Banking Terms: Interest Subvention Scheme

Interest Subvention Scheme

Scheme in brief:
The Hon'ble Finance Minister in his budget speech (para 49) for 2006-07 announced that the Government had decided to ensure that the farmer receives short term credit at 7%, with an upper limit of Rs 3.00 lakh on the principal amount. The policy came into force with effect from Kharif 2006-07. The amount of subvention was to be calculated on the amount of crop loan from the date of disbursement up to the date of repayment. 

In persuance of this announcement, the Government of India provided interest subvention of 2 % to Public Sector Banks, Regional Rural Banks and Cooperative Banks in respect of short term production credit up to Rs 3.00 lakh provided to farmers out of their own resources, provided that they make available short term credit @ 7% p.a. at ground level. 

The scheme, introduced in 2006-07, has continued in the following years with certain modifications and changes in rate of subvention. Year wise rate of interest subvention made available to the banks on their own funds was as under:-

2007-08 -2% 
2008-09 -3%
2009-10 -2%
2010-11 -1.5%
2011-12 -2%
2012-13 -2%

Incentive to farmers on prompt repayments 
Since the year 2009-10, the GoI revised the scheme and additional interest subvention was extended to farmers who will repay their loans on or before the due date or the date fixed by the bank, subject to a maximum period of one year. Year wise rate of incentive to prompt payee farmers was as under :-
2009-10- 1%
2010-11 -2%
2011-12 -3%
2012-13 -3% 

Interest Subvention to Small and Marginal Farmers against Negotiable Warehouse Receipts 
In order to discourage distress sale of produce by farmers and to encourage them to store their produce in warehouses against warehouse receipts, Government of India (GoI) had introduced a scheme in 2011-12 for extending concessional loans to the farmers against negotiable warehouse receipts. Post harvest loans against Negotiable Warehouse Receipts (NWR) provided by banks to Small and marginal farmers (SF/MF) having Kisan Credit Cards, would be eligible for interest subvention, period of up to six months on the same rate as available to crop loan. SF/MF, who have not availed crop loans through banking system, would not be eligible. No additional subvention towards prompt repayment, as is available for crop loans, is envisaged under the scheme.

Interest Subvention on conversion of Short Term Crop Loans in drought affected areas 
In order to provide relief to farmers, GoI has decided that in cases where crop loans were restrucrured due to drought during 2012-13, the interest subvention of 2% p.a. which is already available for short term crop loans to Public Sector Banks, Regional Rural Banks and Cooperative Banks will continue to be available for the current financial year on the full restructured loan amount. However, the restructured loans will attract normal rate of interest from next financial year onwards. 

Interest subvention to NABARD 
As per scheme, interest subvention would be available to NABARD for providing concessional refinance to RRBs and Cooperative Banks. NABARD is subvented to the extent of difference between weighted average cost of funds mobilised and refinance rate. Additionally, administrative cost of 20 basis points is also provided by GoI.