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Banks look for higher subsidy on farm loans

Banks look for higher subsidy on farm loans
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First Published: Fri, Aug 01 2008. 12 09 AM IST
Updated: Fri, Aug 01 2008. 12 09 AM IST
Mumbai: Public sector banks are demanding higher subsidy from the government to be able to offer farm loans at 7%, now a full 2 percentage points less than the policy rate in India. They also want the government to reimburse them for those written-off farm loans that are not covered by the government’s Rs71,700 crore loan waiver scheme.
If these demands are accepted, public sector banks, which account for about 70% of the Indian banking industry, will have some cushion to absorb the twin blows of rise in rates and a hike in their cash reserve ratio by the banking regulator. But, it will clearly worsen the already deteriorating fiscal health of the Indian government.
Under India’s banking law, at least 18% of loans must go to the agriculture sector. This is within the overall limit of “priority sector” lending norms that require all Indian banks to direct 40% of their loans to sectors such as small-scale industry, small business and exports, besides agriculture.
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Under the government’s directive, public sector banks have been doubling their exposure to agriculture every year and lending to small farmers at 7% with the government chipping in another 2% to take care of the cost of funds.
“As the cost of funds is rising, banks cannot afford to offer small farm loans at 7% any more unless the government raises the subsidy,” said the chairman of a large public sector bank who didn’t want to be identified because of the politically sensitive nature of the issue.
The Indian Banks’ Association, or IBA, a national bankers’ body, has already discussed the issue and is ready to take it up with the government. “We will ask the government to raise the subsidy,” H.N. Sinor, chief executive of IBA, told Mint.
According to another banker, who also didn’t want to be identified, the level of subsidy will have to be at least doubled if the banks are to lend such loans on a no-profit, no-loss basis. If the government accepts this demand, it will have to made budgetary provision of at least Rs2,500 crore, this banker said.
Mint couldn’t independently confirm this with the ministry of finance.
Banks currently charge 7% interest on all farm loans up to Rs3 lakh. The banking system’s target of agricultural loan disbursement this year is Rs2.8 trillion. As crop loans account for about 70% of agricultural loans, banks will need to disburse Rs1.96 trillion. And, the bulk of the disbursements are in the kharif season that begins in July.
Bankers also say they want the government to take care of the written-off farm loans in the Rs71,700 crore debt waiver programme that has benefited 43 million small, marginal and other farmers.
While small farmers, cultivating more than 1ha and up to 2ha agricultural land, and marginal farmers, cultivating up to 1ha, have got full waiver on their loans, other farmers have got 25% of their loans waived off under the plan, provided they are ready to clear the rest of their debt in three instalments in one year.
The government, the majority owner of these banks, will reimburse them the debt waived-off but won’t pay for the bad debts that have been already written off.
“In normal circumstances we can always recover the written off debt but under the waiver scheme, we cannot do so. The government will have to pay us that money,” said another IBA official. For public sector banks, the amount will be around Rs10,000 crore, he said.
A back-of-the-envelope calculation shows close to Rs40,000 crore worth of farm loans have been waived by the public sector banks and the rest by cooperative banks and regional rural banks, or RRBs. Since the government cannot discriminate one set of banks against another, if it agrees to the proposal reimbursing public sector banks, it will have to do so for cooperative banks and RRBs, too.
International credit appraiser Fitch Ratings on 15 July revised the outlook on India’s long-term local currency issuer default rating to negative from stable, citing a “considerable deterioration in the Central government’s fiscal position in 2008-09, combined with a notable increase in government debt issuance to finance subsidies not captured in the budget.”
Fitch forecasts Union government deficit may increase from 2.8% of gross domestic product in fiscal 2008 to 4.5% in 2009, on account of higher on-budget subsidies, interest payments and public wages.
The Reserve Bank of India, too, noted on 29 July India’s “growing fiscal stress” citing, among other reasons, the debt waiver scheme.
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First Published: Fri, Aug 01 2008. 12 09 AM IST
More Topics: Video story | Farmer | Banks | Loan Waiver | Debt |