The increased lending proposed under the short-term farm credit subvention scheme will further squeeze banks' margins. | |
| The measures |
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| The 2 per cent interest subsidy scheme launched last year for providing short-term credit up to Rs 3 lakh to farmers will continue in 2007-08. The Centre has made a provision of Rs 1,677 crore for this. |
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The context The Budget 2006-07 announced an interest subvention scheme to provide relief to farmers. Under the scheme, banks would provide short-term crop loans to farmers at 7 per cent interest and, in turn, would receive 2 percentage point interest subsidy. Public sector banks (PSBs) and regional rural banks (RRBs) were provided this facility under the RBI window, while Nabard was extending the facility to co-operative banks. However, with the rising cost of funds, public sector banks were clamouring for a higher interest subsidy of up to 4 per cent.
| BURDENSOME LOANS | | Rs crore | Agriculture* | Small scale | Others | | Outstanding balances at the end of | | 2004-05 | 1,24,269 | 74,189 | 1,76,495 | | 2005-06 | 1,73,871 | 90,946 | 2,45,069 | | Variations during | | 2004-05 | 33,728 | 8,334 | 69,057 | | 2005-06 | 49,602 | 16,757 | 68,574 | | * Indirect finance not included |
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| The impact The increased lending proposed by the government under the short-term farm credit subvention scheme will further squeeze banks' margins, said bankers. The target of lending Rs 1,75,000 crore to the agricultural sector in 2006-07 will be exceeded comfortably and is likely to reach Rs 1,90,000 crore, said Finance Minister P Chidambaram. For 2007-08, farm credit flow has been targeted at Rs 2,25,000 crore, a growth of over 28 per cent year-on-year. |
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| Interest rates over the past year have firmed up and prime lending rates of most PSBs are hovering around 12-12.5 per cent. The RBI has already raised its short-term lending rates five times this fiscal. In such a scenario, bankers feel that the cost of funds should determine lending rates. |
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| Banks have already refrained from raising interest rates on existing housing loans and educational loans. |
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| The government had allocated Rs 1,700 crore for the 2 per cent interest subvention announced on the principal amount up to Rs 1,00,000 for 2005-06. Only half of the allocated amount was claimed by public sector banks, according to banking sources. |
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| This time around the government has made a provision of Rs 1,677 crore for the short-term subsidised farm loan scheme. It is estimated that Rs 83,850 crore of farm lending will be in the nature of short-term production credit to farmers. |
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| "Under the scheme, banks will be lending at an effective rate of 9 per cent to agriculture. Lending at this rate will have a slight impact on bank bottom lines. The impact would be relative to the size of the agricultural portfolio," said a senior official with a large public sector bank. |
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| Private sector banks, which continue to remain outside the scheme, feel the interest subsidy to public sector banks is seriously hampering their agricultural portfolio. |
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