The Hindu Business Line : Banks readying to fund ‘informal’ loans of farmers

Bangalore, June 19 Public sector banks are preparing for the second phase of credit support to the farm sector as part of the concerted efforts to step up agriculture growth.

Banking sources said that the blueprint for the second phase, involving refinancing of farmers’ loans from unorganised lenders, was ready. The first phase was the loan waiver scheme involving writing off loans to small/marginal farmers and a one-time settlement of overdue loans amounting to Rs 71,000 crore.

Bankers said the loan waiver scheme was restricted in coverage; only farmers covered by the bank credit would be eligible for the waiver. Currently, the number of farmers covered by the formal credit or bank network was about 90 million, on the basis of the coverage under the National Agriculture Insurance Scheme.

Inclusive growth

Bankers said that the second phase was intended to bring more farmers into the formal credit network. Such refinancing would help raise the farm loan coverage. Outstanding farm loans are currently about Rs 2.2 lakh crore or about 10 per cent of total bank credit or just about 4 per cent of the gross domestic product. The improved coverage, bankers said, would also help in meeting the objectives of financial inclusion and help step up farm sector’s contribution to the GDP growth from the current level of 2.5 per cent.

Public sector Syndicate Bank already has a specific loan product, branded as Jai Kisan, for freeing farmers from indebtedness to unorganised money lenders. The refinance was made available on the condition that farmers do not create fresh debts to the informal lenders. .

Unorganised moneylenders, usually retailers of fertilisers and farm inputs, priced the loans at 20 per cent flat interest. In addition, they loaded hefty margins on sales of agricultural inputs, leaving the farmers in a debt-trap. The loans also involved mortgage of farm lands . In situations of crop failures or price slumps, farmers were left with little choice other than defaulting on the loan repayments leading to indebtedness. Informal sector financing is also not covered by crop insurance schemes. This was also part of the reason for the high level of farm indebtedness.

More in fray

But more public sector banks have entered the fray, including Canara Bank. The Canara Bank’s Chairman and Managing Director, Mr M.B.N. Rao said, “We have a fixed a target of 3 per cent of incremental disbursements for refinancing farmer’s liabilities to unorganised money lenders.”

In such farm sector refinancing, public sector banks stood to gain, bankers said. This was because refinance to farmers was likely to be priced at about 12 per cent, though it would be substantially lower than what moneylenders charged . Besides, the advances would also come within the scope of farm insurance cover.

But bankers said the refinancing would not be eligible for subsidy support from the Government as in the case of existing farm loans. Currently, farm loans up to Rs 3 lakh are priced at 7 per cent though the banks receive a yield of 9 per cent, inclusive of a Government subsidy of 2 per cent.