Crisil Ltd on Tuesday said the Centre's sops to Food Corporation of India including cut in interest rate on bank loans to FCI by 1.5 per cent, will negatively impact the bottom line of public sector banks pulling down pretax-profit by 4.5 per cent in the near term.

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The government's package for FCI including permission to raise Rs 5,000 crore (Rs 50 billion) from the domestic debt market would positively impact the corporation's financial profile, but has the potential to pull-down PSBs pre-tax profits, Crisil said in a release in Mumbai.

This reduction in interest income would add to the profitability pressures that banks are expected to face in the medium to long term due to their falling investment income and interest on advances, it said.

Currently, banks (mainly PSBs) have an average exposure of Rs 42,000 crore (Rs 420 billion) to food credit. This bears an interest rate of 10.95 per cent, which will come down to 9.45 per cent once banks implement the proposed measure, the release said.

Financial sector ratings director Raman Uberoi said: "Even at the reduced interest rates, the returns on loan will be significantly higher than that commensurate with credit risk of the underlying exposure, which is linked to the Centre."

"Hence, the possibility of interest rates on food credit coming down further in the medium to long term cannot be ruled out," Uberoi said.

Crisil said the permission to access the debt market opens up new avenues for FCI to reduce its borrowing costs. This measure would lower the government's subsidy bill to the extent of the reduction in interest expenses, it added.

The agency said it would also bring down the interest income earned by banks on their food credit exposures and those with low profitability and high FCI exposure would be most susceptible to this impact.

Financial sector rating head K Sitaraman said other than the interest rate reduction on food credit, the extent of FCI's market borrowings would impact banks profitability.

If these borrowings are backed by sovereign guarantees, the interest rates on these instruments will be significantly lower than even the proposed reduced rates on food credit, it said.

The extent of FCI's market borrowings backed by sovereign guarantee could go upto 50 per cent of the banks exposure to food credit, Crisil said.

The consequent impact on the banks' pre-tax profits would be about 7.9 per cent if the interest rates continue to remain at 9.45 per cent, it added.