Policy

Govt may pay interest subsidy directly to borrowers

Our Bureau New Delhi | Updated on January 20, 2018 Published on April 11, 2016

Finance Secretary Ratan Watal   -  PTI

Goal is to improve transmission of monetary policy: Finance Secretary



The Centre may revisit interest subvention schemes and replace them with back-end interest subsidies to improve transmission of monetary policy actions.

Interest subventions provide cheaper credit to a borrower up front, with the lender being compensated later by the government. A back-end subsidy involves direct payment of a subsidy at a later date to the borrower, who pays the market rate up front.

“We need to revisit our interest subvention schemes and replace them with back-end interest subsidies that do not interfere with marginal lending rates and yet have the same effect on loan repayments as interest subventions,” said Finance Secretary Ratan Watal on Monday.

The government currently provides interest subventions on export credit, farm loans, housing and education loans.

In his closing remarks at the second conference with State Finance Secretaries, Watal stressed that marginal distortions must be removed to ensure that the new system of setting marginal lending rates, started from April 1, is successful.

The government has moved to a quarterly review of the return on small savings in line with G-sec yields.

‘A better deal’

Watal said the decision to rationalise the small savings rate should be seen as a positive development that will help households get a “better deal” on lending rates.

Noting that monetary policy transmission cannot be left solely to the Reserve Bank of India, he said: “Our policy interventions can often interfere with the transmission of monetary policy actions.”

Analysts, however, noted that the impact of the back-end interest subsidy will depend on its design. Further, it would also have an effect on the industry.

“Specifically, for exporters, a back-end subsidy, such as one in cash, could impact their competitiveness while for other sectors, it could create a mismatch in their cash flow in the intervening period,” said Devendra Pant, Chief Economist, India Ratings.

In December 2015, a committee set up by the RBI on the Medium-term Path on Financial Inclusion had recommended phasing out the interest subvention scheme and ploughing the subsidy amount into a universal crop insurance scheme for small and marginal farmers.

It felt that the scheme had distorted the agricultural credit system and seems to have impeded long-term investment.

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Published on April 11, 2016
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