In a bid to ensure credit flow in the agriculture sector as well as ensure financial health and viability of lending institutions, the Union Cabinet on Wednesday approved restoring interest subvention on short-term agriculture loans to 1.5% for all financial institutions. The decision has been taken in the backdrop of the changing economic scenario, especially the increase in the interest rate and lending rates for the financial institutions, particularly cooperative banks and regional rural banks, after recent hikes in repo rate by the Reserve Bank of India (RBI).

The interest subvention will be applicable for lending short-term agri-loans up to ₹3 lakh to the farmers and will be provided to lending institutions (public as well as private sector banks) from the financial year 2022-23 to 2024-25, as per a Cabinet statement. The government has made additional budgetary provisions of ₹34,856 crore for the period from 2022-23 to 2024-25 under the scheme.

“Interest subvention of 1.5% will be provided to lending institutions (public sector banks, private sector banks, small finance banks, regional rural banks, cooperative banks and computerised PACS directly ceded with commercial banks) for the financial year 2022-23 to 2024-25 for lending short term agri-loans up to ₹3 lakh to the farmers,” as per the release.

The release notes that the increase in interest subvention will ensure the sustainability of credit flow in the agriculture sector as well as ensure financial health and viability of the lending institutions especially regional rural banks and cooperative banks, ensuring adequate agriculture credit in the rural economy.

“Banks will be able to absorb an increase in cost of funds and will be encouraged to grant loans to farmers for short term agriculture requirements and enable more farmers to get the benefit of agriculture credit. This will also lead to generation of employment since short-term agri-loans are provided for all activities including animal husbandry, dairying, poultry, fisheries,” it adds.

Besides, farmers will continue to avail short-term agriculture credit at an interest rate of 4% per annum while repaying the loan in time.

As per the Cabinet release, hassle-free credit availability at a cheaper rate to farmers has been the top priority of the government of India. Accordingly, the Kisan Credit Card scheme was introduced for farmers, to empower them to purchase agriculture products and services on credit at any time. To ensure that the farmers have to pay a minimal interest rate to the bank, the central government introduced Interest Subvention Scheme (ISS), now renamed as Modified Interest Subvention Scheme (MISS), to provide short-term credit to farmers at subsidised interest rates.

Under this scheme, short-term agriculture loan upto ₹3 lakh is available to farmers engaged in agriculture and other allied activities including animal husbandry, dairying, poultry, fisheries, etc. at the rate of 7% per annum. An additional 3% subvention, in the form of Prompt Repayment Incentive (PRI), is also given to the farmers for prompt and timely repayment of loans. Therefore, if a farmer repays his loan on time, he gets credit at the rate of 4% per annum. For enabling this facility to the farmers, the government provides interest subvention to the financial institutions offering this scheme.

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