FM plays teacher, explains credit basics in House

Finance Minister P Chidambaram had a tough time in the Rajya Sabha today, explaining economic fundamentals to his party MPs, who joined the Left and the Opposition BJP in questioning why agriculture loans were dearer than car loans.

Why should Mercedes car owners be given loans at rates lower than farmers and poor customers? Why are interest rates not being brought down when scores of farmers are committing suicide under the burden of debt?

Faced with such questions from all corners of the House, Chidambaram said a car loan was a "collateralised loan" and since a car could be repossessed, the banks had a lower risk.

It was the risks involved in a sector, the cost of refinance and the cost of administration which determined the rate charged by the banks, he said.

It would not be wise for the Central government to step in and fix interest rates, he said, adding that the right thing to do was to bring down inflation and the cost of funds and, thereby, enable banks to lend at

lower rates. This, he said, would help maintain macro-economic stability and at the same time ensure that funds flow to the agricultural sector.

Successive governments had taken the position that they should leave the price mechanism to the judgement of the banks, he said.

This didn't satisfy the agitated MPs, including Janardhana Poojary of the Congress, Sushma Swaraj of the BJP, Nilotpal Basu of the CPI (M) and Sharad Yadav of the JD(U), among others. They cited Swaminathan Committee's recommendation that the rate of interest for farmers should be 4 per cent.

Chidambaram explained that though interest rates charged by commercial banks were deregulated, the rate on loans up to Rs 2 lakh should not exceed the Benchmark Prime Lending Rate (BPLR).

However, due to public perception regarding over pricing of loans to the agriculture sector and small and medium enterprises, Indian Banks' Association (IBA) had been advised to review the BPLR system and issue guidelines for appropriate pricing of credit, he said.

With an efficient cooperative credit structure, it was possible to lend at lower rates, but this structure was in a shambles, he said.

The government has already announced a Rs 13,500 crore package for revamping the cooperative credit structure. Meanwhile, the government has done its best for the farmers, increasing farm credit substantially in its first year in power, he said.

"While we will address, in the long term, the question of inflation and revamping of the cooperative credit structure, we are working with the banks to ensure that farm credit rates are brought down. But that will critically depend upon our ability of master some other factors, namely, inflation and the cost of administration," Chidambaram said.