Rbi Orders Banks To Charge Annual Interest On Farm Loans

In a significant relaxation of policy, the Reserve Bank of India has ordered commercial banks to charge interest on agricultural advances at annual intervals instead of quarterly or longer intervals. The banks have also been told to compound the interest only if the loan/instalment becomes overdue.

RBI has asked all banks to treat all agricultural loans sanctioned by them on or after June 20, 1994, in the same way. The date is the one on which the Supreme Court delivered a major judgement in case of two banks on how agricultural interest can be charged so as to reduce the burden of compounded interest on the farm sector

 

The RBI decision on the matter was communicated to the banks by way of a circular. RBI has also asked the banks to forward to it a copy of the banks instructions on the matter to its controlling offices and branches.

In the case of Corporation Bank versus D S Gowda and Bank of India versus Karnam Ranga Rao, the apex court had ruled inter alia that allowing the banks to charge interest quarterly or half-yearly from farmers is tantamount to virtually compelling them to pay compound interest since they would not be able to pay interest except once a year when they receive the income from the sale proceeds of their crops.

The court had therefore ruled that as far as agricultural loans were concerned, at best interest may be charged annually, and compounded only if the loan or instalment became overdue. This is exactly the system which RBI has now adopted for all commercial banks.

The chairman of a leading nationalised bank told Business Standard : This would provide major relief to the farmers who would no longer have to bear the burden of paying compounded interest on their loans.

The RBI has also circulated an extract from the Supreme Court judgement, which says that the fact that farmers are liquid only at a given point of time every year has to be kept in mind while determining when they should repay the loan or pay the instalment/interest on advances.

The court had also emphasized on the point that farm advances should not be treated at par with commercial loans insofar as the rate of interest is concerned, since farmers do not have any regular source of income besides the sale proceeds of their crops which they get once a year.