More reports on: Government policies

RBI bats for direct benefit transfer of farm loan subsidies

02 September 2015

Stung by a distorted agriculture credit culture that keeps on adding to state-run banks' bad loans, Reserve Bank of India (RBI) has urged the government to give provide subsidies directly to the farmers instead of routing it through banks.

Much of the banking sector's bad loans in agricultural credit comes from the government's interest subvention scheme a scheme for providing subsidies to the farm sector.

Between 2010 and this year, non-performing assets (NPA) pertaining to the agriculture sector rose fourfold - from Rs10,400 crore to Rs39,100 crore. Gross NPAs, as a percentage of total agricultural loans, increased to 4.7 per cent as of March this year, compared with 2.2 per cent five years ago.

RBI has now written to the government seeking direct transfer of subsidy to farmers instead of channeling it through banks.

Sources said RBI had suggested the government transfer the subsidy directly to farmers' bank accounts, the way it provided subsidy for liquefied petroleum gas. "While giving a subsidised loan, a bank does not differentiate between borrowers. This is an area of concern," said a source.

The government provides three per cent interest subvention for short-term crop loans, through banks that charge a lower amount from the farmer and get it reimbursed from RBI at the end of every quarter.

For this financial year, the government has budgeted for Rs13,000 crore of expenditure on interest subvention, for short-term credit to farmers, compared with Rs9,500 crore in 2014-15.

That rising bad loans in the interest rate subvention scheme was a concern was highlighted in RBI's recently-released annual report. "Though the government has been incentivising repayment of agricultural loans through the interest subvention scheme, this has not helped improve asset quality. The government has been examining various measures to improve the efficacy of the scheme," the report stated.

The central bank noted NPAs in the agriculture sector had been rising steadily since 2010, reflecting a decline in recovery in agricultural advances. According to data compiled by the banking regulator, the ratio of recovery to total demand fell from 74.5 in 2012 to 73.4 in 2014.

Although overall credit growth has slowed the flow of credit to the agriculture sector has been increasing through the years. In 2014-15, banks disbursed about Rs6,00,000 crore as agricultural loans against the target of Rs5,40,000 crore.

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