Date:01/03/2006 URL: http://www.thehindubusinessline.com/2006/03/01/stories/2006030103480600.htm

Back Banks to cut lending rates on farm loans

Priya Nair

Mumbai , Feb. 28

The Finance Bill 2006/2007 proposals to boost the flow of credit into the agriculture sector is being seen as a welcome measure as agriculture lending is a profitable venture, bankers said.

The Finance Minister Mr P. Chidambaram has said that banks should give short-term loans to farmers at seven per cent, with an upper limit of Rs three lakh on the principal amount.

But giving short-term credit at seven per cent to farmers would be feasible only if the Government gives subsidies, bank officials said.

"It is a good move but instead of tinkering with rates Government should increase funds to the sector. This would automatically bring down lending rates. The crucial point is the rate at which Nabard will give refinance to banks," said Mr Rajeev Handa, Head - Agri Finance and Priority Lending, IDBI Ltd.

At seven per cent the interest rate would be neutral to the cost of funds, he said.

"We normally give loans at 8.5 per cent. Now we will have to give loans at seven per cent. Seems that the difference of 1.5 per cent would be borne by Nabard. Therefore, the impact on banks would be minimal," said another bank official.

Loans up to Rs three lakh typically form 40 per cent of the short-term credit for most banks, said bank officials.

Farm credit has increased above the target to Rs 1,25,309 crore in 2004-05 and is expected to cross the target of Rs 1,41,500 crore set for 2006-07. "We shall not only achieve but exceed the target of doubling farm credit in three years," he said. The Finance Minister plans to ask the banks to increase the level of credit to Rs 1,75,000 crore in 2006-07 and also add another 50 lakh farmers to their portfolio.

The Finance Minister also urged banks to increase linkages with Self Help Groups (SHGs) by 3.85 lakh in 2006-07, in addition to over eight lakh SHGs linked in the last two years.

The Government will ask Nabard to open a separate line of credit for financing farm production and investment activities through SHGs, Mr Chidambaram said.

By increasing their relationship with SHGs through lending, banks can also cross-sell products like small housing loans, small retail loans and small deposits, said an officer in-charge of priority lending at a public sector bank.