The government has cut interest subsidy offered to banks for providing short-term crop loans to farmers at low rates, a move that will affect the profitability of the lenders further after a recent increase in deposit rates.
The decision, however, will not impact the flow of credit to the farm sector as banks are required to set aside 18% of their total advances for agriculture. It is part of the broader target of 40% to all sectors classified as a priority by the Reserve Bank of India.
The government has reduced the interest subvention, or subsidy, on short-term crop loans lower than Rs 3,00,000 by 50 basis points to 1.5% for the current rabi season, which begins in October. The banks, however, will still have to provide these loans at the earlier rate of 7%, implying a 50 basis points hit on these loans that would amount to at least Rs 1,000 crore.
The banks are expected to provide Rs 2,00,000 crore in short-term crop loans this year. The government has set a target of Rs 3,75,000 crore for farm loans this year. In 2009-10, banks disbursed around Rs 3,66,000 crore to the agriculture sector.
“The lower interest subvention has been given after taking into account the current interest rate regime and inputs from National Bank for Agriculture and Rural Development (Nabard),” said a senior finance ministry official.
Banks are disappointed, but have no choice in the matter.
Lower margins on these loans means the banks will have to exercise due caution in extending such loans as rates of default are high in this segment. According to government data, the net non-performing assets of 21 public sector banks have increased by over 30% since 2007. The net NPAs for all state-run banks stood at Rs 20,620 crore on March 2009.
A senior official with Punjab National Bank said banks are adhering to RBI guidelines on bad loans. PNB’s agriculture loans stood at around Rs 30,000 crore at the end of FY 2009-10. Crop loans are sanctioned to farmers depending upon their landholding and cropping pattern.
Banks can, however, leverage the 2% interest rebate provided on timely repayment. The incentive was doubled to 2% this year as the government is keen to ensure that the debt waiver of 2008 did not encourage wilful default by farmers. With the rebate for timely payment, the effective cost of loan for farmers will only be 5%.
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