Issue of Misuse of Interest Subvention Scheme

The interest subvention scheme was introduced in 2006-07 to provide cheaper credit for crop loans to farmers. An interest subvention at 2 per cent was given to banks for making crop loans available to farmers at 7 per cent. Further, an additional subvention of 1 per cent was given to the farmers who repaid their loans on or before the due date. Later in 2011-12, this was increased to 3 per cent. So, as of now, those farmers who repay their loans on or before the due date will receive a subvention of 5 per cent and are charged an effective interest rate of 4 per cent. In addition, few states like Madhya Pradesh, have even given loans to farmers at zero interest.

What are the implications for the financial health of the banking sector?

The banks are first required to credit the subvention amount to the account of the farmers and then claim the amount reimbursed from the NABARD/RBI. Thus, any delay in settling the claims of the banks due to insufficient budgetary allocations, or any other reason, may have serious implications on the financial health of the banking sector.

What are the concerns?

The main concern for the economy is the swelling of unpaid bills of the interest subvention scheme. The scheme has been constantly under-provisioned in the last few budgets. The allocation of Rs 15000 crore in the recent budget is way too little to meet the current expenses and settle backlogs. There is a sharp increase in the short term agricultural credit growth at an average 18% per annum in the past 5 years. This has resulted in the cumulative unpaid bills to the banking system to the tune of Rs. 35,000 crore in the FY15. It is estimated that if the corrective measures are not taken then this amount may cross Rs 50,000 crore by FY17 with severe repercussions for our banking sector.

Whether interest subvention scheme resulted in high agricultural productivity?

With this much credit pumped into the agricultural sector, it is natural to expect high agricultural productivity and rising profitability to the farmers, but it did not happen. In fact, the average agri-GDP growth in the last two years has collapsed to less than 0.5% and the profitability in farming crashed due to acute farm stress.

Why the rising farm credits are accompanied with falling farm incomes?

The reason for the anomaly is the substantial diversion of funds away from agriculture. The farmers were found to take as much loans as possible at a concessional rate of 4% and then divert at least a part of it to the fixed deposits earning 7-8% interest or even became money lenders extending credit at 15-20% interest to those people who lack access to formal institutional sources of finance. It is evident from the data provided by the All India Debt and Investment Survey that 44% of the loans taken by the farmers in the year 2013 were from non-institutional sources. Curiously, the short term credit from institutional sources had exceeded the total value of inputs used in agriculture by about 10% in 2014. It shows that around 30-40% of crop loans under the interest subvention scheme are getting diverted for non-agricultural purposes. Further evidence comes from the sudden increase in agricultural loans, which are often more than 60% of the annual disbursement taken during January-march, when there is not much agricultural activity.

What is the way forward?

The misuse of interest subvention schemes calls for rationalizing the interest subvention subsidy. Even, a committee constituted by the RBI on Medium-term Path on Financial Inclusion (2015) has recommended phasing out the interest subvention schemes and move towards universal crop insurance.

Another way would be to change the policy instrument from price policy (subsidizing inputs) to income policy, which involves direct transfer to farmers’ accounts linked to Aadhaar for all input subsidies like fertilizers, seeds, farm machinery and agricultural credit. Depositing money into farmers’ account and allowing the markets to care of the input needs would give the farmers the freedom to choose the right mix of inputs at market prices. Here, the Jan Dhan Yojana will come handy. This will help minimizing the losses and leakages, which are anywhere from 30-40%. China has already started to move in this direction. It will be even more beneficial if the subsidy income package is designed on a per-hectare basis, with small land holders benefitting from a higher per-hectare rate.