Base-rate regime may raise crop loan rate

The Indian Express
New Delhi, 21 June 2010
Base-rate regime may raise crop loan rate
BASE-RATE regime might prove to be costly for farmers who wish to take short-term crop loans from banks. Currently farmers get crop loan of up to Rs 3 lakh at flat 7 per cent. However, with the base-rate regime starting from July 1, the government proposes to link these rates with the cost of funds of banks, which is likely to make these rates volatile. “We will continue to give interest subvention on agricultural credit. This will not be a fixed percentage and would depend on the cost of funds of banks. For now, it will be the difference between the cost of funds and 7 per cent (the rate at which farmers get loans now). Besides this, in case farmers pay their dues in time, they would be eligible for a further discount of 2 per cent, as announced by the finance minister in the Budget this year,” a finance ministry official told The Indian Express. According to bankers, currently the cost of funds of public sector banks hover between 5.50 and 6.25 per cent. This would translate into an interest subvention of 0.75 per cent to 1.50 per cent — less than 2 per cent rebate which is offered now. Since the cost of funds of banks will be reviewed every quarter, it is likely that the interest rate on agriculture credit will also be reviewed. In order to streamline interest rates charged on various advances or loans, the Reserve Bank of India (RBI) has asked banks to adopt a base rate. Barring priority sector lending that will continue to get subvention, no bank will be allowed to offer loan or any advance below this rate. The RBI has asked banks to review the base rate once in a quarter. “Since all the advances will be linked to base rate, we would have to revisit the interest matrix for different loans quite regularly. However, I do not expect any great changes in the new regime,” said TY Prabhu, chairman of Oriental Bank of Commerce. In his Budget speech, the finance minister proposed interest-rate subvention to farmers of 2 per cent, which brought the effective rate to 5 per cent per annum. He also noted that banks had consistently met the targets set for agriculture credit in past few years. For financial year 2011, the target for farm credit has been raised to Rs 3,75,000 crore from Rs 3,25,000 crore in the last fiscal