Govt okays 2% farm loan rate subsidy

The union government will pay 2 per cent interest subvention (subsidy) to public sector banks (PSBs) and regional rural banks for extending short term credit up to Rs 3 lakh to farmer at 7 per cent rate. PSBs, had, sought a subvention of 2.5 to 3 percentage points.

The extent of assistance will be calculated on the amount of the crop loan disbursed from the date of disbursement till the date of payment or up to the date beyond which the outstanding loan becomes overdue, that is, March 31, 2007 (for Kharif) and June 30, 2007 (for Rabi), RBI said in a communication to PSBs and RRBs.

Finance minister P Chidambaram in his budget speech for 2006-07 had said that the government will ensure that farmers receive short term credit and the Centre will provide financial support to PSBs for extending credit at 7 per cent. The government had made budgetary provision of Rs 1,700 crore for providing interest subsidy to PSBs for 2005-06.

Besides subvention, the banks had sought tax break on interest income from agri-lending portfolio, cheaper refinance from National Bank for Agriculture and Rural Development (Nabard) and reduced risk-weights for making the lending at concessional rate to farmers a viable proposition.

Extending short term credit to farmers at 7 per cent with a 2 per cent interest subsidy is a viable proposition on the backdrop of improved recovery and good growth prospects, said Anil Khandelwal, chairman and managing director, Bank of Baroda.

In case of RRBs, the subvention will be available only to short term production credit disbursed out of their own funds.

Banks should immediately provide estimates of short-term production credit to farmers up to Rs 3 lakh for Kharif and Rabi 2006-07 to RBI to enable us to provide Government with an estimate of the likely amount of subvention.

Commercial banks have exceeded the target set by the government for flow of credit to agriculture sector in 2005-06. Against the target of Rs 87,200 crore fixed for 2005-06, banks disbursed Rs 1,07,900 crore, which is 125 per cent of the target, according to the Indian Banks' Association.