Farmers paying 14% for 7% loans: NABARD study

Former finance minister P Chidambaram had raised cheers by announced loans for farmers at a subsidised rate of 7 per cent in his 2006-07 budget speech; but a study by the National Bank for Agriculture and Rural Development (NABARD) has found that this actually translates to twice as much – 14 per cent.

The development bank conducted a survey of 2,500 farmers and found that the borrowers end up paying a significant amount as transaction charges. When these transaction costs are included, the all-inclusive cost of the loan comes to almost 14 per cent.

Since 2006-07, the government has been providing interest subvention to banks to enable them lend to farmers at 7 per cent for loans up to Rs3 lakh. But speaking at a banking summit organised by the Federation of Indian Chambers of Commerce & Industry and the Indian Banking Association, NABARD chairman Prakash Bakshi said on Wednesday, "We have found in our study that banks have externalised most of their costs in the form of transaction charges. The non-interest costs on these loans work out to 7 per cent."

Moreover, Bakshi also said that the subsidised loans may not actually be going to the intended beneficiaries. He pointed out that one-fourth of the money is disbursed in February and March, which isn't farming season. Besides that, only one-third of the amount is loaned during the peak kharif season.

The Reserve Bank of India said earlier that there was a need for better data on the farm sector, which is critical given that the Planning Commission is pushing to ensure that the sector grows at 4 per cent in the 2012-17 period.

This is essential to control food inflation and ensure economic growth.