The National Bank for Agriculture and Rural Development (NABARD), whose funding of corporate warehousing projects on terms far softer than those offered to poor and often suicidal farmers was highlighted by The Hindu last month, has withdrawn its controversial scheme with retrospective effect under pressure from the Reserve Bank of India.

The minutes of a meeting of the sub-committee of the NABARD Board held last month confirm that the RBI had advised the NABARD on September 27, 2012, to refund the amount refinanced to banks in the year 2011-12 with interest at applicable rates under the Rural Infrastructure Development Fund (RIDF) to contributing banks “in proportion to their contribution to the warehousing fund, alleging violation of RBI Interest Rate Directives and also that funds under RIDF could not be used for providing refinance to banks.”

The RBI reiterated its objections on December 17, 2012 — a week after The Hindu’s expose — and advised the NABARD “to either refund the entire amount to banks or treat the deposits used for refinancing as our own commercial borrowings from the depositing banks, by paying interest rate at which NABARD raises money from open market through non-SLR and Non-Priority Sector bonds/debentures for an equivalent tenor of RIDF deposits,” the board’s minutes note.

The RBI’s unrelenting stance has forced the NABARD management to change tack. “In view of the above, the following proposals are made: NABARD (Warehousing) Refinance Scheme 2011-12 will be withdrawn with retrospective effect in view of the RBI advice. Banks which availed [themselves of] refinance during 2011-12 would be advised either to refund the entire amount drawn by them at the contracted rate (i.e. 8% pa) or carry the entire amount as per the repayment schedule prescribed by us at the prevailing rate of General Refinance (i.e. 10% pa for RRBs/SCBs/PUCBs and 10.25% for Commercial Banks).”

Further, “NABARD would refund the entire amount of Rs. 759.09 crore drawn under RIDF XVII to the contributing banks with interest as applicable.” This implies a loss of Rs. 125.86 crore of losses will be booked by the NABARD in the present financial year.

Finally, the management has also decided “NABARD (Warehousing) Refinance Scheme 2012-13 would be withdrawn with immediate effect.”

Chairman, NABARD, Prakash Bakshi, did not respond to a detailed questionnaire emailed by The Hindu on January 14, including on whether any enquiry had been initiated to probe the matter.

Two loans compared

Investigation reveals that under the same scheme, NABARD refinanced Federal Bank at 8% for onward finance to a small entrepreneur Abdul Kareem for a small Rs. 60-lakh loan as well as for a Rs.100-crore loan to Emmay Logistics of the over $4.5-billion Middle East retail giant EMKE Group (the parent company of the famous Lulu hypermarket chain). However, Federal Bank lent to Emmay Logistics at 10.65% (effective rate after rebate of 1.5% for prompt repayment is only 9.15%), with a grace period of 2 years. EMKE has so far claimed only Rs. 573.30 lakh as refinance. In contrast, Mr. Kareem, the ideal target group for such welfare schemes, was charged 13.22% interest (eventual interest burden of 11.72%) with a grace period of just 6 months on a small Rs.60-lakh loan. In effect, the rate of interest charged is inversely proportional to the amount of loan sanctioned culminating in the powerful Emke Group paying 2.57% less interest than the aam aadmi. The Managing Director, EMKE Group, Yusuf Ali MA, did not respond to questions about its funding or whether the warehouse is used to stock material for the Hypermarket or for some other purpose.

While active in supporting rich corporates, the NABARD has been found to be choking the credit flow to farmers throughout the country by systematically withdrawing support to cooperative banks.

From its inception, the NABARD was refinancing State Co-operative Agriculture and Rural Development Banks (SCARDBs) by way of contributions to debentures floated by them. Following advice from its freshly appointed consultant the Boston Consulting Group (BCG), in September 2011, the NABARD, without prior warning to the State governments or SCARDBs, replaced this with a loan system. The NABARD also insisted on executing a revised guarantee deed as a pre-condition for refinance. According to Chairman, National Cooperative Agriculture & Rural Development Banks’ Federation Ltd, K. Sivadasan Nair, the NABARD delayed disbursement of refinance to most of the SCARDBs up to 9 months by placing additional conditions throughout the year. Moreover, the NABARD imposed a second audit on the banks to be conducted by chartered accountants empanelled by it in addition to the statutory audit undertaken by the SCARDBs. “NABARD has never at any time in the past, ever pointed out any shortcomings in the audits conducted by the CAs empanelled by the States. This second audit results in the doubling of expenditure — with Rs. 8 lakh being the lowest rate quoted by CAs empanelled by NABARD — and can only be viewed as a deliberate move to delay release of refinance and make these institutions unviable,” Mr. Nair told The Hindu.

Data bears out this claim. Though the NABARD’s refinance business grew 208% over a decade from Rs. 7,418.77 crore to Rs. 15,471.20 crore in 2011-12, the share of commercial banks grew from 16.73% to 54.68%, while the share of SCARDBs declined by from 63% in 2002-3 to 15.86% in 2011-12.