A group of state-run banks having significant exposure to the farm sector is looking forward to set up a credit guarantee fund. They have initiated talks with the government for the same. As reported by Mint, the credit guarantee fund will cover defaults by farmers, making lending to the sector less risky, two people directly aware of the development said.

The banks have proposed the government to provide an initial corpus of Rs.70,000 crore over three years for the fund. This will be structured on the lines of the Credit Guarantee Fund Trust for MSMEs, while the credit guarantee fund for small businesses makes good losses incurred by lenders up to 85 percent of the outstanding amount in the event of a default.

One of the two people said on the condition of anonymity that the proposed fund if approved by the government, will cover the entire Kisan Credit Card (KCC) scheme loan exposure of banks and will solve a big worry for lenders. The person further added that the KCC scheme is mainly availed of by small and marginal farmers with very limited financial resources. Assuming that 10 percent of the total outstanding amount becomes stressed, it is estimated that a corpus of Rs.60,000-70,000 crore will be required to cover loan losses.

Currently, the government gives an interest subvention of two percent and prompt repayment initiative of three percent on short-term crop loans up to Rs.3 lakh.

With the setting up of the fund, banks will be encouraged to lend to the sector. The banks are also hoping that it would obviate the need for farm loan waivers by states as they can participate in the fund, the banker said.