The Hindu : National : Panel wants crop loan lending rate reduced

Online edition of India's National Newspaper
Sunday, Dec 26, 2004

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National

Panel wants crop loan lending rate reduced

By Our Special Correspondent

NEW DELHI, DEC. 25. The Government has come under pressure from a Parliamentary committee to reduce the maximum lending rate on crop loan from the present 9 per cent and also to raise the ceiling of Rs. 50,000 set for such loans.

According to a report of the Standing Committee on Finance, which went into the issue of credit flow to agriculture in the light of the crisis in the rural economy, the Government's specification of a maximum 9 per cent rate of interest on agricultural loans was on the higher side in the present day scenario of falling interest rates. Moreover, the committee felt that the limit of Rs. 50,000 was very meagre and such a limit would hardly provide any relief to farmers. "It is widely known that the rate of interest in other sectors has fallen sharply and in the housing sector, it was reduced to as low as 6 per cent, but the falling interest rate had not been witnessed in the agricultural sector," the committee said.

`Not feasible'

The Government, in its reply, said interest rates charged by banks were a function of many variables and could vary from bank to bank. Consequently, it said a single mandatory rate for all banks was not feasible at present as the capacity of various agencies to deliver agricultural loans at lower rates of interest varied due to their differential cost structure. "What ultimately matters to borrowers in addition to the rate of interest was the timeliness and adequacy of credit as well as the concomitant costs that many incur to avail credit. Accordingly, banks have been advised to pay attention to their systems and procedures to make their lending cost effective and also consider measures to save the borrower avoidable expenses for getting a loan sanctioned," the Government said.

The committee has, however, not accepted the Government's viewpoint and insisted that the maximum rate of interest could be lowered further. It also asked the Government and the Reserve Bank of India to advise banks to take effective steps towards lowering their costs so that interest rates could be reduced.

Similarly, the committee has not accepted the Government's contention that Rs. 50,000 limit was expected to benefit most of the crop loan account holders and cover almost all small and marginal farmers. In the committee's view, the loan limit for agricultural loans should be suitably hiked.

Inadequate flow of credit

Another major issue pertains to the inadequate flow of credit to the agricultural sector. Against the stipulated norm of 18 per cent of net bank credit to be lent to the agriculture sector (13.5 per cent direct lending and 4.5 per cent for indirect lending), the committee found that the percentage of total agricultural advances as of March 2003 was 15.38 per cent for public sector banks and only 10.78 per cent in case of private sector banks. Even in this, public sector banks could extend only 10.84 per cent of net bank credit as direct lending to agriculture and 4.54 per cent as indirect lending.

Expressing dissatisfaction at the low percentage of direct credit to agriculture, the committee said that even by March 2004, 20 public sector banks and 28 private sector banks were off the target. The committee wanted the Government to make it mandatory for all banks to meet the 18 per cent agricultural credit target and take punitive action in case of failure by any bank to do so. The present system of depositing the shortfall in credit disbursement in the Rural Infrastructure Development Fund was not found to be adequate punitive action.

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