Park part of interest subvention amount with banks at beginning of year, says task force

To incentivise banks to reach out to more farmers with crop loans, a portion of the anticipated interest subvention amount should be parked with banks at the beginning of the year and adjusted at the end of the year, according to a Ministry of Agriculture task force report.

With the Government upping the target for flow of credit from banks to farmers from Rs 3.75 lakh crore in FY2010-11 to Rs 4.75 lakh crore in FY2011-12, bankers are of the view that the Government should park a portion of the anticipated interest subvention amount with them at the beginning of the year so that liquidity pressure could be eased to an extent.

Limited in scope

Currently, the Government parks a portion of the anticipated interest subvention amount with banks at the beginning of the year only in the case of subsidy-oriented development schemes.

In order that a farmer (particularly small and medium farmers with a production loan of up to Rs 3 lakh) has cheaper finance from the banking system, banks currently charge an interest rate of 7 per cent or less, with the Government of India (GoI) providing an interest subvention to public sector banks, regional rural banks (RRBs) and cooperative banks of 2 per cent.

In the Budget for 2011-12, the Finance Minister, Mr Pranab Mukherjee, said the existing interest subvention scheme of providing short term crop loans to farmers at 7 per cent interest will be continued during 2011-12.

Referring to the announcement in the last Budget wherein the Government had provided an additional 2 per cent interest subvention to those farmers who repay their crop loans on time, Mr Mukherjee said, “The response to this scheme has been good. In order to provide further incentive to these farmers, I propose to enhance the additional subvention to 3 per cent in 2011-12. Thus, the effective rate of interest for such farmers will be 4 per cent per annum.”