 "Pvt banks eye a bigger pie in crop loans")
Private sector banks are sensing a business opportunity in rural villages following the government's decision to extend interest subvention scheme to short-term crop loans offered by these lenders. This scheme was so far restricted to public sector banks and allowed state-run lenders to lend crop loans at lower rates than their private sector rivals.
"The move will ensure level playing field among public and private banks. Till now, public sector banks have been enjoying a cost advantage over us. Small and marginal farmers preferred public sector banks because of lower interest rates. The subvention scheme will allow us to compete with them," a senior banker in charge of agri loan business of an old-generation private bank said.
State-run banks currently give short-term crop loans up to Rs 300,000 at an annual interest rate of 7%. Farmers who repay their dues on time are eligible for another 3% subvention. Hence, the effective borrowing rate for them is only 4%. Some state governments also provide subsidies and loans are made available at as low as 2-3% interest.
"We have a number of products like micro-insurance, irrigation loans, agri-supply chain finance. The interest subvention scheme will allow us to get new customers and we plan to offer them the entire suite of agri-banking products and not just crop loans," an official with a mid-sized private bank said.
Bankers, however, said clarity was needed on the rate of interest at which private banks should lend to gain eligibility for interest subvention.
"The government wants farmers who repay loans on time to get credit at 4%. We are not sure if 3% interest subvention will ensure that because currently we are offering these loans at 9-10%. For that to happen, some refinancing facilities must be made available from institutions like NABARD," a banker said.
A finance ministry official clarified the benefit of the scheme will be provided to private banks within the service area of the branch concerned and other branches of the bank will not be eligible for it. "The service area is divided geographically. Within a service area it is the responsibility of a bank to give loans be it a private sector lender or public sector bank," the official added.
After exceeding the target of Rs 5,75,000 crore fixed for agriculture credit in 2012-13, the government has set a target of Rs 7,00,000 crore for this year. Of these short-term crops loans are estimated at over Rs 70,000 crore and about 80-90% of it is extended by government banks.
Interest subvention of Rs 3,287 crore and Rs 5,400 crore was given in 2011-12 and 2012-13, respectively. For 2013-14, the government has pegged the subvention at Rs 6,000 crore.
The service area approach was introduced in 1989 where service area villages were identified and assigned to bank branches based on their proximity. It was observed that the activities of service area branches were restricted only to allotted villages and they were unable to provide financial assistance outside their service areas.
Borrowers were also required to approach designated bank branches for their credit needs and were not in a position to avail the services of any other bank branches. Bankers said the restrictive provisions along with certain other aspects of service area were removed from December 2004, except for the government sponsored schemes.
"Probably, the government wants credit disbursal to happen in an orderly manner in clearly earmarked areas. May be that is the reason why the benefits of interest subvention will be in respect of loans given within the service area of the branch," a banker said.
"The move will ensure level playing field among public and private banks. Till now, public sector banks have been enjoying a cost advantage over us. Small and marginal farmers preferred public sector banks because of lower interest rates. The subvention scheme will allow us to compete with them," a senior banker in charge of agri loan business of an old-generation private bank said.
State-run banks currently give short-term crop loans up to Rs 300,000 at an annual interest rate of 7%. Farmers who repay their dues on time are eligible for another 3% subvention. Hence, the effective borrowing rate for them is only 4%. Some state governments also provide subsidies and loans are made available at as low as 2-3% interest.
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In absence of a subvention scheme, private banks were offering these loans at 9-11% rate. According to bankers, interest subvention will reduce client acquisition cost, expand customer base in rural villages and provide them an opportunity to market other agri-banking products.
"We have a number of products like micro-insurance, irrigation loans, agri-supply chain finance. The interest subvention scheme will allow us to get new customers and we plan to offer them the entire suite of agri-banking products and not just crop loans," an official with a mid-sized private bank said.
Bankers, however, said clarity was needed on the rate of interest at which private banks should lend to gain eligibility for interest subvention.
"The government wants farmers who repay loans on time to get credit at 4%. We are not sure if 3% interest subvention will ensure that because currently we are offering these loans at 9-10%. For that to happen, some refinancing facilities must be made available from institutions like NABARD," a banker said.
A finance ministry official clarified the benefit of the scheme will be provided to private banks within the service area of the branch concerned and other branches of the bank will not be eligible for it. "The service area is divided geographically. Within a service area it is the responsibility of a bank to give loans be it a private sector lender or public sector bank," the official added.
After exceeding the target of Rs 5,75,000 crore fixed for agriculture credit in 2012-13, the government has set a target of Rs 7,00,000 crore for this year. Of these short-term crops loans are estimated at over Rs 70,000 crore and about 80-90% of it is extended by government banks.
Interest subvention of Rs 3,287 crore and Rs 5,400 crore was given in 2011-12 and 2012-13, respectively. For 2013-14, the government has pegged the subvention at Rs 6,000 crore.
The service area approach was introduced in 1989 where service area villages were identified and assigned to bank branches based on their proximity. It was observed that the activities of service area branches were restricted only to allotted villages and they were unable to provide financial assistance outside their service areas.
Borrowers were also required to approach designated bank branches for their credit needs and were not in a position to avail the services of any other bank branches. Bankers said the restrictive provisions along with certain other aspects of service area were removed from December 2004, except for the government sponsored schemes.
"Probably, the government wants credit disbursal to happen in an orderly manner in clearly earmarked areas. May be that is the reason why the benefits of interest subvention will be in respect of loans given within the service area of the branch," a banker said.