The Hindu Business Line : FCI sops may impact banks' profit: Crisil

THE Government's decision to reduce interest rates on bank loans to Food Corporation of India (FCI) and allowing it to borrow funds directly from the market could impact the pre-tax profits of public sector banks by 4.5 per cent in the near term, Crisil has said.

Over time, Crisil expects these measures to have the potential to impact bank's pre-tax profits by 10.2 per cent.

Early this month, the Government had allowed FCI to borrow directly from the market by floating sovereign-backed bonds. This would automatically bring down the interest rate from the current level of 10.95 per cent under the existing lending situation for FCI.

Currently, a consortium of 54 banks led by State Bank of India carries out FCI's funding requirements. Through this route, the interest rate for FCI is 10.95 per cent. This rate is based on the prime lending rates (PLR) of five large public sector banks: State Bank of India, Punjab National Bank, Canara Bank, Bank of Baroda and Bank of India.

Over the last 2 years (FY2001-02 to FY2002-03), the range of decline of the average PLR of these public sector banks at 125 bps (12 to10.75 per cent) has been much lower than the decline in yield on the 10-year. Government of India (GOI) securities, which has fallen by around 400 bps (April 2001 to March 2003)

According to Crisil, these measures will have a positive impact on FCI's financial profile but would affect bank's bottomlines.

Currently, banks have an average exposure of Rs 42,000 crore to food credit. This bears an interest rate of 10.95 per cent, which will come down to 9.45 per cent once banks implement the proposed measure.

``Even at the reduced interest rates, the returns on these loans will be significantly higher than that commensurate with the credit risk of the underlying exposure which is integrally linked to the Government,'' Crisil said quoting Mr Raman Uberoi, Director, Financial Sector Ratings of the agency.

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