Govt in talks with banks to cut Kisan Credit Card interest subvention by 50 basis points

New Delhi: The government is in discussions with banks to reduce the interest subvention rate on Kisan Credit Card (KCC) loans by 50 basis points, citing the reduction in policy rates.

Since February 2025, the Reserve Bank of India (RBI) has reduced the repo rate in stages by 125 basis points to 5.25%. A basis point is a hundredth of a percentage point. The government wants the interest under the Modified Interest Subvention Scheme through the Kisan Credit Card (MISS-KCC) to reflect the lower policy rates.

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Currently, the government pays a 1.5% interest subvention, or financial subsidy, to banks so they can extend short-term KCC loans up to ₹3 lakh at a lower 7% interest rate.

The discussions with banks are preliminary and part of the broader policy measures for continuing the MISS-KCC scheme till 2031-32, said two executives aware of the deliberations. In May 2025, the government extended the scheme for 2025-26, retaining the existing 1.5% interest subvention.

"There is a view within the government that on account of rate cuts, the marginal cost of funds-based lending rate (MCLR) has also come down, and the banks can now absorb this 50 bps reduction the government has suggested," said one of the executives, requesting anonymity.

Queries emailed to the finance ministry did not elicit a response till press time. A recent report pointed out that the scheme's total subsidy outlay is estimated at ₹1.87 lakh crore till 2024-25 since its launch in 2006-7. In the budget for 2026-27, ₹22,600 crore has been allocated under the scheme, the same as for the preceding financial year.

Farmers who repay their loans promptly receive an additional interest benefit of up to three percentage points as a prompt repayment incentive, bringing down the effective interest rate to just 4%.

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Banks have argued that despite the subvention their interest income on KCC is below their base rate. "Also, KCC loans are largely extended in rural areas, which requires considerable human resources and these all need to be factored in," said another bank executive. Banks will keep the interest rate at 7% on account of reduced policy rates, and if there are any changes in subvention rate, the change will not be passed on the farmer borrowers, said an executive.

A CareEdge Ratings report in July said during 2025-26, the Indian banking system witnessed continued strength in credit expansion, with scheduled commercial banks recording credit growth of about 14.5% year-on-year. Monetary easing and surplus liquidity supported lower lending rates and stronger transmission and boosted the credit demand, it said.