Bankers see farm, export catch in base rate regime.

MUMBAI: Bankers are a worried lot these days. As they switch over to a new loan pricing mechanism, most are clueless on how to handle credit to farmers and exporters — the two most politically sensitive lending activities.

Till now, the government has been picking up a part of the cost on such loans, something lenders fears may soon stop. While lending to farmers no state-owned bank can charge more than 7% interest, even if the bank’s cost of fund is as high as 9%. But such loans are given as the government pays the balance 2% to the bank in the form of subsidy.

Similarly, in case of rupee loans to exporters, the government disallows PSU banks from charging more than 2 percentage points below its prime lending rate (PLR) — the benchmark interest rate.

Now, there is growing fear among bankers that the government will hold back the subsidy once the base rate system — the new mechanism that will replace PLR — comes into play.

Chances are that if banks fix the base rate at 8%, the interest rate subsidy may come down.

“Banks receive the 2% subsidy on grounds that the cost of lending to farmers is much higher than the mandated interest rate of 7%. But there is every possibility that finance ministry may argue that since the floor interest rate is 8%, the subsidy will be 1% , and not 2%,” said a senior official of a PSU bank. Big lenders like State Bank of India has indicated that it’s base rate would be around 8%.

“Since the government has been talking about fiscal consolidation, it will look at ways to lower interest subsidy,” said another banker. A year ago the subsidy element on farm loans was lowered from 3% to 2%.

The local lenders’ lobby, Indian Banks Association, will met RBI deputy governor on Thursday to voice their concern. They may request the regulator to take up the matter with the government so that the interest subsidy on farm loans is unchanged at 2%, irrespective of the base rate.

Faced with shrinking margins and the government resistance to let them charge higher interest rate on loans to farmers and exporters, they are desperate to protect the subsidy.

Source : The Economic Times