Date:13/01/2006 URL: http://www.thehindubusinessline.com/2006/01/13/stories/2006011302340600.htm

Back PSBs courted on farm loans — Private, foreign banks behind targets

C. Shivkumar

This year, foreign and private sector banks have reportedly refined their buy-out offers and have sought ready forward deals on surplus farm loans.

Bangalore , Jan. 12

NEW generation private sector and foreign banks have stepped up efforts to buy out farm loans from public sector banks to compensate for slippages in targets with the financial year-end approaching.

Banking sources said that most of the private and foreign banks were severely short of the 18 per cent of advances target fixed as farm lending targets. The shortfall in lending targets by the new generation private sector banks was mainly on account of limited reach and their operational concentration in the metros and urban regions.

Last year too, these banks had fallen short of farm lending targets and had made attempts to buy out the portfolios from the PSU banks. PSU banks had then declined to oblige the banks. "Where is the need for us to part with assets that generate good returns?" high-level bankers said. Yield on farm credit is as high 9.5 per cent.

This year, the banking sources said, foreign and private sector banks had refined their buy-out offers. Bankers said the private sector and foreign banks have now sought ready forward deals on surplus farm loans. Several PSU banks are already well over the directed lending target on farm loans. It is these banks that private sector/foreign banks are targeting for such ready forward deals. Such a deal entails buying out the loans by the private sector banks for the balance sheet period and selling back the same at a premium. This was in order to window-dress the balance sheet for compliance with the RBI's guidelines, the sources added.

Traditionally, private sector and foreign banks have concentrated exclusively on large corporates for building up their respective asset base. Few foreign and new generation private banks were prepared to bear the administrative costs of disbursing large volumes of small-ticket loans. Instead, most of them preferred to be in the less administratively cumbersome sectors such as retail and corporate lending, including lending in foreign currencies.

Shortfalls in farm lending entail penalties under current RBI guidelines. These guidelines prescribe that the shortfalls would have to be parked either with the Small Industries Development Bank of India or with the Rural Infrastructure Development Fund at bank rate of 6 per cent. Till last year, some of the foreign banks were content to comply with these penalties. This was because the penalties still earned them a positive spread of at least 1 per cent.

However, since the second half of last year, the situation has reversed. For most of these banks, the weighted average cost of working funds has substantially increased and is closer to about 6.25 per cent. Consequently, making the penalty payments entailed negative spreads.

Moreover, returns on corporate assets have taken a severe beating during the last two years. Yields on corporate advances, bankers said, were less than 7 per cent, leading to thin or sometimes negative spreads.