Banks may refuse to take your gold for cheaper agricultural loans

Representational image. Photo: Reuters

Kottayam: Banks across the country are set to stop disbursing subsidised agricultural loans by taking gold jewellery as the collateral. The Union government has already issued notices to the banks, asking them not to give agricultural loans against gold mortgage from October 1, 2019 and instead provide it only to those holding Kisan Credit Cards (KCC). The Union Agriculture Ministry reportedly conveyed its decision to the banks during a video-conferencing held on July 31.

With the Centre's decision, public may no longer have recourse to agricultural loans of up to Rs 3 lakh by pawning gold. Such loans were charged four per cent interest and it was widely sought by those not pursuing farming or allied activities.

The Centre’s action comes after Kerala Agriculture Minister V S Sunil Kumar shot off letters to the Reserve Bank of India (RBI) Governor and Union Agriculture Minister, seeking to put an end to the practice of non-farmers taking the cheap loans. The state has been demanding that this loan should be given via only KCC to ensure that only the farmers get the benefit. The Kerala government's stance has been that such loans can be given only after the agriculture officer attests it.

The Union ministry had tasked a group of officials to check if the agricultural loan was indeed reaching the non-farmers after the Kerala government's letter. The group includes representatives of Union Agriculture Ministry, state agriculture department, RBI, NABARD, and State Level Bankers' Committee (SLBC).

The banks have now been asked to send in their recommendations within two days on how to implement the stoppage of loans and the plan for those who have taken loan in this manner until July 31. The banks have sent across circulars in this regard to all the branches.

The secretary of the Union Agriculture Ministry, senior officials of the Union Finance Ministry and chiefs of public sector banks participated in the video-conferencing.

New curbs

As per the latest decision, agricultural loan with subsidy should be given to only those holding KCC. All such KCC accounts should be linked to the Aadhaar. Those who do not have Aadhaar would not be eligible for retrospective subsidy.

Other conditions include loans should be given to all those KCC holders who have not received one till now. A decision should be made on the loan applications within 14 days.

Cheap loan

Though nine per cent is the actual interest rate for agricultural loan against gold mortgage, there is a five per cent subsidy with the central government providing three per cent and is the state providing the remaining two per cent.

Of the Rs 80,803 crore given as agricultural loan last year, 62 per cent or Rs 50,169 crore was against gold mortgage. The Kerala government, however, concluded that more than three-fourths of this share went to non-farmers.

There was a 17 per cent rise in such loans last year, according to the statistics with the public sector and private banks. This includes the Rs 15,219 crore given as loans by the State Bank of India (SBI).

KCC advantage

The KCC holders normally get loan up to Rs 1 lakh without collateral. If a loan of higher amount is needed, then the agricultural land has to be mortgaged. Those farmers who do not have their own land or who took land for lease find themselves in a spot.

Banks to be hit?

However, the Centre's decision is likely to drastically affect both the agricultural and banking sector. The banks were encouraged to give out the agri gold loan as the repayment was ensured and the margin was low. The farmers and common folk were also encouraged to take the loan as it was easier to get the loan that had fewer procedural formalities. A person is assured of subsidy only if the repayments are made without default. About 90 per cent of the people renew their loans, the banks pointed out.

The gold loan with subsidy is most sought after as it is quickly disbursed and has fewer official procedures.

People from Kerala take the most number of gold loans in the country as the state is the biggest consumers of gold in the country.

The new decision might lead to the slowdown of banking sector in Kerala, even across the country.

The interest rate of gold mortgage is from 9.45 per cent and more for private finance establishments and banks. If the repayment is stalled or any other issue crops up, the interest rate would be doubled.

The banks are apprehensive that more people might head to the private finance establishments for the readily-available loan even if the interest rates are higher.

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