Govt to discontinue interest rebate on farm loan

In the wake of drastic interest rate cut on agriculture loans by nationalised commercial banks (NCBs), the government has decided to discontinue two percent interest rebate for farmers who repay loans in due time.

Finance ministry sources said for food-grain production NCBs now charge only eight percent interest on loans which was between 11 percent and 14 percent until 2003. The NCBs went for the drastic rate cut in line with government's policy to promote agriculture sector.

The finance ministry on Wednesday issued a circular to announce discontinuation of the interest rebate. Ministry sources said if two percent interest rebate continues, the rate stands at six percent whereas cost of fund of NCBs remains 7.22 percent.

The ministry in the circular says interest receipts of Bangladesh Krishi Bank (BKB) may be reduced by Tk 124.45 crore a year due to drastic cut in interest rate.

BKB and Rajshahi Krishi Unnayan Bank (Rakub), the two specialised banks on agriculture loans, are seeing huge income loss due to rate cut. Other NCBs have different loan portfolios but the BKB and Rakub only channel credit into farm sector. So, the two specialised banks are becoming weak concerns, the circular said.

The government introduced the two percent rebate system on agri-loans repaid in original schedule from July 1, 1995.

However, Bangladesh Bank (BB) recommended continuing the rebate facility. According to BB, BKB offered interest rebate worth Tk 1.5 crore in the last five years of which BB refinanced 50 percent.

Discontinuation of such scanty rebate would hardly affect BKB's earnings. Agri-loan defaulters often enjoy interest waiver in line with government's decision to cope with natural disaster. So, discontinuing the interest rebate for law-abiding farmers will not be justifiable, the central bank claimed.

After the BB observation, finance ministry convened a meeting with representatives of BB, NCBs, BKB and Rakub in October with Finance Secretary Zakir Ahmed Khan in the chair. After analysing pros and cons, the meeting resolved that the rebate facility may be withdrawn in view of worsening financial health of BKB and Rakub.