The Hindu Business Line : Advances to commodity trade under RBI watch

Bangalore, July 2 Banks have completed the review of advances to the commodities and forwarded the same to the Reserve Bank of India (RBI) for supervision.

Top public sector officials said that their exposures to the agricultural commodities sector were “minimal.” In fact for the public sector banks (PSB), the exposure to traders in agricultural commodities and advances against warehouse receipts was considerably less than 5 per cent of their incremental advances.

Low exposure

One public sector banker who declined to be identified said, “Exposure is very low, far less than the exposure to the equity markets.”

In fact, one public sector banker said, “We have stopped financing traders almost a year back, after complying with Basel II guidelines.”

But top bankers said exposures of private sector banks to the commodities sector were far higher than that of PSBs. Besides, some of the commodity traders also accessed funds from the non-banking finance sector.

Supervisory review

Banks were directed to submit their review to the RBI, in April this year. This was intended for a supervisory review of bank financing to the commodities sector. Based on a supervisory review, the RBI was likely to resort to extreme measures such as selective credit controls for containing inflation, bankers said.

Inflation has remained in the double digit territory, despite the RBI’s interventions. Last week, the RBI had raised the cash reserve ratio and repurchase rate by 50 basis points each after inflation moved into the double digit zone.

Bankers said, “If the current inflationary trajectory remained, selective credit controls would be a possibility.”

The wholesale price index as on June 14, showed food products prices had risen by over 14 per cent over the corresponding period of last year.

Food grain and food article prices for the same period escalated by 6.10 per cent and 6.76 per cent for the same period based on the estimates.

Options

Among the credit control options open before the RBI are prescribing increased margins and imposing physical limits on credit availability to the sector.

However, bankers said new measures available also included raising the risk weightage on credit support to the commodities sector.

In fact, increasing the risk weights was used effectively in containing bank exposures to the realty sector.

In 2006, risk weightage on realty sector was hiked to 150 per cent.

Credit controls were intended to raise the carry costs of agricultural commodity traders and negate arbitrage opportunities.

The escalated carry costs, bankers explained, as a result lead to inventory liquidation and help bring down prices of agriculture commodities.