Do the non-banking finance companies have a role in hoarding and the resulting inflation?

If you read a recent notification of the Reserve Bank of India to the NBFCs, there, certainly, is a shadow of doubt over the NBFCs in this regard.

In a strange move prompted by soaring inflation, the Reserve Bank of India has asked the NBFCs to furnish details of their exposure to large borrowers (corporates and other entities) for procurement of foodgrains.

According to analysts, this is a step to prevent misuse of funds for hoarding of foodgrains. In a notification issued to non-deposit taking NBFCs with an asset size of Rs 100 crore (Rs 1 billion) and above, the RBI said: "Concerns have been expressed that some of the corporates may be hoarding foodgrains, which could have the benefit of resources from the NBFC finance. NBFCs with an asset size of Rs 100 crore and above are, therefore, advised to undertake a quick scrutiny of their financial exposures to large borrowers for procurement of foodgrains."

In the notification, the RBI has also asked these NBFCs to confirm that funds have not been diverted for procurement of foodgrains for hoarding. The NBFCs were asked to submit a comprehensive report by March 10, 2007.

There are several non-deposit taking NBFCs with an asset size of Rs 100 crore and above, which are floated by corporates as well as Indian and foreign banks. It is feared that some corporates use these NBFCs to stock up commodities.

However, analysts feel that it is unlikely that big NBFCs are involved in funding corporates for hoarding foodgrains. Prices of essential items have been rising. Despite the impending harvest of rabi crops (wheat, pulses, oilseeds), the prospect of easing the market rates appear bleak.

Analysts said corporates buy only 2-3 million tonnes of wheat compared to the FCI's 18 MT, meaning the role of corporates in hoarding is highly unlikely. Indian agriculture faces a supply constraint. Foodgrain production has essentially been stagnant over a six-year period, ranging from 195 MT to 210 MT in the period between 2000-01 and 2006-07, say market watchers.