Banks Likely To Offer 5-Year Agri Credit

The Reserve Bank of India (RBI) is planning to allow banks to offer a term "credit" limit of five years for agriculutural loans. The longer cycle will help farmers who are denied credit once they lose their crops on account of drought or any other natural calamity.

The scheme will be executed through a cyclical credit scheme for crop production. It will provide an institutional mechanism to ensure uninterrupted credit to farmers in rain-fed areas for crop production in the case of natural calamities.

In a cycle of three to five years, a farmer gets good crop yields in one or two years. During the rest of the period, for reasons beyond his control, he is unable to service his debt and secure credit to meet fresh production needs.

 

The RBI said the financing bank may adopt a 'credit cycle approach' and set an overall term credit limit of three to five years, with sub-limits for each year so that the farmer's production requirement is fully met. The repayment schedule may be dovetailed with the farmer's repayment capacity based on crop yield during the year and the resultant income stream in such a way that the entire principal is repaid over the cycle.

The RBI has suggested that for fixing the yearly sub-limit, the banks may take 150 per cent of the scale of finance so as to provide a cushion for other small consumption and other needs. The yearly sub-limits may be disbursed to farmers well before the cropping season and are repayable after approximately 12 months on a due date to be fixed by the bank for all farmers within the branch's jurisdiction.

However, in the event of a drought or poor harvest, the amount to be recovered by banks will be proportionate to the crop yield of the area and the recovery of the balance due shall be deferred to the next year. The deferred balance and the fresh loans during the next year shall be recovered keeping in view the crop yield levels of the previous years.

This process of recovery shall be followed over the entire five-year credit cycle. When the yields are substantially higher, the entire outstanding is to be recovered so that the credit cycle comes to a close and a fresh cycle starts with a new limit.

During the period of the credit cycle -- not exceeding five years -- the banks may postpone the repayment date of crop loans if they are satisfied that the farmer is not in a position to repay the loan, due to natural calamities. The banks can also grant fresh crop loans for the next seasons subject to the rescheduled dates of repayment not exceeding the five years and also servicing the interest regularly.

Under the cyclical credit scheme, rescheduling of instalments of principal alone will not turn a standard asset into a sub-standard asset provided interest is paid every year and the facility is fully secured. The current prudential norms for non-performing assets (NPAs) classification in respect of agricultural advances is applicable where interest and/or instalment of principal remains overdue for two harvest seasons but for period not exceeding two half years.

If a loan is covered under the crop insurance scheme and if a claim is received, the claim has to be adjusted first against the interest component so that in a failed crop year interest payment need not be insisted upon from the farmer for the purpose of avoiding the account turning NPA.

The scheme could be dovetailed to the existing Kisan Credit Card Scheme provided the card is issued for 3-5 years. The margin and security norms will be as per extant guidelines of the RBI. Default in repayment under any other circumstances will render the account as bad loan.