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Interest subsidy to farm sector not viable: RBI

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The Reserve Bank of India (RBI) on Wednesday said the government should do away with subsidised farm loans, as the proposition was not viable.

“If banks are able to give loans to big corporate bodies at nine per cent, why can’t they give loans for agriculture at 13 per cent? The problem is it (the government) wants credit to be available at seven per cent, when inflation is nine per cent. That is our objection,” said Deputy Governor K C Chakrabarty, while addressing a banking seminar organised by YES Bank. He said banks could not provide subsidy to all farmers when the deposit rate was nine per cent.

Banks extend loans of up to Rs 3 lakh to the farm sector at seven per cent, and get 1.5 per cent interest subvention from the central government. The rate of interest is fixed and not related to the base rate, or the benchmark lending rate. The has risen in the last one and half years, and has exerted an upward pressure on the banks’ cost of funds. Since the interest rate is fixed for farm sector loans, banks are unable to pass on the rise in the cost of funds to borrowers.

Chakrabarty said financial inclusion could only be led by banks, and not by micro-finance institutions (MFIs) or technology providers. While financial inclusion would be brought about by regulated financial institutions, others could only facilitate it, he said.

He said an entity needed to provide savings and payments systems apart from credit facility for financial inclusion. “provide only credit, hence they cannot bring about financial inclusion,” said Chakrabarty.

Within the banking fold, financial inclusion initiatives have to come from private sector banks, he said. “Public sector banks would not bring financial inclusion in this country. It would be brought by private sector banks,” he said. This would be visible in the next two-three years, he said, adding banks needed to work out viable business models, since financial inclusion was not possible through charity.

Under new norms, banks have been mandated to open one-fourth of their new branches in unbanked, or under-banked, areas to expand the reach of financial services.

The banking regulator has also liberalised branch opening in unbanked areas. Chakrabarty said if banks wanted to grow in a planned manner, this was the time to build a customer base.

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