Farm credit sop on Mar 31: FM

Finance minister P Chidambaram has assured public sector banks that a compensation package for providing short-term farm credit at 7 per cent would be announced by March 31, 2006, banking sources said.

The 2006-07 Budget has made it mandatory for public sector banks to lend short loans at 7 per cent of up to Rs 3,00,000 and only regional rural banks and co-operative have been extended a refinance subvention against the concessional farm credit scheme.

At the March 23 meeting with Chidambaram, the chairmen of public sector banks had made a forceful plea that farm credit at 7 per cent was unviable and had sought an interest subsidy of 2.5 to 3 percentage points.

Sources said the finance minister had said that the manner of compensation for possible loss of income on providing farm credit at 7 per cent needed to be worked out. Bankers said farm credit is not highly profitable because of a bad repayment history.

"Such directed lending at low rates will lead to banks choosing to lend only to rich farmers to stay away from high losses," a senior banker said.

The government will be providing a two percentage points direct interest subsidiary to farmers, who had borrowed in 2005-06. A provision of Rs 1,700 crore has also been made for this purpose.

Bankers also said directed lending at a subsidised rate is a major corporate governance issue for state-owned banks as it goes against the interests of minority shareholders.