The Reserve Bank of India’s move to hike collateral-free short-term loans for farmers to Rs 2 lakh from Rs 1.6 lakh, is expected to equip smallholder farmers to adapt to the rising cost of farming. It will also help them meet the working capital requirements of farmers engaged in animal husbandry, dairy and fisheries.
Officials said the move would particularly help landless farmers engaged in agri-allied activities to access working capital without providing any asset guarantee.
Currently, financial institutions provide short-term loan upto Rs 3 lakh to farmers who have Kisan Credit Cards (KCCs) at 7% annual interest rate. Under the modified interest subvention scheme (MISS) of the agriculture ministry, it has a provision of interest subvention of 3% through prompt repayment incentives.
Interest subvention effectively reduces the effective annual rate of interest to 4% under KCC. Short term loans beyond Rs 3 lakh are, however, charged under the bank rate.
RBI Governor Shaktikanta Das during the announcement of the monetary policy on Friday said “taking into account the rise in agricultural input costs and overall inflation, it has been decided to increase the limit for collateral-free agriculture loans from Rs 1.6 lakh to Rs 2 lakh per borrower,”
Das stated that the move will further enhance credit availability for small and marginal farmers. The limit for collateral-free agriculture loans was last revised in 2019 and the KCC scheme was extended to cover working capital requirements of animal husbandry, dairying and fisheries.
‘While collateral-free loans come with their own set of risks, while on-boarding borrowers, it is vital for lenders to vet any properties they own or their income,’ Vishal Sharma, cofounder and CEO of Advarisk, an ICICI bank and Nabard-supported fintech, said by adding that the move will be boon for small holder farmers.
Currently, out of 73.6 million KCC holders, 23.7 million belong to agri-allied sectors. Under the MISS, in FY25 a budgetary allocation of Rs 22,600 crore has been made.
“By easing credit availability, this move will not only boost agricultural productivity but also contribute to the overall economic well-being of rural communities and bolster rural consumption,” Sandeep Sabharwal, group CEO, Sohan Lal commodity management, which provides post-harvest logistics and agri-solutions company, said.
The government has set an agri-credit disbursement target of a record Rs 27.5 lakh crore for commercial banks, cooperative banks and regional rural banks for the current fiscal, which is significantly higher by 37% compared to target in 2023-24.
“By availing KCC, farmers are able to access working capital loans at subsidized interest rates, which helps them to meet their short-term financial needs for activities like animal rearing, poultry farming, and fisheries,” according to an agriculture ministry note.
It stated that even farmers have the option to take benefit of livestock insurance, personal insurance, assets insurance and health insurance wherever product is available.