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Home Best Practices India Govt: Agricultural Credit Risk Fund a safeguard from bad debts

Govt: Agricultural Credit Risk Fund a safeguard from bad debts

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The government in an effort to encourage banks to provide loan to the drought stricken agriculture sector has been contemplating on setting up an agriculture credit risk fund. 

"We have received various propositions from banks, banking association IBA and even the Reserve Bank. We are looking at all options," the official said. An RBI committee headed by MV Nair had also recommended a Credit Guarantee Scheme for small and marginal farmers.

The Nair Committee had suggested that the scheme may be initially tried out for five years as a pilot project, and depending on its success, it may be expanded to cover bigger credits.

"We have to look at the cost implication. Any such fund cannot be set up solely through budgetary allocation. Further, in the long term, sustainability of the fund also needs to be worked out," the official said.
 
A senior official with Indian Banking Association (IBA) said that such a fund could be set up with contributions from Central, state governments, Nabard and commercial banks.

"We had proposed that a nominal charge should be passed on to the borrower and the lock-in period may be kept at minimum for such a cover. For example, it could be an annual cover for every crop season," he said.
 
In a meeting held recently, the Reserve Bank of India (RBI) governor D. Subbarao citied that the reason for increase in the bad loans to 47% is because of a “lagged effect of double-digit growth” in bank credit to the sector and a slowing economy, he said.

Banks feel that such a fund will substantially bring down the bad loans in the sector. "Today, PSBs have to bear the delinquency cost of lending to agriculture sector, which constitutes a significant proportion," said the chairman of a South-based state-run bank, adding the move may also reduce the cost of lending towards agriculture sector.
 

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