The government on Wednesday nearly halved the interest rate on agriculture credit to a maximum of nine per cent for crop loans up to Rs 50,000 as part of efforts to facilitate small farmers.

"Currently, the interest rates on farm loans work out to as high as 16-18 per cent. Banks have been directed to provide farm loans up to Rs 50,000 at nine per cent," Finance Minister Jaswant Singh told reporters in New Delhi.

He said plans are also afoot to franchise post offices to disburse loans directly to the farmers.

State Bank of India, ICICI Bank, Indian Overseas Bank and Indian Bank would start a pilot project on September 1 in Tamil Nadu to disburse farm loans through post offices, Singh said, adding if successful, the franchising would be replicated all over the country through the 154,000 post offices.

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"This will be done by the post offices for which they will be paid a fee", he said.

The finance minister said since a village postman was better known to farmers than bank officials, he was in a better position to deliver the loan.

Singh also said the government was planning to amend the Nabard Act to ensure that the nodal agri credit bank is able to give loans directly to district central cooperative banks.

Currently, refinancing of Nabard loans was at 6.5 per cent but the actual interest rate worked out to 16-18 per cent after passing through multi-layers.

Through this mechanism the interest rate on farm loans charged by cooperative banks will come to about 9 per cent, the finance minister said.

With this, the government targets to achieve Rs 7,36,510 crore (Rs 7,365.10 billion) credit flow to the farm sector by the end of 10th Five-year Plan in 2007, from Rs 70,810 crore (Rs 708.10 billion) disbursed during 2002-03.

Observing that interest rates on loans for tractor or other agriculture equipment was much higher than that for the motorcars, Singh said, "A consortium of banks led by SBI has been formed to negotiate with the manufacturers and dealers of tractors and other agri-equipment for the purpose of obtaining maximum possible discounts and concessions."

Singh said, "I am confident that this single digit rate will benefit most of the crop loan account holders and also cover almost all small and marginal farmers."

Despite the sharp reduction of rates, he said banks have been directed to meet the 18 per cent agriculture loan limit.

"Banks are in a position to absorb that. It will be ensured that the volume of credit to agriculture does not decline in the process," he said.

Most of the crops would be covered through the scheme, Singh said, adding if a farmer is able to repay Rs 50,000 within a crop season, he could avail another such loan in the same year.

Loans above Rs 50,000 would attract an interest rate of prime lending rate plus two per cent.

Dismissing the notion that the government was initiating a administered price mechanism for farm loans in a election year, Singh said the Centre will seek the partnership of states in adopting the voluntary scheme of disbursing credit directly through DCCBs.

The scheme was worked out after extensive discussion with the Reserve Bank of India, Indian Banks Association, Nabard and the Department of Post.

Singh said the move to reduce interest rate on farm loans and franchising post offices was a follow-up to what he had announced in the Budget.

Agriculture Minister Rajnath Singh, who was also present on the occasion, said the reduction in interest on farm loans would bring down the cost of borrowing of farmers.

This in turn will make Indian agriculture globally competitive, he added.