Subsidisation of farm loans to cost govt more

The Union government may have to shell out more to ensure the continuation of loans to farmers at 7 per cent per annum. The Indian Banks' Association, which is meeting Finance Minister P Chidambaram on Monday, will demand an increase in subvention from 2 per cent to 3-4 per cent for the farmer loans.

If accepted, the demand could be met in Budget 2007-08. The development assumes significance as Agriculture Minister Sharad Pawar has urged Chidambaram to further reduce interest rates for farmers to 4 per cent a year.

Banks are under pressure due to the sharp increase in their cost of funds over the past one year.

All banks are now paying 8.5 - 9 per cent interest to attract term deposits. The effective interest rates (including subvention) for banks to lend to farmers is 9 per cent annually.

In Budget 2006-07, the government announced that it would give interest subvention of 2 per cent a year to public sector banks and regional rural banks for short-term production credit up to Rs 3 lakh extended to farmers for Kharif and Rabi 2006-07.

Out of the target for agriculture credit flow of Rs 1,75,000 crore for 2006-07, it is estimated that Rs 1,20,000 crore will be in the nature of short-term production credit to farmers. "We have no problem in giving loans to farmers at 7 per cent or less, but government has to increase subvention," a public sector bank chief said.

The official said the banks are doing business and are listed companies, so the costs of funds should determine the loan rates for farmers. Interest rates have hardened and most of the banks' prime lending rate is hovering at 12-13 per cent after the RBI raised short term lending rates five times this fiscal so far.

For 2005-06, government had allocated about Rs 1,700 crore for the 2 per cent interest subvention announced on the principal amount up to Rs 1,00,000.