Provide subsidy to farmers directly, RBI tells govt

The move comes amid rising NPAs pertaining to the sector

Expressing concern over distortion of the credit culture in agriculture, the Reserve Bank of India (RBI) has written to the government, urging it not to give subsidy for the sector to banks and, instead, provide it directly to farmers.

The move comes amid rising non-performing assets (NPA) pertaining to the sector. Between 2010 and this year, these rose fourfold - from Rs 10,400 crore to Rs 39,100 crore. Gross NPAs, as percentage of total agricultural loans, increased to 4.7 per cent as of March this year, compared with 2.2 per cent five years ago.

Sources said RBI had suggested the government transfer the subsidy directly to farmers' bank accounts, the way it provided subsidy for liquefied petroleum gas. "While giving a subsidised loan, a bank does not differentiate between borrowers. This is an area of concern," said a source.

The government provides three per cent interest subvention for short-term crop loans, through banks that charge a lower amount from the farmer and get it reimbursed from RBI at the end of every quarter.

For this financial year, the government has budgeted forRs 13,000 crore of expenditure on interest subvention, for short-term credit to farmers, compared with Rs 9,500 crore in 2014-15.

That rising bad loans in the interest rate subvention scheme was a concern was highlighted in RBI's recently-released annual report. "Though the government has been incentivising repayment of agricultural loans through the interest subvention scheme, this has not helped improve asset quality. The government has been examining various measures to improve the efficacy of the scheme," the report stated.

The central bank noted NPAs in the agriculture sector had been rising steadily since 2010, reflecting a decline in recovery in agricultural advances. According to data compiled by the banking regulator, the ratio of recovery to total demand fell from 74.5 in 2012 to 73.4 in 2014.

The flow of credit to the agriculture sector has been increasing through the years. The quantum of farm loans to be disbursed by banks is set by the government. In 2014-15, banks disbursed about Rs 6 lakh crore, against the target of Rs 5.4 lakh crore.