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Money & Banking - Farm credit
Agri-Biz & Commodities - Agricultural Institutions


Banks may let FCI prepay loans sans penalties

C. Shivkumar
Abhrajit Gangopadhyay

Bangalore , March 29

AS part of a strategy to retain good customers on their books, public sector banks have indicated that they would not impose any prepayment charges on Food Corporation of India (FCI).

FCI was allowed to raise funds directly through bonds early this year. Accordingly, FCI has been preparing for another issue, banking sources said.

FCI is expected to hit the bond markets during the financial year 2004-05 and the amount is likely to be upwards of Rs 500 crore, they added.

Bankers said FCI would be in a position to raise loans at around six per cent or even finer, at rates slightly above sovereign borrowing rates. Sovereign borrowing rates for 10 year is currently about 5.1 per cent.

Currently, several corporates, both public and private sector, are already raising funds at these rates.

On the other hand, FCI is currently paying about 11 per cent on the loans drawn from the consortium of banks for funding its procurement operations or what bankers refer to as food credit.

Bankers expect FCI to prepay its outstanding food credit through its bond issue to prune interest costs.

The savings would be in the region of at least five percentage points. In addition, the proceeds are also expected to fund part of the procurement operations for the next fiscal.

However, none of the banks is prepared to levy any prepayment charges on FCI. Banks have been levying hefty prepayment charges on other corporates and on public sector undertakings.

These prepayment charges have been priced on the basis of the prevailing interest rates or on a yield to maturity basis. In fact, several corporates have opted for making prepayments despite the hefty prepayment penalties.

Speaking to Business Line, Mr Probir Moulik, General Manager Allahabad Bank, said: " FCI falls in a different category and therefore there is no need for prepayment charges."

FCI's food credit requirements are determined by the Reserve Bank of India on the basis of the procurement targets fixed by the Government.

Besides, bankers said the bond issue by the FCI was also likely to be used for financing the procurement operations for the next fiscal year.

But bankers said FCI would still be customer for the banks even after the prepayments. Bankers are keen to have this account on their books in view of the potential impact on their asset portfolios.

In fact, for most banks, food credit has contributed a substantial portion of their asset growth.

But FCI this year has reduced its drawal of food credit from the banks. This was evident from the food credit offtake this year.

On a year-on-year basis, food credit has shown a negative growth of Rs 14,000 crore as on March 5 this year. The outstanding food credit was about Rs 35,000 crore.

The reduced offtake was partly due to the large surpluses earned by FCI through liquidation of part of its food stocks. FCI has earned close to about $4 billion through foodgrain exports. Bankers said that part of the earnings from liquidation of the stocks have helped FCI to reduce its food credit offtake.

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