NEW DELHI -- India's federal cabinet Thursday approved the release of 40 billion rupees ($826.4 million) to state-run banks as a subsidy to offset revenue losses arising from the grant of cheap short-term farm loans.
The funds, already provided for in this fiscal year's budget, come at a time when loan demand for winter-sown crops usually picks up.
"For this year, the government has decided to continue the ongoing interest subvention scheme with the provision of interest subvention at 2% to the banks on their own funds," Information and Broadcasting Minister, Ambika Soni, said at a news conference.
State-run banks are mandated by the government to offer farm loans up to 300,000 rupees apiece at an interest rate of 7%. This compares with an average interest of around 12% charged by the banks on other loans.
The government spent 43.11 billion rupees on farm loan subsidies in the fiscal year that ended March 31.
"For the year 2009-10, the target for flow of credit to the agriculture sector has been revised to 3.25 trillion rupees, of which short-term farm loans disbursements by all banks could be 2 trillion rupees," Ms. Soni said.
Farm loans totaled 2.8 trillion rupees last fiscal year.
"The interest subsidy will be available to farmers for one year," Ms. Soni said.
Soft farm loans could be used as one of the many tools to blunt the impact of a severe drought that threatens to shrink summer-sown crop output by around 18%.
The government expects a normal winter harvest will help the country of 1.2 billion people shrug off a food supply crunch.
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