Govt to give 2% interest subsidy on farm loans: RBI

Moneycontrol Bureau

In a bid to ensure enough credit in agriculture sector, the government decided to give interest subsidy of 2% a year to all state owned banks for farm loans upto Rs 3 lakh in 2012-13 in respect of special interest subvention scheme already introduced by the ministry. In the Union Budget 2012-13, the then Finance Minister proposed to continue the interest subvention scheme for providing short term loans to farmers at 7% p.a in FY13. 

Public sector banks (PSBs) generally charge 9% rate of interest on farm loans. Lenders can now claim for 2% back from the government of India while disbursing such loans at 7%.

"In pursuance of this announcement, government of India will provide interest subvention of 2 % p.a. to public sector banks in respect of short-term production credit up to Rs.3 lakh during the year 2012-13," the Reserve Bank of India (RBI) said on Friday in a notification.

"This amount of subvention will be calculated on the crop loan amount from the date of its disbursement/drawal up to the date of actual repayment of the crop loan by the farmer or up to the due date of the loan fixed by the banks for the repayment of the loan, whichever is earlier, subject to a maximum period of one year."

Impact on banks

In case any farmer fails to repay and the loan account turns bad, according to Ram Sangapure, general manager – retail, Central Bank of India, a bank can at least be assured of getting back 2% of interest instead of total interest along with the principal amount.

"Agricultural credit is important for the growth of economy. All these measures are aimed at facilitating loans to farmers. However, banks can also secure their asset quality to a little extent. In a sense, the government is subsidizing banks in the form of interest subvention benefits," Sangapure told moneycontrol.com.

Additional interest subvention of 3%

Moreover, the ministry had also offered additional 3% interest subvention for farmers who repay their loans promptly. In view of that, the government is also providing 3% p.a. to all PSBs. This suggests, a prompt paying farmer can avail a loan effectively at 4% (9-2-3= 4%) wherein banks later can claim 5% (2+3) from the government of India.

"This additional subvention will be available to Public Sector Banks on the condition that the effective rate of interest on short-term production credit up to Rs. 3 lakh for such farmers will now be 4 % p.a. This benefit would not accrue to those farmers who repay after one year of availing such loans," RBI said.

In respect of 2 % interest subvention, according to the central bank, lenders need to submit their claims on a half-yearly basis as at September 30, 2012 and March 31, 2013 while they may submit their one-time consolidated claims pertaining to the disbursements made during the entire year 2012-13 latest by April 30, 2014; in case of 3% additional subvention.

saikat.das@network18online.com