RBI group suggests subsidy for small farmers

MUMBAI: The Working Group of Reserve Bank on farm distress on Tuesday suggested direct input subsidy to small and marginal farmers, broadbasing commodity futures and permitting banks to offer credit on rate of interest based on repayment capacity to tackle indebtedness among farmers.

"Credit is not a panacea for all the problems of the farm sector," the Group headed by S S Johl observed in its report.

Identifying indebtedness as the common factor of economic distress, the Group recommended direct subsidy to small and marginal farmers in the form of input subsidy.

"A scheme involving back-ended interest rate subsidy through banks may be made available to the target group on prompt repayment of bank loans," it said.

Observing that small farmers were unable to reap benefits of commodity futures market as the trading lots are often much bigger than what the farmers produce, the group recommended that banks be allowed to become "aggregators" by expeditiously amending the Banking Regulation Act.

The Group noted that providing credit without proper evaluation of needs and repayment capacity will only worsen indebtedness. Also, requiring banks to change interest at flat rates without risk perception is likely to act as a disincentive for them to lend to the sector.

"Banks may be permitted to provide agriculture credit at appropriate rates of interest on the basis of repaying capacit or incremental repaying capacity estimated to be generated out of borrowed funds and availability of other risk mitigants, rathar than only on security considerations," it said.