RBI pilots Digitalization of Loans through Kisan Credit Card for Farmers

Digital Payments

The Reserve Bank of India (RBI) on Friday (September 2 2022) announced a pilot project for end-to-end digitization of loans through Kisan Credit Cards (KCC).

Launched in 1998, the KCC program allows farmers to purchase agricultural products and services on credit. The central government provides an interest subsidy of 2% and a prompt repayment incentive of 3% to farmers to help them avail of credit at a rate of 4%.

“The pilot project for comprehensive digitization of KCC loans, developed by Reserve Bank Innovation Hub (RBIH) in association with RBI is being taken up,” the central bank said in a statement.

The pilot project will be launched later this month in selected districts of Madhya Pradesh and Tamil Nadu in collaboration with the Union Bank of India and Federal Bank, respectively. After the completion of the pilot, RBI will actively use ‘learning’ to gradually roll out KCC-based lending across the country.

RBI stated The pilot project would mean the automation of various processes in banks and the integration of their systems with service providers. The proposed digitization of the KCC loan process will make it more efficient, reduce costs for borrowers and significantly reduce TAT (turnaround time).

According to the central bank, the pilot project will facilitate the flow of credit to the unserved and unserved rural population. The goal of the project is to “speed up and make more efficient” the process of using loans. The project is one of the key aspects of RBI’s fintech initiatives aimed at digitizing rural finance in the country.

India is primarily an agrarian country with an active demand for rural finance to meet the needs of farmers, small businesses and other ancillary services related to agriculture. Noting the cumbersome funding process, the RBI said the current process involves personal branch visits and submission of physical documents.

The central bank has pegged the TAT from loan application to disbursement in the range of two to four weeks. Digitization of KCC can give farmers access to credit at the touch of a button.

Earlier, the RBI noted that only 40% of India’s small and marginal farmers were covered by formal credit. Outside the formal credit system, farmers are exposed to unregulated loans that charge high-interest rates.

Earlier this month, the Union government approved the restoration of interest subsidy on short-term agricultural loans to 1.5% for all financial institutions.

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