Farm interest subsidy for all banks

The 2 percentage point subsidy on farm loans of up to Rs 3 lakh will be extended to all scheduled commercial banks. In other words, private banks, too, will get the benefit of the government decision.

Finance Minister P Chidambaram, in the Union Budget for 2006-07, announced the scheme of public sector banks offering farm loans up to Rs 3 lakh at a subsidised rate of 7 per cent against the prevailing rate of 9 per cent.

At the insistence of the Reserve Bank of India (RBI), the government agreed to make good the 2 percentage point gap by making budgetary provisions.

"All scheduled commercial banks will get the benefit. It is not meant only for public sector banks," Indian Banks' Association (IBA) Chief Executive HN Sinor told Business Standard.

The inclusion of private and foreign banks in the scheme will create a level playing field, as these banks are disadvantaged vis-à-vis the public sector banks.

"It is a competitive field. When the PSU banks are offering agriculture loans at 7 per cent, we cannot charge more. Hence we should also get the subvention," said the CEO of an old private bank.

The IBA had taken up the issue with the RBI. The scheme is expected to see the government pay about Rs 1,600 crore to banks as interest subsidy, based on the likely disbursement of Rs 122,500 crore as short-term loans to farmers.

The government had provided Rs 1,700 crore for the interest subsidy.

Commercial banks exceeded the target set by the government for flow of credit to the agriculture sector in 2005-06. Against the target of Rs 87,200 crore set for 2005-06, banks disbursed Rs 107,900 crore, which is 125 per cent of the target.

The target for total farm lending in 2006-07 is Rs 175,000 crore.