Budget 2024: Banks seek hike in interest subvention on farm loans

Banks have urged the government to increase the interest subvention on short-term agriculture loans, said people aware of the matter.

Currently, lenders receive an interest subvention relief of 1.5% on short-term farm loans of up to ₹3 lakh. Banks have argued that a 0.5 percentage point increase in subvention can help them absorb the increase in cost of funds and push more credit towards the farm sector over the short term, the people said.

"The issue was discussed in a meeting last month with senior finance ministry officials. We have represented that the subvention should be increased to 2%," said a bank executive, who did not wish to be identified.


In 2022, the government had decided to restore interest subvention for short-term agriculture loans to 1.5% for all financial institutions after a gap of almost two years. It had said that the measure would require an additional budgetary provision of ₹34,856 crore for the period of 2022-23 to 2024-25 under the scheme.

The government had then stated that the restoration would ensure adequate credit flow in the agriculture sector, employment generation and also ensure financial health of lending institutions.

"This will be the right time to review the subvention scheme as the government is likely to increase the agriculture lending targets by another 15%," said another bank executive.

In 2023-24, banks, including cooperative and regional rural banks, disbursed ₹24.84 lakh crore in term loans and crop loans, 15% more than in the previous fiscal.

Banks have been making the case for incentivising deposits amid growing concern over the widening credit-deposit ratio. Recently, State Bank of India said in a research report that if the deposit rate was made attractive in line with mutual funds, it could push up household financial savings and low cost current and savings deposits.

"Increase in bank deposits will bring not only stability in core deposit base and financial system but also financial stability in household savings as the banking system is better regulated and having a superior trust as compared to other alternatives with high volatility/risk," said Soumya Kanti Ghosh, group chief economic adviser at SBI, in his report, 'Prelude to Union Budget 2024-25'.

The Modified Interest Subvention Scheme provides short-term credit at 7% annual interest to farmers engaged in agriculture and other allied activities, including animal husbandry, dairying, poultry and fisheries. An additional 3% subvention (prompt repayment incentive) is also given to the farmers for prompt and timely repayment of loans.