Subsidised farm loan limit may rise to Rs 500,000

After the Rs 66,600-crore (Rs 666 billion) farm debt waiver and relief scheme, more relief is on the way to farmers hit by rising prices of fertilisers and other inputs.

The government is planning to raise the limit for the subsidised farm loan from Rs 300,000 at present to Rs 500,000.

At present, farm loans up to Rs 300,000 come at an interest rate of 7 per cent a year. The move comes at a time when banks have sought an increase in the subvention amount from the current 2 per cent. In recent months, borrowing money has become more expensive and banks have had to bear the additional cost.

National Bank for Agriculture and Rural Development is now working out the details and is likely to submit a report to the finance ministry in a fortnight, sources close to the development said. The government may announce an increase in the limit for the subsidised farm loan next month, they added.

While it is more or less certain that the limit will be raised to Rs 500,000, the sources said Nabard is discussing with banks if the debt should be treated as a crop loan or a term loan. A crop loan is generally paid back within a year, while a term loan can be paid back in two to four years.

"A sharp increase in fertiliser and other input costs is hurting cultivation. The incentive to farmers is needed at this moment," a government official said.

The loans to farmers will be given at 7 per cent interest, while the government will provide 2 per cent interest subvention (subsidy) to the banks.

"With cost of funds rising nearly to 10 per cent, some revision is required in lending rates to farmers to protect our bottom lines," said a public sector bank chief, who did not wish to be identified.

In the Union Budget for the current financial year, the government has made a provision of Rs 1,600 crore (Rs 16 billion) towards 2 per cent subvention that it will give to public sector banks, cooperative and regional rural banks. The subsidy burden is likely to go up by at least 50 per cent in case the loan limit is raised to Rs 500,000.

The government started providing interest subvention to banks for lending at 7 per cent to farmers in 2005-06, when the limit was Rs 100,000. In 2006-07, it was raised to Rs 300,000.