A little over a fortnight ahead of the Budget, Finance Minister P Chidambaram announced a major relief for small and marginal farmers and promised a 30 per cent increase in agricultural credit to Rs 1,04,500 crore (Rs 1,045 billion) in the current fiscal.

Addressing a press conference, Chidambaram spelt out a four-pronged strategy to restructure farmers' debts that expected to add 5 million new farmers as borrowers under the special agricultural credit plan. The package was announced hurriedly in view of the new sowing season.

PC formula for 30% credit hike Outstanding debt of to be repaid over 5 years with 2 year moratorium. Loans in default to be rescheduled, fresh credit for ineligible farmers. One-time settlement for farmers declared as defaulters. Loans for farmers to pay off money lenders.

Chidambaram made it clear that the measures would not impose any added burden on the government.

He said the debt relief would not involve any debt write-off in violation of the prudential norms of the Reserve Bank of India.

The plan was similar to the corporate debt restructuring mechanism available for companies, ministry sources said.

According to the minister, the package would agriculture lending a "commercially viable proposition".

It will help in "unclogging" the credit delivery channel for farmers, Chidambaram said, dismissing the view that the new measures would further increase the woes of the regional rural banks and cooperative banks.

The action plan, prepared by Nabard and the Indian Banks' Association, indicates that farm credit is slated to surge to Rs 1,04,500 crore in 2004-05 from Rs 80,000 crore (Rs 800 billion) in the previous year.

Of the total farm credit, commercial banks would lend Rs 57,000 crore (Rs 570 billion), while regional rural banks would offer Rs 8,500 crore (Rs 85 billion) and cooperative banks, another Rs 39,000 crore (Rs 390 billion).

For farmers in distress, the package includes clubbing of interest with principal as on March 31, 2004, which would be repayable in five years at the current interest rate with an initial moratorium of two years.

For those in arrears and ineligible for fresh credit, Nabard will issue guidelines to co-operatives and the regional rural banks for rescheduling of loans in default so that they become eligible for fresh credit.

In addition, banks and cooperatives will also extend a one-time settlement facility for small and marginal farmers so that they can apply for fresh credit.