RBI Monetary Policy: After Goyal, Shaktikanta Das announces gift for farmers

The RBI Monetary Policy Committee on Thursday decided to increase the limit on agriculture loan.  RBI has reduced the policy repo rate, and has linked banks lending rate with external benchmark which includes the central bank's interest rates. Now that, repo rate are lower, one can expect banks to follow the method and pass on the benefits to borrowers. Hence, in this midst, an increase in loan limit, is a music to farmers ears.  RBI said, "Keeping in view the overall inflation and rise in agriculture input costs since then, it has been decided to raise the limit for collateral­–free agriculture loans from Rs 1 lakh to Rs 1.6 lakh. This will enhance coverage of small and marginal farmers in the formal credit system."

Currently, the banks are mandated to extend collateral-free agriculture loans up to Rs 1 lakh. This limit of Rs 1 lakh was fixed in the year 2010. Apart from this, RBI has also appointed an Internal Working Group (IWG) to review Agricultural Credit.

"Agricultural credit growth has been significant over the years. In spite of this, there remain issues relating to agricultural credit such as regional disparity, extent of coverage, etc. There is also the issue of deepening long-term agricultural credit for capital formation," said RBI.

Shivendra Foujdar, Founder and Managing Partner, Avighna Trades said, "RBI MPC has surprised all stake holders in market with rate revision of .25 bps. On grounds of easing out inflation rate and stable recovered crude oil rates along with world trade movements. Other major announcements are easing ECB policies for external borrowings. Limit for without collateral loans to farmers also increased to 1.6 lacks from earlier 1 lack, it could be more impactful politically than economically in election season, though adverse impact on health of banks specially nationalized one cannot be completely rolled out. All in all MPC decision looks positive and aiming to growth."

A collateral free loan means, that farmers will not have to offer any tangible asset for availing free loan from banks. In this case, the loan given is generally unsecured as lenders do not have any asset in hand to recover losses during default. 

RBI has kept policy repo rate at 6.25%, followed by reverse repo rate at 6%. Whereas, the marginal standing facility (MSF) rate and the Bank Rate stands at 6.5%.

Recently, in interim Budget 2019, the Finance Minister Piyush Goyal had announced major reforms for farmers welfare. One of the major development was income support to farmers of Rs 20,000 crore in FY19E and Rs 75,000 crore in FY20E.