What changed
RBI observed that banks are not ensuring end-use of crop loans disbursed under the interest subvention scheme, leading to fund diversion and arbitrage by borrowers. The circular reiterates that loans must meet specific criteria—borrower must be an agriculturist, interest rate capped, loan amount as per scale of finance, and seasonality observed. Banks are now explicitly advised to strengthen pre-sanction scrutiny, post-disbursement supervision, and conduct post-disbursement audits.
What it means for you
Banks claiming interest subvention must now prove that crop loans are actually used for agriculture, not parked in deposits or other investments. Failure to meet the criteria will result in disallowance of subvention claims, impacting banks' income from these subsidies. This tightens the noose on lax lending practices and forces better monitoring of agricultural credit.
What you must do
- Review all crop loan accounts where subvention is claimed to ensure borrower is an agriculturist and loan is used as per scale of finance.
- Implement or strengthen post-disbursement audits to detect diversion of funds to fixed deposits or other investments.
- Ensure seasonality is documented for both disbursement and recovery of crop loans.
- Do not claim subvention for loans that fail any of the specified criteria; adjust systems to flag non-compliant accounts.
- Train field staff on pre-sanction scrutiny to verify end-use intent and prevent arbitrage.
Who it affects
All public sector banks disbursing short-term crop loans under the interest subvention scheme, Branches handling agricultural credit in rural and semi-urban areas, Credit monitoring and audit teams within banks
What is the interest subvention scheme for crop loans?
Introduced in 2006-07, it provides short-term crop loans up to Rs. 3 lakh to farmers at 7% p.a., with an additional 3% subvention for timely repayment, making the effective cost 4% for farmers.
What happens if a bank claims subvention for loans that don't meet the criteria?
RBI states such loans will not be treated as agricultural loans, and banks should not claim any interest subvention for them. This means the bank will lose the subsidy amount.
How can banks prevent diversion of crop loan funds?
By strengthening pre-sanction scrutiny to verify borrower status and loan purpose, conducting post-disbursement supervision and audits, and ensuring seasonality in disbursement and recovery.