Cheap Loan Proposal

The minister's immediate solution is to provide agricultural loans at one or two percentage points lower than the going bank rates. This is of a piece with his efforts to make inputs into agriculture available at a cheaper price. Surely, the amounts involved are not large "" based on a total agriculture credit outstanding of Rs 20,000 crore, a 2 per cent subsidy will mean an additional outgo of Rs 400 crore. Indeed, the nominal outgo may even carry the proposal through. But the fact remains that the proposal militates against the grain of the interest rate reform of the last five years. A burdensome, multi-tiered interest rate structure has been dismantled and instead all loans except those for below Rs 25,000 are priced freely. In fact, most agricultural loans are within Rs 25,000 and qualify for lower rates. But in suggesting the creation of a further tier of subsidised loans, the minister is only indicating a rollback of the government's commitment to keeping out of interest rate determination.

 

Cross subsidisation has been effectively ruled out in the concept paper itself. If banks were to bear the additional cost of cheaper loans, they would have to push up real interest rates for other sectors even more to compensate themselves. This leaves only one option: a direct subsidy to be paid by the government to the banks concerned. But it must be realised that the proposed mechanism is by no means an easy one. While banks immediately realise the impact of lower interest rates, they have to wait for long periods of time before they get to recover the subsidy component. In fact, such a scheme cannot work unless one or more agencies are specifically identified as nodal agencies to collate all the claims "" in one direction "" and then, to ensure orderly distribution of monies, in the other direction. And with each tier introduced "" whether at the taluka, district, state or national level "" the delays become more pronounced. This is in fact burdening banks with a hidden subsidy as they are out of money for a long period of time. Coming as it does when the banking system looks vulnerable, this is one exercise they may wish to avoid. Perhaps the minister could refer to any number of empirical studies which have stressed that adequate availability of credit at the right time is more important to farmers than the pricing.