The Hindu Business Line : Full credit on the farm front

Bankers need not wear long faces over the Budget proposal to fix the price of short-term credit (up to three years) to farmers at 7 per cent on loans up to Rs 3 lakh as New Delhi could be taking the losses, if any.

It has taken too many suicides and ruined families for the debt-ridden farming community to get heard.

For 2005-06, the interest liability of farmers has been lowered by two percentage points on a principal of Rs 1 lakh with the difference being credited into their accounts ahead of March 31, 2006.

The Government has agreed to gather the bill of Rs 1,700 crore. Is it unfair if the Government had taken the entire burden of cancelling the debt forever?

India's corporates have set a precedent. Bankers need not wear long faces over the Budget proposal to fix the price of short-term credit (up to three years) to farmers at 7 per cent on loans up to Rs 3 lakh as New Delhi could be taking the losses, if any.

Nabard will be providing refinance to banks and for that to be meaningful, the refinance rate has to be around 4.5 per cent. With the bond market getting tight and Nabard losing its tax shelter status, the agri-refinance agency will find it hard to raise cheap money.

"This would require a certain level of subvention to Nabard. I propose to give the subvention.

This policy will come into force with effect from kharif 2006-07 and I shall make a detailed statement in due course," the Finance Minister, Mr P. Chidambaram, has said.

Interest rates on farm loans

Currently, Nabard refinances term loans with the rate varying between 6.5 per cent and 7 per cent and the Budget proposal promises refinance for short-term credit absorbed by farmers.

The Centre has decided to step in to fix interest rates on farm loans with the banking system reluctant to sup with farmers and treat them on a par with corporates.

If the banking system had credit rated loan books of farmers (like in the case of corporates), New Delhi could have sat back. Even as the Finance Minister promises trebling of farm credit, he quotes the findings of the NSS 59th Round (2003) which show that only 27 per cent of cultivator households are linked to the banking system with 22 per cent tied to moneylenders.

Many committees have studied the way farmers have been shunted aside by banks but that has not stopped the Finance Minister from setting up yet another Committee on Financial Inclusion.

Perhaps studying the wretched status of farmers has become big business.

Funds shortage to ease

The needless squall over shortage of funds should now ease with banks being able to tap the RBI's repo window for funds against Rs 22,808-crore worth SLR securities.

In the process of recapitalising a weak banking system, the Finance Ministry placed liquid funds with banks who in turn re-invested them in special securities earning 10 per cent per annum.

These securities were treated as non-SLR bonds in the investment book. With today's gesture, banks can now sell their holdings to raise funds or go to the RBI.

The Bank of India chairman said he might not be keen to sell; rather he will take the repo route.

The gilts held by banks are long bonds and the debt market is not in the best mood to offer a good price.

That brings one to ask whether the RBI will step out of the primary debt market effective April 1 as promised under the FRBM? The Budget speech does not make any mention.

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