In order to improve transmission of monetary policy actions, Finance Secretary Ratan Watal has said that the government is likely to revisit interest subvention schemes and replace them with back-end interest subsidies that do not interfere with marginal lending rates and yet have the same effect on loan repayments as interest subventions. Further, Watal said that the marginal distortions must be removed to ensure that the new system of setting marginal lending rates, started from April 1, is successful.
Currently, the government provides interest subventions on export credit, farm loans, housing and education loans. Interest subventions provide cheaper credit to a borrower up front, with the lender being compensated later by the government. A back-end subsidy involves direct payment of a subsidy at a later date to the borrower, who pays the market rate up front.
Watal said the decision to rationalize the small savings rate should be seen as a positive development that will help households get a ‘better deal’ on lending rates. In December 2015, a committee set up by the RBI on the Medium-term Path on Financial Inclusion had recommended phasing out the interest subvention scheme and ploughing the subsidy amount into a universal crop insurance scheme for small and marginal farmers.