Cheap farm credit is most valuable to farmers who can get it before sowing

A farm loan at 4% can be transformative if the money arrives before sowing. For a farmer waiting on a bank approval when seed and fertiliser bills fall due, the advertised rate can matter very little. The Reserve Bank’s 13 January circular continues the Modified Interest Subvention Scheme for short-term loans through the Kisan Credit Card. It sets out a subsidised lending rate of 7%, an additional benefit for timely repayment and an overall eligible amount of ₹3 lakh. The policy priority should be getting timely formal finance to farmers who still borrow informally or have to cut back on inputs. Increasing the subsidised ceiling can help existing borrowers. It does less for farmers who are outside the system. RBI’s 13 January circular on the interest subsidy · NABARD rural financial inclusion survey results

The limit in the circular is the operative one

The February 2025 Budget speech announced an increase in the interest subsidy limit from ₹3 lakh to ₹5 lakh. The January circular governing 2025–26 describes benefits on up to ₹3 lakh. It also provides a ₹2 lakh ceiling for allied-activity credit under the relevant rules and gives crop borrowing priority within the overall limit. A higher sanctioned card limit and a higher amount qualifying for the subsidy are two separate decisions. The RBI’s own illustrations include sanctioned Kisan Credit Card limits above ₹3 lakh and apply benefits only to the eligible portion. Banks and borrowers should work from the circular when calculating this year’s subsidy. Union Budget 2025–26 speech · Cabinet decision on the interest subsidy · RBI’s 13 January circular on the interest subsidy

Take a farmer drawing ₹1.5 lakh for six months, with a constant balance and no fees. At 7%, simple interest is ₹5,250. A 3 percentage point prompt repayment incentive lowers the effective annual rate to 4% and the six-month interest to ₹3,000, a ₹2,250 reduction. On those assumptions, the separately calculated 1.5 percentage point lender subsidy amounts to ₹1,125. That payment helps the lender offer the administered rate. It should be counted separately from the borrower’s interest bill. Actual subsidy calculations follow the dates and caps in the circular, so irregular drawings and earlier repayment change the amounts. RBI’s 13 January circular on the interest subsidy

For a farmer buying inputs in the next fortnight, the value of the facility can exceed the saving in interest. An informal loan can be available the same day and can accommodate repayments timed to a particular sale. It may carry a high price or bind the farmer to one trader. A formal bank line that is available reliably can improve the farmer’s ability to shop for inputs and sell output to another buyer. A loan approval that arrives after sowing provides much less leverage. Performance data should therefore include when borrowers first drew the funds, alongside the sanctioned limit and interest rate.

The problem is who gets through the application

NABARD’s 2021–22 financial inclusion survey, analysed by Dvara Research, found that 75.5% of agricultural households reporting a loan borrowed exclusively from institutional sources. The remainder used a non-institutional source for at least some of their borrowing. The denominator is agricultural households reporting a loan. It excludes households that needed credit but never obtained any. The data are from an earlier survey round, so they establish a substantial gap at that time, with no direct estimate of the current gap. For the same reason, the number of cards issued tells us little about eligible households that never applied or whose cards remain unused. NABARD rural financial inclusion survey results · Dvara Research’s survey analysis

The RBI previously raised the collateral and margin waiver for agricultural loans to ₹2 lakh per borrower, effective from January 2025. This can help farmers who have a viable crop plan but lack acceptable security. Screening and documentation still matter. A tenant may be able to establish cultivation through local evidence yet find it difficult to meet a lender’s paperwork requirements. A farmer with existing bank relationships can navigate renewals more easily. The January circular requires Aadhaar authentication and limits subsidy duplication for the same parcel. Those provisions can protect public money. They also make it important to monitor failed verifications and allow errors to be corrected quickly enough for borrowers to plant on time. RBI collateral circular · RBI’s 13 January circular on the interest subsidy

A higher subsidy ceiling has a serious case. The cost of cultivating a commercial crop can exceed the eligible amount, especially on farms with more acreage, irrigation or expensive inputs. A grower who has exhausted the subsidy may turn to informal credit for the balance. But the fiscal gain per borrower rises with the size and duration of the eligible loan. An expansion concentrated among borrowers already able to borrow commercially would deliver less additional access per public rupee than an expansion that brings previously excluded cultivators into formal finance. The relevant comparison is between the additional lending each policy produces, including the rate paid on the next rupee, and the subsidy cost. Union Budget 2025–26 speech · RBI’s 13 January circular on the interest subsidy

A fiscal comparison can make the trade-off explicit. Suppose one million already eligible borrowers each draw an additional ₹1 lakh for a full year and repay on time. At the present rates, the combined 1.5 percentage point lender subvention and 3 percentage point borrower incentive on that increment would amount to ₹450 crore. The same calculation for half-year drawdowns gives ₹225 crore. These are scenarios under the existing subsidy rates, with assumed take-up, rather than a cost estimate for the proposed expansion. The government could compare the benefit of those higher balances with what a similar sum might achieve in speeding up first approvals, resolving documentation problems or extending the reach of local lenders. RBI’s 13 January circular on the interest subsidy · Union Budget 2025–26 speech

Repayment incentives work best when farm risks are recognised

The prompt repayment benefit gives a farmer a reason to repay on time and a lender a way to distinguish ordinary cash-flow management from emerging stress. Farm incomes can also move together after a flood, drought or price collapse. A farmer whose crop has failed can miss the repayment date despite having made sensible decisions. The circular provides for lender subvention on restructured loans after natural calamities and additional relief for severe cases under specified procedures. Transparent and timely application of those rules matters. An unexpected delay in relief can force a farmer to sell assets or refinance at a higher rate before the concession arrives. RBI’s 13 January circular on the interest subsidy

The circular also permits eligible small and marginal farmers to receive interest subvention for up to six months after harvest against negotiable warehouse receipts for produce in accredited warehouses. This addresses a specific problem. A farmer who must repay immediately may accept a low price while many neighbours are selling the same crop. A warehouse-backed loan can make it possible to wait. The gain depends on the eventual price, interest, storage charges and deterioration. It also depends on a practical route to an accredited warehouse. In a district with few facilities, aggregation through a credible local organisation can matter more for take-up than a further cut in the nominal rate. RBI’s 13 January circular on the interest subsidy

What the government should measure

Publish application, approval and drawdown data by district and crop season, separating renewals from first-time borrowers. Track time to drawdown, reasons for rejection, failed authentication and the share of borrowers who repay on time without taking another expensive loan. Survey tenant cultivators and other eligible applicants whose experiences disappear from loan registers. An increase in cards accompanied by earlier drawdowns, lower informal borrowing and better access for tenants would support the case for expanding the facility. If balances rise mainly among existing borrowers and the time to secure funds barely changes, widening access should take precedence over raising the subsidised amount. A farm credit policy earns its subsidy when it changes the decision a farmer can make before the crop goes into the ground.