The expert committee on rural credit has recommended a cut in interest rate on the rural infrastructure development fund (RIDF) to encourage commercial banks to lend to the agriculture sector.
The committee, chaired by V S Vyas, professor-emeritus, Institute of Development Studies, submitted its report to the National Bank for Agriculture and Rural Development (Nabard) today.
Commercial banks, according to the Reserve Bank of India (RBI) stipulation, are required to maintain 40 per cent of their net credit to the priority sector, of which 18 per cent is for agriculture. But, as the expert committee found out, banks seem to have turned shy from extending credit to the agriculture sector as they find servicing large numbers of small accounts -- both deposit and borrowing -- costly and cumbersome. Banks rather prefer to invest in RIDF, which is the safer and remunerative alternative of meeting the targeted levels of lending to the agriculture sector.
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The expert committee suggested that the interest rate under RIDF should be reduced to nine per cent for a shortfall (in lending to agriculture) of less than two percentage points.
For a shortfall of two percentage points or more, it should be seven per cent. If the shortfall of less than two percentage points continues, the interest rate should be seven per cent, which would just cover the 6.24 per cent average financial cost of raising resources in 1999-2000. The reduced rate of interest should apply to future deposits under earlier tranches of RIDF also."
The committee also views that the stipulation of 18 per cent (of net credit) for agricultural loan and 40 per cent for priority sector should be reviewed after five years "to help set realistic targets in view of the dynamics of Indian agriculture".
To encourage the small loans of below Rs 25,000 by the commercial banks, the panel said interest rates on small loans should be removed. It also recommended that any shortfall in lending to the weaker sections against a target of 10 per cent should be called into RIDF.
To revitalise the co-operative credit system, the expert committee suggested that the Centre should act expeditiously on the recommendation of the Jagdish Capoor task force on revitalisation and place Rs 500 crore with Nabard for the purpose.