Crop loan subventions: Political problem with panel suggestion

With 50% Indians not having access to banks, the plant will not find many takers

The Urjit Patel committee’s recommendation to revisit the interest subvention on short-term crop loans might be desirable but is not likely to find many takers, say experts.

“Rather than  interest subvention, it needs to be seen who is availing of the loans. On the one  hand, credit flow to the farm sector is rising exponentially. On the other, 50 per cent of Indians don’t have access to banks,” says Ashok Gulati, chairman of the Commission for Agricultural Costs and Prices.

The Patel committee was constituted by Reserve Bank of India governor Raghuram Rajan. It has recommended revisiting the policy on extending interest subventions, due to a rising ratio of agricultural credit to agricultural gross domestic product.

The committee found the ratio of agricultural loan dues to agricultural GDP had risen from 9.5 per cent in the 1990s to 12.2 per cent in 2001-02 and to 35.9 per cent in 2012-13.

The justification for the committee’s recommendation is the need for smooth  transmission of RBI’s monetary  decisions. These are, instead, impacted by government directives such as an interest subvention on crop loans.

“The suggestion is good but not implementable. The decision to grant or extend any interest subvention scheme is not taken by banks but by the government in power,” said Madan Sabnavis, chief economist, CARE Ratings.

A senior government official said interest subvention schemes cannot be discontinued at one go.  

Says Yogendra Alagh, former Union minister for power and planning: “What is important is to ensure availability of funds.” Agricultural credit shouldn’t be affected but to help farmers, the government should give the subsidy directly to them, rather than tampering with the financial markets, he said.

Sabnavis is of the same opinion. A solution to the problem, he said,  could be to allow farmers to pay the market rate for loans from banks and then compensate them through a system of subsidy. Adding, however: “This is easier said than done, as interest subvention is a political decision.”

Right now, farmers get loans at a concessional rate of interest and banks later get the money from the government.

In 2006-07, the government introduced a two per cent interest subvention scheme, to ensure availability of short-term crop loans of up to Rs 300,000 to farmers at a reduced rate of seven per cent. In 2009-10, it provided an additional one per cent interest subvention to those who’d repaid their short-term crop loans on schedule.  This subvention for timely repayment was raised to two per cent in 2010-11.

In the 2013-14 Union Budget, the government announced a three per cent additional interest subvention on timely repayment of short-term crop loans, bringing down the effective rate of interest for farmers to four per cent. Earlier, only the public sector banks were covered by this, but it has now been extended to include even private sector banks.

Flow of Institutional Credit To Agriculture Sector (in Rs crore)
Year	Credit
2004-05	1,25,309
2005-06	1,80,486
2006-07	2,29,400
2007-08	2,54,658
2008-09	3,01,908
2009-10	3,84,514
2010-11	4,68,291
2011-12	5,11,029
2012-12	6,07,375
2012-13*	7,00,000
*Target As Per 2013-14 Union Budget
Source: Department of Agriculture