A Kisan Credit Card, a Dairy Shed and a Defaulted Crop Loan in Bahraich
Geeta Devi cultivates 1.6 ha of irrigated land in Bahraich, half under paddy and half under wheat. Her bank's scale of finance is ₹42,000 per hectare for kharif paddy and ₹30,000 per hectare for rabi wheat, and the branch is willing to lend 80 per cent of the scale of finance for each season, sanctioning a limit based on the higher of the two seasonal requirements. The Kisan Credit Card rate is 7 per cent per annum with a 3 per cent prompt repayment incentive, and she would draw the kharif limit on 15 June for a repayment due on 31 January. She also wants ₹40,000 for a small dairy shed. The state dairy scheme lends at 9 per cent with a 25 per cent subsidy on the shed cost; a gold loan against 22 grams of jewellery is available at 12 per cent with a 75 per cent loan-to-value. Her input dealer offers seed and urea on four months' credit at prices about 20 per cent above the market. Last kharif her paddy was damaged by flood and she repaid only half of her crop loan by the due date, so the branch has not yet renewed the limit.
1. Compute Geeta's crop loan entitlement under the branch's method and the interest she would pay on the kharif drawdown with and without the prompt repayment incentive, then compare the Kisan Credit Card with the input dealer's credit.
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Seasonal requirements at 80 per cent of scale of finance: kharif 0.8 × 0.8 ha × ₹42,000 = ₹26,880; rabi 0.8 × 0.8 ha × ₹30,000 = ₹19,200. Under the branch's method the limit is set at the higher seasonal requirement, i.e. ₹26,880, because the paddy sale is supposed to repay the kharif drawdown before the wheat drawdown begins. She should argue for a composite limit of ₹46,080 if she can show that both crops are financed simultaneously, but the peak-season method is the standard practice and ₹26,880 is what she can draw now.
Interest on ₹26,880 from 15 June to 31 January is 7.5 months: 26,880 × 0.07 × 7.5/12 = ₹1,176. With the 3 per cent prompt repayment incentive the effective rate is 4 per cent and the interest is 26,880 × 0.04 × 7.5/12 = ₹672, a saving of ₹504 - but only if she repays within one year and the account is standard.
Input dealer credit: if she buys ₹20,000 of inputs at a 20 per cent markup, the implicit cost is ₹4,000 for four months, several times the ₹504–₹1,176 of a KCC. The dealer's credit is the most expensive option even though it looks interest-free, and it also obliges her to buy the dealer's brand and quantity.
2. Advise Geeta on how to fund the ₹40,000 dairy shed, comparing the dairy scheme loan, the gold loan and using the crop loan, and state the risks of each.
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Dairy scheme: borrow ₹40,000 at 9 per cent, with a 25 per cent subsidy of ₹10,000 on the shed cost, so the effective outlay is ₹30,000 and the interest is about ₹2,700 a year; if the subsidy is credited upfront the effective rate is lower still. The loan is purpose-linked, which matches the asset's life, and the milch animal income can service it monthly.
Gold loan: ₹40,000 at 12 per cent costs ₹4,800 a year, about ₹2,100 more than the dairy loan, and 22 grams at 75 per cent loan-to-value gives ample cover. It is fast and needs no project report, but it pledges the family's liquid safety net, is usually short-term, and a default risks the jewellery.
Using the crop loan: this is not a financing option but a diversion. A Kisan Credit Card sanction is for crop production; spending it on a shed is a breach of the terms, can lead to the limit being withdrawn, and turns a subsidised 4 per cent production loan into a costly dispute.
Recommendation: take the dairy scheme loan with the subsidy, keep the gold as a contingency, and do not touch the KCC except for genuine crop expenses. One caution: with a default already on record, she should confirm the dairy loan is under a separate scheme so that it is not refused on the strength of the overdue crop account.
3. What are the consequences of the part-repayment last kharif, and what sequence of steps would restore Geeta's access to institutional credit before the next season?
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An overdue crop loan becomes a non-performing asset after 90 days. The consequences are cumulative: the 3 per cent prompt repayment incentive is lost and penal interest applies, so the effective rate rises above 7 per cent; the limit is not renewed and no fresh kharif loan is sanctioned; the default is reported to the credit information system, which follows her to other banks; she becomes ineligible for interest subvention on future crop loans; and she may lose access to collateral-free crop credit, pushing her back to the trader and the 20 per cent markup.
The restoration sequence should start before the account is classified, not after. First, record the flood loss with the lekhpal or revenue officer and file the crop insurance claim if she was insured under the Pradhan Mantri Fasal Bima Yojana, where the farmer's kharif premium is only 2 per cent of the sum insured. Second, take the loss certificate and the claim status to the branch and ask in writing for restructuring or a rescheduling of the overdue instalment rather than waiting for recovery notices. Third, clear the balance from the dairy income or a small gold loan only if that is cheaper than penal interest, and insist on a receipt and a clean statement. Fourth, for the next season, insure the crop, repay before the due date to capture the incentive, and keep the account within the limit so that a composite limit for both seasons can be negotiated.