Government banks have demanded that the amount eligible under the farm waiver scheme should continue to be considered lending to the farm sector till the government clears the dues to help banks meet the mandatory priority sector lending target.

The issue was discussed when the chiefs of the government-owned banks met Finance Minister P Chidambaram last week.

Priority sector lending covers farming, low-cost housing, and small-scale sector units.

Under Reserve Bank of India [Get Quote] norms, domestic banks must allocate 40 per cent of net bank credit to these sectors. The farm sector alone accounts for 18 per cent of net bank credit.

The total bill for the farm loan waiver and relief scheme, which was estimated at Rs 71,000 crore (Rs 710 billion), has been scaled down to Rs 66,600 crore (Rs 666 billion). In this, the government banks' share is estimated at Rs 30,672 crore (Rs 306.72 billion) (see table).

The amount is to be compensated by the government in four instalments with the last due July 2011. The first tranche for 32 per cent of the total amount due is expected 2008-09.

Costly relief (Latest data put the cost of farm relief package lower than Rs 71,000 crore estimated earlier)
Cooperative and RRBs	35,368.32
Public sector banks	30,672.10
Private banks	540.74
Urban cooperative banks	9.95
Local area banks	1.17
Total	66,592.28
Source: Finance ministry                               (Figures in Rs crore)

At the end of July, the RBI, in its guidelines for the scheme, had asked banks to transfer the eligible amount for wavier into a separate account.

This leaves banks in a quandary because they now face the prospect of collectively having roughly Rs 30,000 crore (Rs 300 billion) written off from the farm sector allocation alone, which means that their priority sector requirement will increase.

Around Rs 10,000 crore (Rs 100 billion) is expected to be released by the Centre this fiscal, but banks may have to raise over Rs 20,000 crore (Rs 200 billion) at a time when the liquidity is tight. This will be over and above the normal lending in the course of the year.

"The government is going to pay us over three years. Without the benefit that we have sought, reaching the priority sector target for the farming and allied sectors will be a tough task," a public sector bank chief said.

In the absence of relief from the RBI, lenders will be required to either step up credit flow to the farm sector in the coming months or transfer the money to the Rural Infrastructure Development Fund. In either case there will be pressure to lend more, which banks are wary of doing in a deteriorating market.

Banks also have to make adequate provision for the loss in present value terms of such loans.

According to RBI norms, the discount rate for arriving at the loss in PV terms is 9.56 per cent. This was the yield on 364-day treasury bill on July 30, 2008. "Using this rate, the banks will have to keep aside Rs 1,800 crore (Rs 18 billion) for loss provision," a banker said.