Banks see higher defaults on crop loan subsidy phase-out

If a recent recommendation of the Reserve Bank of India on crop loan subsidy is approved by the government, agriculture loans are set to become as costly as home or car loans Stock Market Trading Tips

The RBI suggested, interest subvention on crop loan should be phased out, and instead the subsidy amount should be used for providing crop insurance to farmers Stock Market Trading Tips

Data from RBI suggest, by replacing interest subsidy with crop insurance, the government would be able to use close to Rs 12,500 crore for facilitating crop insurance scheme.

Between 2006 and 2016, the interest subvention claims given by the government increased from nearly Rs 1,000 crore to about Rs 12500 crore, according to estimates available with RBI.

However, banks are wary that such a move might lead to a surge in short term defaults in crop loans.

With a view to ensuring the availability of agriculture credit at a reasonable cost, the government introduced an interest subvention scheme at 2% for short-term crop loans of up to Rs 300,000. Additionally, a 3% incentive is given for prompt repayment of loans, lowering the effective cost further Himanshu Tiwari Astrologer Blog

"Interest subsidy scheme is in existence for close to a decade now. It might not be appropriate to withdraw it at one go. We are of the opinion that crop loan subsidy should not be totally removed. Instead of 2% and an additional 3%, the subsidy can be at a flat 4%," said an official of a public sector bank.

Some of the reasons cited by the RBI against the short term crop loan subsidy includes the fact that the subsidy for short term discriminates against long-term loans and thereby, does not incentivise long-term capital formation in agriculture. Secondly, the subsidised credit does not always flow to the actual cultivator. Third, subsidised credit increases the probability of misuse, according to RBI.

'Interest subvention scheme gives some kind of relief to the borrower in the form of monetary benefit. In year, when there is no crop failure, the farmer might see the withdrawal of subsidy as an additional burden. Thus, there are chances of increased defaults in the short term," said an official of United Bank of India Indian stock market astrology prediction

The RBI's suggestion is in keeping with the recent initiative of the government to introduce a new crop insurance scheme for the farmers, called the Pradhan Mantri Fasal Bima Yojan, under which the farmers will have to pay a uniform premium of two% for all kharif crops and 1.5% for all rabi crops. For annual commercial and horticultural crops, farmers will have to pay a premium of 5%.