The Reserve Bank of India (RBI) said banks have failed to ensure the end-use of funds disbursed as crop loans and some borrowers were diverting such loans for other purposes.
RBI has asked banks to strictly monitor end-use of short-term crop loans under the interest subvention scheme and make sure these are not used for any other purpose. RBI cautioned banks that crop loans not meeting this criteria will not be considered as agricultural loans.
The central bank also asked banks to ensure that the borrower is a farmer and the rate of interest charged did not exceed seven per cent.
The interest rate is stipulated by the government and it gives the subvention of three per cent on timely payment by farmers, thereby effectively making the interest rate at four per cent.
The banking regulator further said that there have been reports of borrowers of cheap crop loans diverting the funds for other purposes such as investing in fixed deposits and other investment avenues that accrue higher interest rates.
According to banking sources, the interest rate arbitrage is prevalent particularly in Andhra Pradesh, Karnataka, Kerala and Tamil Nadu.