Public sector banks have asked the government to pay interest for delay in reimbursing the Rs 70,000 crore (Rs 700 billion) worth farm loans written off by them, even as the administration is expected to pay back about Rs 25,000 crore (Rs 250 billion) by October-end.

"Banks have suggested that they be compensated on payment of farm debt waiver," Financial Sector Secretary Arun Ramanathan told reporters after a meeting of Finance Minister P Chidambaram with chairpersons of Regional Rural Banks.

RRBs, which cater to the rural sector, are sponsored by major public sector banks, and Centre and State governments also hold stake in them.

Earlier, the bankers told Chidambaram that they were facing liquidity crunch due to delay in the relief package, and were unable to provide credit to farmers.

On this, Chidambaram said due to delay in Parliament session, supplementary demand of grants could not be passed.

The RBI and National Bank for Agricultural and Rural Development have been asked to look into the matter so that banks do not face fund shortage for advancing loans to the farmers, he said.

They asked the government to compensate banks by providing interest on the loans waived off, as they had to pay interest to their lenders for that period.

The bankers were concerned that though the farms loans have been written-off as on March 31, 2008, they have still to get funds from the government.

Since the Parliament session has been deferred to October 17, the government would not be able to release funds before October-end. 

Asked whether government would consider the demand of paying interest on debt waiver, Ramanathan said, "The point is when suggestion is submitted, it is considered and a decision is taken."

RRBs are expected to get about Rs 9,000 crore (Rs 90 billion) from the government for waiving off the loans of the farmers.

Ramanathan said out of 88 RRBs, seven are expected to be merged this year, so 12 banks would become five entities.

Referring to the performance of the RRBs, he said the current profit after tax of all RRBs has gone up from Rs 787 crore (Rs 7.87 billion) to Rs 1,102 crore (Rs 11.02 billion)  in 2007-08 over the previous year, while net NPAs came down from 3.46 per cent to 2.96 per cent.