Chidambaram announced the 600 billion rupee package in his budget speech last Friday and the prime minister said this week banks would be compensated as and when loans came due, while the scheme would be funded through government revenue.
"The banking sector will be compensated in a way that the banks will not be constrained at all," Chidambaram told reporters after a meeting of the board of the Reserve Bank of India (RBI).
"The (RBI) governor has told the board that the RBI is fully geared to support the government in implementing the scheme in a manner that the banking sector will be strengthened, not weakened."
The debt relief package is expected to apply to farm loans made by many state-run banks up to March 31, 2007, and overdue on Dec. 31.
Farmers with up to 2 hectares (5 acres) of land would be eligible for a complete write-off of loans overdue on Dec. 31, 2007, and which remained unpaid up to Feb. 29.
Chidambaram said the government, central bank and banks would work together to implement the scheme.
He said the fiscal stimulus and higher public spending unveiled in the budget would stimulate consumption and boost growth and the board of the central bank had appreciated the thrust of the budget.
"The broad consensus is that with more money in the pockets of tax payers, with more public expenditure and fiscal stimulus to manufacturing through custom and excise duty cuts, taken together (that) should stimulate consumption, demand and growth," he said.
The Indian economy is expected to grow 8.7 percent in the fiscal year that ends on March 31, slower than 9.6 percent in 2006/07. Chidambaram has said he expects the economy to grow by at least 8.8 percent this fiscal year.
"I hope that 2008/09 will be another year of high growth," he told reporters.