End of crop loan subsidy likely to heighten defaults, banks say

But RBI data suggest that by replacing interest subsidy with crop insurance, government can use about Rs 12,500 cr to facilitate crop insurance scheme

If a recent recommendation of the Reserve Bank of India (RBI) on crop loan subsidy is approved by the government, agricultural loans are set to become as costly as home loans or car loans. RBI has suggested interest subvention on crop loans should be phased out, and instead the subsidy amount should be used for providing crop insurance to farmers.

But banks are wary that such a move might lead to a surge in short-term crop loan defaults.

With a view to ensuring the availability of agricultural credit at a reasonable cost, the government introduced an interest subvention scheme at two per cent for short-term crop loans of up to Rs 3 lakh. Additionally, a three per cent incentive is given for prompt repayment of loans, lowering the effective cost further.
 

“The interest subsidy scheme has been in existence for close to a decade now. It might not be appropriate to withdraw it at one go,” a public sector bank official said. “We are of the opinion that crop loan subsidy should not be totally removed. Instead of two per cent and an additional three per cent, the subsidy can be at a flat four                     per cent.”

However, data from RBI suggest that by replacing interest subsidy with crop insurance, the government would be able to use close to Rs 12,500 crore for facilitating the insurance scheme. Between 2006 and 2016, the interest subvention claims given by the government increased from nearly Rs 1,000 crore to about Rs 12,500 crore, according to estimates available with RBI.

One of the reasons cited by RBI for doing away with the short-term crop loan subsidy is that such a subsidy discriminates against long-term loans and, therefore, does not incentivise long-term capital formation in agriculture. Two, the subsidised credit does not always flow to the actual cultivator, RBI argued. Third, subsidised credit increases the probability of misuse, RBI said.

“The interest subvention schemes give some kind of relief to the borrower in the form of monetary benefit,” a United Bank of India official said. “In a year when there is no crop failure, the farmer might see the withdrawal of the subsidy as an additional burden. Thus, there are chances of increased defaults in the short term.”

RBI’s suggestion is in keeping with the government’s recent initiative to introduce a new crop insurance scheme for farmers. Under the Pradhan Mantri Fasal Bima Yojana, farmers would have to pay a uniform premium of two per cent for kharif crops and 1.5 per cent for rabi crops. For annual commercial and horticultural crops, farmers will have to pay a premium of five per cent.