The success of the Special Purpose Tea Fund will depend on response from commercial banks, and credit lines from the LIC and Nabard as co-financiers. The new Tea Fund seems to be the right recipe

Sankar Ray

The Commerce and Industry Minister, Mr Kamal Nath, during the Lok Sabha debate on July 21, 2004, had said that a few senior officials of a prominent tea-growers' body feared that the Special Purpose Tea Fund (SPTF) would face hurdles. Senior officials of the Tea Board did not seem optimistic either. The SPTF, in which the Government is ready to contribute 20 per cent of borrowings, was initially of the size Rs 4,761 crore. But Mr Kamal Nath slashed it to Rs 400 crore. The Finance Minister, Mr P. Chidambaram, has allocated Rs 100 crore to the SPTF for 2006-07, although the structural document of the fund put the capital commitment at Rs 32 crore in 2005-06 and Rs 64 crore in 2006-07 plus a subsidy of Rs 63 crore in 2006-07. So signs of backing down from assurance are evident.

CAUTIOUS OPTIMISM

The Tea Board Workmen's Association general secretary, Mr Chandra Chur Dasgupta, is cautiously optimistic about the STPF. It combines subsidy schemes with the loan schemes, he says. "The subsidy schemes began in 1968, with 40 per cent subsidy on individual subsidy proposals approved by the Tea Board. Unlike banks, we disburse subsidies in phases based on performance and inspection reports by our officers. That is why its success rate has been comfortably high." In the 1990s, the rate was reduced to 25 per cent by the Commerce Ministry but revived a couple of years back, he points out. The Association wrote to the Tea Board and the Ministry arguing for restoring the 40 per cent subsidy. "The loan schemes are not that successful due to growing defaults. Even many big companies are defaulters. The Tea Board has taken up an active initiative in realising the dues. Our experience in this is mixed. So, whether the pulling of two schemes into the single one or SPTF will bear results depends on many factors."

RAISING OUTPUT

In reality, the loan element is 50 per cent of Rs 4,761 crore, taking into account the expenditure of managing it. The physical aim of SPTF is to raise the average yield rate per hectare from 1,700 kg to 2,120 kg in the North and from 1,700 kg to 2,420 kg in the South, so that the average national production is up from 860 million kg (the present mean) to 1,096 million kg in less than a decade.

Lending under the SPTF attracts 8.25 per cent interest (0.5 per cent above the borrowing rate) and has a 13-year repayment period in eight instalments from the sixth year with a moratorium of five years.

Every borrower will have to enter into an escrow arrangement with the "Tea Board and the tea brokers under which the borrowers will be required to route their produce through the tea auctions to the extent of 80 per cent of total production during the loan period. The Tea Board will issue necessary orders to this effect which will be binding on the borrowers from the SPTF.

The sale proceeds will flow directly into a Trust and Retention Account. After the lenders appropriate their dues, the remaining proceeds will flow back to the borrowers," Mr Kamal Nath stated in his written reply to Parliament.

THE RATIONALE

The scheme has a rationale, based on new banking principles, attuned to "banking supervision, including the Basel II regulatory capital framework," set out by the Basel Committee. The cash flow model, incorporated in the Ministry document, is flexible as there is a provision of 10 per cent default rate by the borrowers in repaying the principal and interest to the SPTF.

"The model assures a comfortable cover for default, yielding a net surplus of Rs 257.26 crore. This surplus could be utilised for funding capital contribution to future programmes," the Government states in an optimistic tone.

The Ministry admits that the SPTF's success will depend on response from commercial banks and credit lines from the LIC and Nabard as co-financiers.

The Centre agrees that banking support to the programme would depend on the viability of the loan scheme. Banks and financial institutions will think twice before supporting the scheme, as PF defaults in West Bengal tea companies have crossed Rs 110 crore, something unthinkable even in the mid-1990s. Nevertheless, chances of SPTF accounts turning sticky should not be high.

(The author is a Kolkata-based freelance writer.)

(This article was published in the Business Line print edition dated March 30, 2006)
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