Banks seek interest subsidy

Demand 2.5 to 3 percentage points cushion to offer farm loans at 7%.

Public sector banks (PSBs) have decided to demand an interest subsidy of 2.5 to 3 percentage points if the government wants to go ahead with its budget announcement of short-term credit to agriculture at 7 per cent.

Chairmen of government-owned banks will ask for the subvention during a post-budget meeting with the finance minister, P Chidambaram, scheduled on March 23 under the auspices of Indian Banks' Association (IBA), banking sources said.

The chairmen are also likely to urge the finance minister to let PSBs increase their prime lending rates (PLRs) as the cost of funds has already gone up by as much as 200 basis points. PSBs have so far refrained from hiking their PLRs on the finance minister's request for keeping interest rates stable, the sources said.

The public sector bankers' delegation will be led by A K Purwar, chairman of State Bank of India (SBI) and also IBA.

Public sector bankers said they need to hike their PLRs by at least 100 basis points in order to maintain a viable asset-liability match. The largest private sector bank, ICICI Bank, has raised its PLR by 175 basis points since January 2006.

Chidambaram, in his budget speech, proposed to provide farmers short-term credit of up to Rs 3 lakh at 7 per cent from the kharif season of 2006-07.

He had also proposed subvention through a refinance package through National Bank for Agriculture and Rural Development (Nabard).

The directive by the government to lend at 7 per cent is applicable only to public sector banks and not to private banks and also the refinance package promised will be available only to regional rural banks and cooperative banks, the sources said.

Sources said an yield of 9.5 to 10 per cent will make farm credit a viable proposition. Lending at 7 per cent to farmers without the required direct subsidy from the government will be "disastrous" for banks, they said.

The government has announced it will bear two percentage points of the interest burden of farmers who borrowed in 2005-06. It has provided Rs 1,700 crore for this purpose.

The sources said directed lending at a subsidised rate is a major corporate governance issue for public sector banks as it goes against the interests of minority shareholders.

If the government directly pays PSBs a subsidy, it will ensure that banks' interests are protected and also farmers get credit at 7 per cent.