In 2006, the Finance Minister announced that farmers borrowing crop loans up to Rs 3 lakh would pay only 7% interest — roughly half the prevailing market rate. The government would pay the difference to banks. Two decades later, the scheme persists with the same core structure: the government absorbs the cost, banks collect the reimbursement, and farmers borrow at rates that no commercial calculation would support. The February 2026 Statement on Developmental and Regulatory Policies (PR_62171) confirmed the continuation of farm loan subvention for 2025-26. The mechanism is simple but the plumbing is intricate — and the RBI sits at every junction.
Interest subvention is how India makes policy through the banking system. The government decides who deserves cheaper credit. The RBI transmits the instructions to banks. Banks disburse the loans and file claims for reimbursement. The entire apparatus rests on a principle that Indian policymakers have embraced since independence: credit is too important to be left entirely to the market.
How does farm loan subvention actually work?
The Modified Interest Subvention Scheme for Short Term Loans for Agriculture and Allied Activities RBI/2025-26/193, issued on January 13, 2026, sets out the current terms for the 2025-26 financial year:
"In order to provide short term crop loans and short term loans for allied activities including animal husbandry, dairy, fisheries, bee keeping etc. upto an overall limit of Rs 3 lakh to farmers through KCC at concessional interest rate during the year 2025-26, it has been decided to provide interest subvention to lending institutions viz. Public Sector Banks (PSBs) and Private Sector Banks (in respect of loans given by their rural and semi-urban branches only), Small Finance Banks (SFBs) and computerized Primary Agriculture Cooperative Societies (PACS) ceded with Scheduled Commercial Banks (SCBs), on use of their own resources."
The arithmetic is this: banks lend at a market-determined rate — say 8.5%. The farmer pays 7%. The government reimburses the bank 1.5% (the interest subvention rate for 2025-26). If the farmer repays on time — within one year of disbursement — the government pays an additional 3% subvention. The farmer's effective rate drops to 4%.
A 4% interest rate on a crop loan, when inflation runs at 5-6%, means the real interest rate is negative. The farmer is being paid, in real terms, to borrow. This is not an accident — it is the deliberate policy choice of a government that views food security and farmer welfare as justifying below-market credit.
Why does the scheme flow through the RBI?
The RBI is the natural intermediary between the government and the banking system. The government cannot directly credit 1.5% interest subvention to every bank account — it has no operational infrastructure to do so. What it has is the RBI, which already maintains accounts for every scheduled commercial bank, settles interbank payments through its Real Time Gross Settlement system, and issues binding circulars to the banking system.
The money flows in one direction: Government of India → RBI → Banks → Borrowers. The claims flow in the opposite direction: Banks calculate the subvention due on each eligible loan, aggregate the claims, submit them to the RBI, and the RBI debits the government's account and credits the bank's account. The August 2015 Interest Subvention Scheme circular RBI/2015-16/152 described the mechanism:
"Interest subvention @ 2% per annum will be made available to the Public Sector Banks and the Private Sector Scheduled Commercial Banks (in respect of loans given by their rural and semi-urban branches) on their own funds used for short-term crop loans up to Rs.3,00,000 per farmer provided the lending institutions make available short term credit at the ground level at 7% per annum to the farmers."
The RBI's role goes beyond payment processing. It also monitors compliance — verifying that banks are actually passing the subvention benefit to farmers rather than pocketing it, and that the loans classified as "crop loans" are actually being used for agriculture.
Why did the RBI have to crack down on end-use violations?
Because the scheme created an arbitrage opportunity. A borrower could take a crop loan at 4% (after prompt repayment benefit), deposit the proceeds in a fixed deposit at 7%, and earn a risk-free 3% spread — courtesy of the Indian taxpayer. The November 2012 circular on Interest Subvention Scheme Monitoring of end-use of Crop Loans RBI/2012-13/290 addressed this directly:
"It has, however, come to our notice that the banks, in various regions, have failed to ensure end-use of funds disbursed ostensibly as crop loans. As a consequence, the expenditure incurred by the Government of India with an intention to help small and marginal farmers has not, to a significant extent, reached the intended beneficiaries. There have been some reports that the 'borrowers' of these 'crop loans' have diverted the funds and are, to some extent, using the scheme as an arbitrage opportunity by borrowing at a lower rate of interest owing to the subvention available and investing them in fixed deposits."
The RBI instructed banks to monitor end-use by verifying that crop loan disbursements corresponded to actual farming activity — checking landholding records, crop patterns, and input purchase receipts. This monitoring obligation added compliance costs for banks, but the alternative — a scheme where government funds subsidise financial arbitrage instead of farming — was worse.
What is the KCC connection?
The Kisan Credit Card is the primary vehicle through which farm loan subvention is delivered. The Master Circular on the Kisan Credit Card Scheme RBI/2018-19/10 consolidated the guidelines:
"The Kisan Credit Card (KCC) scheme was introduced in 1998 for issue of Kisan Credit Cards to farmers on the basis of their holdings for uniform adoption by the banks so that farmers may use them to readily purchase agriculture inputs such as seeds, fertilizers, pesticides etc. and draw cash for their production needs."
The KCC is a revolving credit facility — the farmer has a credit limit based on their landholding and crop pattern, and they can draw and repay multiple times within the year. Interest subvention applies to the outstanding balance, calculated from the date of each drawdown to the date of repayment. The prompt repayment incentive of 3% applies if the farmer repays within one year of each drawdown.
The 2025-26 scheme expanded the KCC to cover allied activities — animal husbandry, dairy, fisheries, and beekeeping — with an overall limit of Rs 3 lakh per farmer. Within this limit, farmers involved only in allied activities face a sub-limit of Rs 2 lakh. The crop loan component takes priority for subvention benefits, with the residual amount available for allied activities.
The scheme also extended subvention to small and marginal farmers who store their produce in warehouses rather than selling at harvest when prices are typically at their lowest:
"The benefit of interest subvention under KCC will be available to small and marginal farmers for a further period of upto six months post the harvest of the crop against negotiable warehouse receipts on the produce stored in warehouses."
— Modified Interest Subvention Scheme 2025-26 RBI/2025-26/193
This post-harvest subvention is designed to prevent distress sales. A farmer who can borrow against warehouse receipts at 7% does not need to sell their grain immediately at depressed harvest-time prices — they can store it and sell when market prices recover.
What is the Interest Equalisation Scheme for exports?
The logic for export credit subvention is different but the mechanism is identical. Indian exporters compete against manufacturers in countries where credit costs are lower — China, Vietnam, Bangladesh. If an Indian MSME exporter borrows at 12% to finance a shipment while their Chinese competitor borrows at 5%, the Indian exporter's product is more expensive before it leaves the factory.
The Interest Equalisation Scheme (IES) subsidises pre-shipment and post-shipment rupee export credit. The scheme has been extended through a chain of short-lived circulars — each superseding the last when it expires. The August 2024 IES circular RBI/2024-25/71 (since withdrawn — this extension expired and was replaced by subsequent government orders) detailed the terms for the July-August 2024 extension period:
"Government of India, vide Trade Notice No.07/2024-2025 dated June 28, 2024 read with Trade Notice No.08/2024-2025 dated July 10, 2024 has allowed for an extension of the Interest Equalization Scheme for Pre and Post Shipment Rupee Export Credit up to August 31, 2024."
The scheme has been repeatedly extended on a short-term basis — typically three to twelve months at a time — reflecting the government's ambivalence about the fiscal cost. The July 2021 extension RBI/2021-22/65 (since withdrawn — superseded by subsequent extensions) continued it for another three months. Each extension circular replaced its predecessor — the entire IES history is a chain of withdrawn circulars, each valid only for its specified period.
A significant change in the 2024 extension narrowed the eligibility. The August 2024 circular RBI/2024-25/71 (since withdrawn) specified that only MSME manufacturer exporters would remain eligible — non-MSME exporters were excluded. The subvention was also capped at Rs 1.66 crore per Importer-Exporter Code for the extended period. Although this particular circular has been withdrawn (the extension period ended), the policy direction it established — restricting IES to MSMEs — has been carried forward in subsequent extensions. The restrictions reflected a tightening focus: the scheme should benefit small exporters who genuinely cannot access competitive credit, not large firms that would export regardless.
Why are these schemes perpetually extended rather than made permanent?
The interest subvention scheme for agriculture has been "continued" annually since 2006. The export credit equalisation scheme has been extended in three-to-twelve-month increments since 2015. Neither scheme has been made permanent.
This is deliberate fiscal management. A permanent scheme would create an open-ended liability on the government's budget. By requiring annual renewal, the government retains the ability to modify terms — adjusting the subvention rate, narrowing eligibility, or discontinuing the scheme entirely — based on fiscal conditions. The May 2017 interim continuation RBI/2016-17/308 and the August 2017 full-year approval RBI/2017-18/48 illustrate the pattern: the scheme technically lapses at the end of each financial year, is continued on an interim basis while the new year's terms are finalised, and then formalised once the budget allocation is confirmed.
The annual renewal also allows the government to adjust for changing conditions. When bank lending rates fall — as they did after 2019 when the RBI cut the repo rate aggressively — the gap between market rates and the 7% farmer lending rate narrows, reducing the subvention cost. When rates rise, the cost increases. Annual renewal lets the government recalibrate.
What is the fiscal cost, and who bears it?
The combined annual cost of farm loan subvention and export credit equalisation runs into tens of thousands of crores. The farm subvention alone — covering 1.5% base subvention plus 3% prompt repayment incentive on all KCC loans up to Rs 3 lakh — represents one of the largest line items in the agriculture ministry's budget.
The cost is borne by the central government. Banks do not subsidise the loans — they lend at market rates and claim reimbursement. The RBI does not bear the cost either — it acts as the transmission mechanism. The fiscal burden falls entirely on the consolidated fund of India, which means it is ultimately borne by taxpayers.
Whether this is good policy depends on what you value. From a financial inclusion perspective, the scheme has succeeded: crop loan disbursements have grown consistently since 2006, and the prompt repayment rate is high because the 3% additional subvention creates a powerful incentive to repay on time. From a fiscal perspective, the scheme is expensive and prone to leakage — not every rupee of subvention reaches a genuine farmer. From an economic perspective, below-market interest rates distort credit allocation and may encourage over-borrowing.
The RBI's role in this policy tension is procedural, not political. It transmits the government's instructions, monitors compliance, processes reimbursement claims, and flags end-use violations. The decision to subsidise — who gets cheaper credit, how much, for how long — is the government's. The execution is the RBI's.
Also in this series:
- Agricultural Lending: Crop Loans, KCC, and Allied Activities
- Why Banks Must Lend to Farmers — and What Happens When They Don't
- Export, Import, and Forex Regulations: Realisation, Payment, and Trade Credit
Last updated: April 2026