The Hindu Business Line : FCI bond market foray on hold

THE public sector Food Corporation of India (FCI) has put on hold its foray into the bond markets and has instead preferred to continue with the food credit window of the lending consortium led by the State Bank of India (SBI).

The Government had allowed FCI to tap the bond markets in January this year in a bid to cut food subsidies. Accordingly, FCI had planned to tap the bond markets for Rs 5,000 crore though it had initially planned to come with a Rs 500-crore issue. The proceeds were to be used partly for prepaying the outstanding food credit and for funding procurement operations.

Bankers said that they were also receptive to the prepayment plans of FCI and had indicated that they would not impose any penalties for the foreclosure. Bankers though indicated that any borrowing from the bond markets for either pre payments for funding food grain procurement operations would result in a review and scaling down of credit limits. However, FCI had so far refrained from tapping the markets. This was partly influenced by the large earnings from liquidation of a portion of the food stocks. FCI had earned close to about $4 billion through food grain exports.

For remaining with food credit window, the consortium banks brought the rates to 9.35 per cent.150 basis points below the average prime lending rate of the five large members of the lending consortium to the FCI. This rate was lower than last year's food credit rate of 10.95 per cent.

With the reduced rates bankers now expect FCI to continue with the food credit right through the rabi season (October-March). During the first four months of the kharif season (April-September) the outstanding on credit was Rs 42,560 crore an 18 per cent increase from March end.

At the current rate of funding to FCI, PSU consortium members would be earning a spread of at least 5 basis points over their weighted average cost of working funds.

The weighted average cost of working funds, this year for all the top public sector banks, is currently under 5 per cent.

It was on account of the high spreads that the banks were reluctant to let go of the FCI account. This reluctance stemmed from the low growth in non-food credit offtake this year also.

This low growth in food credit has already hit several banks profitability, by shrinking the yield on assets.

But sources said that FCI decision to remain with the food credit window was taken despite the fact, that it would have been in a position to raise long term funds at considerably lower costs.

For instance, some of the AAA corporates at spreads as low 40 basis points over the sovereign yields. In fact, some of the corporates had raised funds at rates less than six per cent.

The reduced borrowing costs would have helped the Government to cut the food subsidy bill, the sources said.

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