yet in absolute value terms these losses amount to some Rs 150 crore.

"If the premium on such insurance comes to say around Rs 50 crore annually, the FCI would save around Rs 100 crore," he said.

The corporation has already started negotiations with the insurance agencies through its interlocutors and their final response is awaited, he said.