* Funding issue is new threat to generous rice subsidy scheme
* Thai government returns around 13 pct of funds to bank buying rice
* Thailand has built up huge stockpiles of grain
* Bank wants guarantee for additional 70 bln baht for policy
By Apornrath Phoonphongphiphat
BANGKOK, Feb 7 (Reuters) - Thailand's generous rice subsidy scheme has hit funding problems, marking a new threat to a policy that wins millions of rural votes for the government, but which has generated huge stockpiles, sparked graft allegations and unnerved markets.
Prime Minister Yingluck Shinawatra came into power in 2011 on a promise to pay farmers way above what was then the market rate for their rice, and the intervention has gone on even though it has priced Thai rice out of the international market.
The policy has knocked Thailand off its perch as the world's top rice exporter and built up stockpiles of around 17 million tonnes of milled rice, or nearly twice what it exports normally, leaving authorities struggling to find warehouse space, and the threat of rice being dumped on the world market at a loss.
Now officials and bankers say the government has paid less than a sixth of what it owes a state bank funding the intervention programme, piling more pressure on the scheme.
"We have informed the government and we expect the cabinet to make a decision to do something very quickly, otherwise there could be a major problem," Bank of Agriculture and Agricultural Cooperatives vice-president Supat Eauchai told Reuters.
Payments to the bank, which buys rice from farmers and is meant to be refunded by the Commerce Ministry, slowed after allegations in parliament of corruption in the scheme, but the ministry has also failed to sell enough rice to secure funds.
Only around 60 billion baht ($2 billion) has been paid to the bank, said Thikumporn Nartworathus, deputy director of the foreign trade department of the Commerce Ministry. He blamed the delay on checks needed to make sure the money had been spent properly.
"The repayment was delayed because we needed to waste time investigating the transparency of the scheme after it was mentioned in the censure debate in November," Thikumporn said.
Bank of Agriculture's Supat said that 336 billion baht ($11.3 billion) had been spent in the first year of the scheme to last September, plus another 125 billion baht after it was renewed for the crop year from October 2012.
Supat said the bank had asked the Finance Ministry to guarantee an additional 70 billion baht to fund the scheme.
A senior bank official, who asked not to be named, said the bank needed around 200 billion baht from the commerce ministry to ensure the smooth running of the scheme.
Other officials at the bank and finance ministry, who asked not to be identified because they were not authorised to speak to the media, confirmed the bank had got back only around a third of that total.
FARMERS NOT PAID
The scheme has been panned by academics, economists, the International Monetary Fund and the opposition, but it has wide support in rural areas and has done nothing to dent Yingluck's high opinion poll rating.
But problems have already appeared in the countryside: farmers in several provinces have said they were unable to get immediate payment when they sold rice to the government.
"Some farmers had to wait a few months to get their money. We hope this won't happen again in late February, when supply from the latest crop will peak," said Prasit Boonchoey, president of the Thai Farmers Association.
With space running out, Thai rice exporters said last week it was only a matter of time before the government was forced to sell grain from its stocks.
It will almost certainly have to sell at a big loss, which will ultimately be covered by the taxpayer.
That will add to huge sums needed for flood defence plans, prepared after disastrous floods in 2011 and still far from complete, and ambitious infrastructure projects, though the government has had no problems funding its budget deficit in the domestic bond market.
Commerce Minister Boonsong Teriyapirom has said repeatedly that Thailand had sold 7.3 million tonnes of rice to foreign governments and that his ministry would gradually repay money owed to the Bank of Agriculture by the end of 2013.
However, industry officials have said activity at ports did not suggest large volumes had been shipped, while Indonesia and the Philippines, named by Boonsong as buyers, denied any deals.
The minister has been vague about export schedules and his ministry has stopped publishing trade data for rice. It has refused to say what price it got for the rice.
The government is committed to paying farmers 15,000 baht a tonne for their rice. That has pushed benchmark Thai export prices up to about $570 a tonne, around $170 higher than grain from main rivals India and Vietnam. ($1=29.8200 Thai baht) (Editing by Alan Raybould, Clarence Fernandez and Ed Davies)
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