Govt moves to revamp interest subvention scheme despite RBI Guv Raghuram Rajan’s opposition

The finance ministry has decided to revamp the interest subvention scheme by channelising it through direct benefit transfer (DBT) or changing the character of the scheme in the wake of complaints about its misuse and distortion in the pricing of credit.

As part of its revamp plan, the finance ministry has asked public sector banks to come up with suitable alternatives to extend loans at reduced rate to small and marginal farmers. The three proposals made by the department of financial services (DFS) to PSU banks include: only 2 per cent subvention upfront/ the need for 3 per cent additional subvention for prompt repayment; scheme in its existing form or only for small and marginal farmers; and DBT either to all farmers or only to small and marginal farmers.

In a note to PSU banks, the DFS said, “of late, it has been suggested by various quarters that the interest subvention scheme should be better targeted so that the benefits are purveyed to the desire segment. Concerns have also been expressed that if end-use of subvented crop loan is not ensured, there’s scope for arbitrage and diversion of funds to non-agricultural purposes.”

The DFS report said there have been demands that the benefit of subvention should also be extended to long-term agricultural loans, as the share of long-term loans in agriculture credit is gradually going down to the detriment of capital formation and asset creation.

The government released close to Rs 24,000 crore under the scheme in the last five years. It has already released Rs 6,000 crore in the current fiscal till January 31, 2015.

Under the interest subvention scheme, short-term crop loans up to Rs 3 lakh are being disbursed by PSU banks, private banks, regional rural banks and co-operative banks at an interest rate of 7 per cent per annum, for which lending institutions are given a subvention of 2 per cent. Besides, additional subvention of 3 per cent is also being extended to those farmers who repay their crop loan within one year, thus reducing the effective interest rate to 4 per cent for them.

RBI Governor Raghuram Rajan had recently said that  “Interest subventions distort the price of credit and lead to misuse.” According to bankers, there were complaints that money given under the scheme is not going to the deserved farmers. “It’s being diverted by people who don’t deserve any interest subsidy. The scheme needs a facelift,” said a banker.