Mumbai, March 23
COME April, refinance on agriculture credit will be costlier for banks.
Yielding to the growing pressure on market interest rates, Nabard has decided to hike the rates at which it provides refinance to banks on agriculture credit from April 2005.
Bankers said that they expect Nabard to hike refinance rates by around 50-75 basis points.
However, they added that nowadays most public sector banks don't need to resort to refinance as they have adequate resources, and borrow only to meet temporary asset liability mismatches.
The major borrowers of refinance from Nabard continue to be co-operative banks and RRBs.
Explaining Nabard's decision to hike refinance rates, Ms Ranjana Kumar, Chairperson, Nabard, told Business Line that Nabard's cost of funds under the general line of credit that it gets from the Reserve Bank of India (RBI) is around six per cent, while the institution, in many cases, is providing refinance at much lower rates of 5-5.50 per cent, thereby earning a negative margin.
"Earlier, there was a feeling that some of our past rates of refinance were very high, around 12 per cent. So, last year we took a bold move and decided to allow banks to prepay their high-cost refinance."
With this, all banks put together prepaid Rs 3,693 crore. Of this, Rs 1,272 crore was returned by public sector banks, which prepaid and availed themselves of refinance of the same amount in the current rate - 5.25-5.50 per cent.
RRBs have prepaid Rs 167 crore, State co-operative banks Rs 727 crore, and long-term development banks Rs 624 crore.
"This was a conscious decision taken by Nabard at that time, at the cost of its own income. By doing all this, banks have improved their profitability," said Ms Kumar.
Nabard has also removed some impediments from the actual refinance on production credit.
Consequently, the refinance amount in comparison to the loan amount has almost doubled.
Earlier the institution was financing up to 18 per cent of the loan, but now it finances up to 30 per cent, she said.
For 2004-05, Nabard's refinance on production credit for co-operative banks has gone up to Rs 8,010 crore from Rs 7,340 crore earlier.
Similarly, for RRBs refinance on production credit went up to Rs 2,105 crore from Rs 1,430 crore the previous year.
"The total incremental growth in production credit, for co-operatives and RRBs put together, comes to around Rs 1,345 crore for 2004-05, against an increase of Rs 735 crore in 2003-04."
On Nabard's plans for the new fiscal, Ms Kumar said that there will be new thrust on `co-financing' arrangements.
"The scheme of co-financing started only at the end of 2003. Until then, we had never done direct financing. We are doing it now. So far, we have been building up the technical expertise in the area. This year, co-financing will pick up especially in agriculture, agro-processing, and food processing."