Cheap gold-based farm loans are no more. What it means for farmers and bankers

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Kottayam: Cheap agricultural loans are no more. Commercial banks in India have been asked to immediately end the practice of disbursing farm loans at lower interest rates on putting up gold as collateral.

Till now, a mere oral declaration was enough for any individual to secure up to Rs one lakh as agriculture gold loan. The Union finance ministry order has now barred banks from issuing the loans from December 17. Nationalised banks including the State Bank of India received internal circulars on December 24. Only farmers with a Kisan Credit Card (KCC) will henceforth be eligible for subsidised agriculture gold loan. Those who have already availed of the loan will enjoy the subsidy only if they get a KCC. If not, they will have to pay the normal 9 per cent interest.

The decision will have retrospective effect from October 1, 2019. Those who had taken the loan after October 1 will have to pay an interest of 9 per cent if they do not have a KCC. Those who had taken the loan before October 1 will have to pay dual rate. For the repayment period before October 1, the loanee need to pay only the subsidised 4 per cent. As for the repayment period after October 1, the interest would be charged at 9 per cent. Borrowers who had closed their accounts with their banks at 4 per cent interest rate but whose repayment period had spilled beyond October 1 will be asked to repay the subsidy amount for the period after October 1. The banks have decided to send notices to the borrowers in the coming days.

The decision was in a way precipitated by agriculture minister V S Sunil Kumar's outburst. While taking on the banks for refusing to extend the moratorium for farmers' loans in the aftermath of the floods, the minister had angrily said that the banks were so unfriendly to farmers that they were granting subsidised gold loans to non-farmers. Though the minister was not available for comment, his office said that the minister was aware of the problems that the latest decision could create. "We know this was an easy and swift way to get emergency loans. The insistence on KCC could create practical issues. The government will soon intervene in the matter to ensure that no one is put to any difficulties," Sunil Kumar's office said.

The Centre had decided to stop the practice of issuing farm loans of up to Rs 3 lakh at 4 percent interest on gold collateral, as exclusively reported by Manorama Online on August 2. Kerala agriculture minister V Sunil Kumar had asked the Union agriculture ministry and the Reserve Bank of India to ensure that undeserving people were availing of the cheap loans meant for farmers.

The banks are barred from issuing the loans from the day they have received the circulars to the effect. The Union minister had asked nationalised banks to stop the loan disbursement from October 1, after a video conference with bank chiefs from July 31.

Of the Rs 83,610 crore disbursed as farm loans in Kerala up to September 2019, Rs 52,153 crore, or 62 per cent, was gold loans, and this would include not just the cheap 4 per cent gold loan but also gold loans secured at higher interest rates. Of the gold loans, nearly 70 per cent were cornered by non-farmers. This startling discovery prompted the Kerala government to suggest that the banks asked for an agricultural officer’s certificate and a guarantee that the loan would be used only for agricultural purposes. The government also recommended that the banks lend up to Rs 1.6 lakh without collateral to farmers with Aadhaar and Kisan Credit Cards.

The farm loans originally came with 9 percent interest but it worked out cheaper after the central government and the state government subsidised 3 percent and 2 percent of it, respectively.

The banks had continued to disburse the loans even after they got the directions in October, saying that they had not received any directive from the Reserve Bank of India.

The condition to pay back the subsidised part of the interest may affect farmers and the common man. For a Rs three lakh loan, a borrower without KCC will have to shell out an extra Rs 15,000 as difference.

Of the 75.4 lakh farm loans given out in Kerala, only 15.83 lakh come under the  Kisan Credit Cards accounts. Though three-fourths of the farm loan applicants have gold to place as collateral, they are not assured of loans at subsidised interest. The banks have now been asked to convert short-term loans and gold-based loans to  Kisan Credit Cards account loans.

What is Kisan Credit Card scheme?

The  Kisan Credit Cards accounts are allotted to farmers who possess enough land as prescribed for various kinds of crops. The farmers have to submit the tax-paid receipts and the land possession certificates to avail of the scheme. They can avail of Rs 2,000 per one cent of land possessed. They will need to own at least half an acre of land to get Rs 1 lakh in loan.

Once the loan is approved of, the amount is credited to the farmer’s account and a credit card is given. He can draw the amount whenever he wants. He can expect to get a discount if he renews the loan within a year.

An existing loan cannot be converted to a  Kisan Credit Cards loan if the applicant does not possess the required certificates.

The changes to the gold-based loans will particularly hit landless farmers and those who farm on leased land. The decision comes as a blow to farmers who already stare at a crisis due to the price crash.

Kerala leads the country in gold-based loans for obvious reasons. The state is also the largest consumer of gold. Even the banks encouraged the loans because the low interest rates ensured prompt repayment.

The Kisan Credit Cards scheme was introduced in 1998. Not even half the farmers are covered under the scheme.

According to government estimates, the country has about 14.5 crore farmers. Of them, 7.03 crore farmers have Kisan Credit Cards. Though 19.73 lakh people have joined various programs meant for farmers, only 18.5 lakh of them are real farmers, the state agricultural department said.

Of these, only 13.65 lakh have Kisan Credit Cards. Though the State-Level Bankers Committee has counted 15 lakh people with Kisan Credit Cards, the Union government estimates only 13.65 lakh.

The government decision may affect banking sector as it does with the agriculture sector. The drying up of cheaper and easier loans may drive people towards easily available loans from private banks despite the high costs.

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