MUMBAI, April 21: The R V Gupta committee on agriculture credit has called for interest-rate deregulation on farm loans. The one-man panel submitted its report to the Reserve Bank of India (RBI) governor, Bimal Jalan, on Tuesday.The committee favours allowing banks to fix interest rates on agricultural loans and offer finer rates to borrowers with a good track record. At present, the RBI regulates the rates on loans up to Rs 2 lakh.
Bankers have welcomed the committee's suggestion. "It is a long-felt need. Like any other credit, farm-sector advances should bear commercial rates. Once we are allowed to charge market rates, the funds flow to the sector will automatically go up," a public-sector bank chief said.
On the rationale behind the deregulation, the panel notes, "Small loans involve higher transaction and administrative costs. As a result, managers tend to look for larger loans where interest rates are deregulated, while the bank seeks to equalise the price differential by cross-subsidisation...regulated rates of interest operate as a barrier to the sanction of small loans... commercial banks should be free to fix the rates of interest of all amounts."
The committee wants farmers to be given a liquid-saving product with an attractive return in-built into the loan product, to act as a buffer during lean periods. Fixing loan targets on the basis of credit flow as against "outstandings" and extending a composite cash-credit limit, reckoned as agricultural credit under the priority sector, are some of the panel's other recommendations.
"During cash-rich periods, farmers have a propensity to invest in gold, land, implements, livestock or incur expenditure of a consumptive nature. Thus, they are vulnerable during adverse price fluctuations and natural calamities. To address this issue, farmers should be offered a liquid-saving product with an appropriate return, which should be in-built into the product to provide them with a cushion during lean periods," the committee says.
Its other suggestionsare:
Banks should prepare special agricultural-credit plans (SACPs) to accelerate the flow and improve lending quality;
The RBI must indicate annually the expected increase in credit flow over the previous year's and not fix a target based on outstanding credit;
The service-area approach must be modified to provide borrowers a choice of banks and bankers a larger area of operation;
Agreements and other covenants/documents must be simplified. Banks should examine their systems and make modifications within two months and report their compliance to the central bank;
The focus of credit appraisal should be on evaluating the borrower's income stream and a comprehensive assessment of credit needs taking into account track record, credibility, capability and the proposal's technical viability;
At least 90 per cent of loan applications should be decided at the branch level. * The farmer's short-term credit needs should include all requirements directly and indirectlyrelated to production, post-harvest and household expenses.The panel also says that repayment capacity should be assessed on the basis of aggregate-household income from all sources including crop production and ancillary activities. The one-man committee was set up in December 1997 by RBI with a mandate was to ascertain the constraints faced by banks in increasing credit flow, introducing new products and simplifying procedures.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
