‘Interest subvention in farm loans hasn’t helped’

Aug 22 2014, 01:21 IST
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SummaryThe Reserve Bank of India (RBI) has raised concerns on interest subvention for short-term agriculture loans, saying the step hasn’t helped in prompt repayment.

The Reserve Bank of India (RBI) has raised concerns on interest subvention for short-term agriculture loans, saying the step hasn’t helped in prompt repayment.

The RBI, in its annual report, said non-performing assets (NPAs) ratio in agriculture loans have been rising and stood at 4.4% as on March 2014. “The recovery of agriculture advances has been almost stagnant at around 75% and needs improvement,” the RBI said.

The government had introduced the interest subvention scheme for short-term crop loans of up to R3 lakh in 2006-07. Under the scheme, agriculture loans will be provided by banks at 7% a year and an additional interest subvention of 3% is provided for farmers who repay the loans in time, making the effective rate of interest for such farmers at 4%.

Agriculture loans as on March 2014 totalled R7,79,200 crore, of which R34,000 crore are NPAs, the report said.

RBI and commercial banks have also expressed reservations against farm loan waivers which were promised by the governments of Telangana and Andhra Pradesh, saying the step would lead to weaker credit discipline. RBI governor Raghuram Rajan, during the monetary policy review in August, had warned against the “moral hazards” which get played out when such promises are made. “We have been quite categorical about the dangers of talking about waivers, about putting the idea of waivers because it creates the possibility that anticipating such waivers, both the beneficiaries as well as others who think there is a chance of benefitting stop paying for fear that they will not benefit when the time comes," Rajan said.

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