Is cheaper farm credit on anvil?

Is cheaper farm credit on anvil?CNBC-TV18 explores the ramifications of the new demands.

Farmers might have reason to smile as loans of upto Rs 300,000 are likely to get cheaper for them. The finance minister said in his budget that farmers who took loans of upto Rs 300,000 would get an interest rate of 7 per cent, which is below the market rate of 9 per cent.

The finance ministry would pay banks a subsidy of Rs 1700 crore (Rs 17 billion) for lending below market rates. Now, sources say, the Agriculture Ministry has asked the Finance Ministry to reduce this 7 per cent interest rate to 4 per cent or 5 per cent.

That means the finance ministry will have to pay an additional Rs 2,000 crore (Rs 20 billion) by way of interest subsidy. Sources say the total subsidy would then rise to Rs 3,700 crore (Rs 37 billion), which the Finance Ministry is not likely to accept.

Banks are reluctant to offer loans to farmers at 7 per cent. For one, they are not sure about receiving the subsidy from the government. Besides, the modalities of the new scheme are still being worked out four months after the budget announcement. Bankers do say, though that they are not averse to lending to the agriculture sector because it is a profitable segment but not below market rates.

Sources in the agriculture ministry say they have been asking the finance ministry to reduce interest rates for farmers. But they will need approval from higher government authorities if the proposal is to be implemented. Even if the agriculture ministry convinces the finance ministry to provide farmers with cheaper loans, bankers are unlikely to smile.

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