Banks get relief on farm lending, debt waiver

The government today decided to ease the burden on banks on account of the farm debt relief package and subsidised short-term agricultural loans.

The Union Cabinet approved a proposal to pay Rs 3,872 crore interest on Rs 30,000 crore to be reimbursed by the Centre to public sector banks, regional rural banks and cooperatives over a three-year period ending August 1, 2011.

The interest on the reimbursement has been fixed at 9.56 per cent as banks would have to make prudential provisions at this rate in case the government did not pay interest on the debt relief outstanding within this financial year. Of the total farm relief package, comprising waiver and one-time settlement, no interest will be paid on the Rs 25,000 crore which will be reimbursed by the government during the current financial year.

The farm debt waiver and relief scheme implemented in June this year, that benefited 36.8 million farmers, will cost the government Rs 55,000 crore. However, farmers will get benefit for Rs 65,318 crore as banks are also waiving penal interest and legal charges.

In addition, the Cabinet also decided that the government would pay 1 percentage point higher interest subvention to the lenders on short-term agricultural credit extended by them. The move will enable public sector banks, regional rural banks and cooperatives to continue lending to farmers 7 per cent.

Banks had approached the government seeking higher subsidy since the cost of funds has gone up. Since 2004, the Centre has been paying 2 per cent subsidy on short-term loans. An interest subvention of 3 per cent will cost the government Rs 3,141 crore over nine months.

“We welcome both the decisions of the government. However, government should have provided 3 per cent interest subvention for 12 months, which is the normal duration for a short-term farm credit,” said a senior executive with a public sector bank.

The target for farm credit for 2008-09 has been fixed at Rs 2,80,000 crore, of which short-term credit is estimated at Rs 1,86,828 crore.

Sources close to the development said that National Bank for Agriculture and Rural Development (Nabard) would extend refinance to regional rural banks at 4.5 per cent interest and at 3.5 per cent per annum to cooperatives. In turn, the government will provide Rs 1,169 crore subvention to Nabard to enable it to provide cheap refinance facility to regional rural banks and cooperatives.

The Union Cabinet today also passed a resolution for giving higher salary to the chairman of the Pension Fund Regulatory and Development Authority (PFRDA). It also approved a proposal to make the term of the chairman and members of the PFRDA for five years with a provision for re-appointment till the age of 65 and 62, respectively.