New Delhi, July 14
The Centre is likely to announce a special lending rate structure for the farm sector this week which can mark the beginning of a declining interest rate regime for the credit-starved agri sector.

Sources said the proposal for launching a separate lending rate regime is being given final touches and it is in line with the announcement made by the Finance Minister in his 2003-04 budget speech.

The proposal conforms to the BJP’s demand finalised during the recently concluded “Chintan Baithak’ of the party and the subsequent letter of BJP President M Venkaiah Naidu to Finance Minister Jaswant Singh.

While the exact structure of the proposed interest rate regime is not yet known, in sources indicated that it would be linked to the prime lending rate (PLR).

The objective is to bring down the rates of interest for the sector by not decreasing the spread for the banks. This would be done by reducing the refinance rates for the banks.

The establishment of a single digit credit rate regime would critically depend to what extent the cost of funds for the funding agencies are brought down.

Commercial banks have been allowed to fix their PLRs and given the flexibility of extending credit at the sub-PLR rates. The biggest beneficiary of this has been the housing sector, where the rates are much lower than the existing PLR which is in the range of 11 to 12 per cent.

However, despite a consistently declining interest rate regime, the farming community had not had access to cheaper institutional funds. Banks and other lending agencies had attributed this to the higher refinance rates.

At present, the annual short-term credit flow amounts to approximately Rs 45,000 crore. As much as 53 or 55 per cent of this is extended by cooperatives and another 7 or 8 per cent by regional rural banks (RRBs).

Importantly, cooperatives and RRBs source as high as 40 per cent of their lendable resources through the refinance facility extended by the NABARD. NABARD, in turn, takes recourse to the general line of credit of the RBI.

Currently, state cooperative banks (SCBs) are charged within the band of 5.5 to 6.25 per cent for availing refinance funds, while RRBs are charged at the rate of 6.25 per cent.

Since the SCBs route credit to farmers through various agencies such as the Primary Agricultural Credit Societies and the District Central Cooperative Banks, the final recipient (the farmer) invariably ends up paying in the range of 12 per cent or above.

The contention of the Agricultural Ministry has been that the GLC of the RBI should be brought down on a par with the existing bank rate of 5.25 per cent which in turn will enable credit lending agencies to lower the cost for the final recipient.