The Hindu Business Line : Govt may hike subvention on farm credit to boost offtake

The subsidy is expected to be increased by at least 1 per cent more, taking the subvention to 3 per cent, allowing for a further drop in farm credit pricing.

C. Shivkumar

Bangalore, June 4 The Government is likely to increase the subvention on loans to the agriculture sector giving a fillip to raise farm credit offtake.

Currently, banks are expected to provide farm loans at 7 per cent to farmers. Banks are provided a subsidy of 2 per cent from the government for covering the deficit in interest margins, taking the effective yield on farm advances to 9 per cent. This year, top officials said, the subsidy was expected to be increased by at least 1 percentage point more, taking the subvention to 3 per cent, allowing for a further drop in farm credit pricing.

This was part of a strategy to increase farm credit coverage in the country. The scheme was also part of the Congress manifesto that had promised low- interest loans to small and marginal farmers.

Before the elections, the Government had extended a farm loan waiver scheme of up to Rs 60,000 crore as part of a debt relief package.

The officials said that few banks had objections to increasing the farm loan component. In fact, most banks find the scheme attractive, if the subventions are raised further. This was especially so in an environment where deposit rates are being pruned. Besides, the non-resistance especially from public sector banks to raising farm loans was partly on account of the low non-performing assets in the agricultural sector. NPAs in the farm sector are barely 1 per cent of the gross advances.

Besides, the officials said, the additional subvention, leading to concessional pricing of farm loans would help banks in overcoming the problem of low credit offtake. This year, banks have been hit by low credit offtake with the incremental credit deposit ratios mostly in the negative. On a nominal basis, the credit deposit ratios have already dropped below 70 per cent.

Karnataka gives subsidy

Besides, bankers said that some State governments were already offering subventions as high as 6 per cent. For instance, the Karnataka Budget for the current financial year had announced a farm loan scheme of 3 per cent. The implicit subsidy in this scheme was 6 per cent. The budgetary impact in the case of the Karnataka Government, assuming full coverage of the farm sector, would barely be Rs 300 crore. Other States have taken the cue from Karnataka to extend similar farm loan subsidy schemes. These include Maharashtra and Andhra Pradesh.

However, bankers said that if the scheme was Centrally sponsored, farm credit offtake would get a greater fillip, thereby raising the credit deposit ratios. Some banks, like Syndicate Bank, are already offering additional assistance to the farm sector. The special schemes started in 2007 included loans to farmers for taking over credits extended by the informal sector, though these loans were at above the benchmark lending rates.

The Syndicate Bank farm loan takeover scheme was a phenomenal success, especially in Punjab, Uttar Pradesh and Haryana.

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