The government is considering including private sector banks in its short-term subsidised farm loan scheme launched this year. An allocation of around Rs 200 crore (Rs 2 billion) would have to be made for extending the 2 per cent interest subsidy under the scheme to private sector banks.

The Indian Banks' Association has submitted details of private sector banks' priority sector lending, including credit to agriculture and short-term production provided to farmers for 2005-06 and 2006-07, to the finance ministry. The ministry had sought details of private sector banks' farm lending portfolios to process their proposal for inclusion in the interest subvention scheme.

In the 2006-07 Budget, the government had announced a scheme whereby a 2 per cent subsidy would be extended to banks for providing short-term credit up to Rs 300,000 to farmers at 7 per cent interest rate.

The interest subvention scheme is extended to public sector banks and regional rural banks through the Reserve Bank of India, while cooperative banks participate in the interest subsidy scheme through the National Bank for Agriculture and Rural Development. Private sector banks were kept out of the purview of the scheme even though the Finance Bill did not specify the exclusion of these banks.

Under the aegis of the IBA, private sector banks had conveyed to the government and the RBI that such a scheme was seriously affecting their farm lending business and, hence, had sought their inclusion.

In the 2006-07 Budget, the government had allocated Rs 1,700 crore (Rs 17 billion) towards 2 per cent interest subsidy on farm loans of up to Rs 100,000 disbursed in 2005-06.

But only half of the allocated amount was claimed, as a part of the farm loans were for more than 12 months and loans under the Kisan Credit Card schemes were not eligible for interest subsidy.

"Private banks' advances eligible for interest subsidy under the scheme would stand at less than Rs 10,000 crore (Rs 100 billion). This would mean an allocation of around Rs 200 crore (Rs 2 billion) to extend interest subvention scheme to these banks," a senior private bank official said.