News APP

NewsApp (Free)

Read news as it happens
Download NewsApp

Available on  gplay

This article was first published 16 years ago
Rediff.com  » Business » Banks seek cover for guarantee scheme

Banks seek cover for guarantee scheme

By BS Reporter in Mumbai
July 05, 2007 12:11 IST
Get Rediff News in your Inbox:
Banks want the government to bear the cost of providing cover under the proposed credit guarantee scheme for distressed farmers. Bankers say the guarantee fee of 1.5 per cent stipulated by the scheme was a burden they could not afford.

The guarantee scheme, proposed by a Reserve Bank of India working group, would cover Kisan Credit Card loans of up to Rs 1 lakh (Rs 1,00,000).

The central bank had asked the Indian Banks' Association for its views to fine-tune the scheme before launching it. Banks estimate that with cost of funds close to 11 per cent, making provisions for the 1.5 per cent guarantee would only add to their losses.

At present, banks have to provide loans up to Rs 3 lakh (Rs 3,00,000) to farmers at 7per cent, with 2 per cent subsidy from the government. However, there has been an over 2 per cent increase in the cost of funds since the subvention package was announced by the government resulting in losses, said bankers.

Banks have suggested that the credit guarantee scheme should keep out regional rural banks and co-operative banks, which have a weak financial structure, from its purview.

"If the credit guarantee scheme is set up for all banks, the scheme will not be sustainable as inflows will not match with outflows," said a banker.

The scheme also stipulates that banks should exhaust recovery options and write off 40 per cent of the amount due before invoking the guarantee to claim 60 per cent from the Deposit Insurance and Credit Guarantee Corporation.

Bankers said they would not make provisions of up to 40 per cent of the dues while lodging their claims, as this would be a huge burden in the context of the Basel II implementation.

According to bankers, the existing regulatory guidelines on asset classification, allow banks to call upon the claim on a loan even before it is classified as a non-performing asset.

Banks have specified that the guarantee should cover 60 per cent of the loan exposure at the time of lodging claims and not the initial exposure as the amount outstanding would increase each time the crop loan is restructured.

The stipulation that loans be covered by crop insurance should be subject to the availability of insurance cover for that crop in the particular state, said bankers.

Bankers have suggested that loans given to farmers under joint liability groups and self-help groups should be included in the scheme if individual members of the group are eligible for cover.

 

 

 

Get Rediff News in your Inbox:
BS Reporter in Mumbai
Source: source
 

Moneywiz Live!