The central bank said agricultural loans would be collateral free up to ₹2 lakh in keeping with current inflation levels and credit requirements of the farm sector. Currently, loans of up to ₹1.6 lakh don’t require mortgage but may, in certain cases, attract margin-money deposits.

“Keeping in view the overall inflation and rise in agriculture input cost over the years, it has been decided to raise the limit for collateral free agricultural loans including loans for allied activities from the existing level of ₹1.6 lakh to ₹2 lakh per borrower,” states a letter from RBI to all commercial banks, including cooperatives-based lenders.

The government categorises agricultural credit, critical for farmers, who depend on it to meet cultivation costs, as priority-sector lending.

“Accordingly, banks are advised to waive collateral security and margin requirements for agricultural loans including loans for allied activities up to ₹2 lakh per borrower,” states the advisory from RBI chief general manager R. Giridharan to all lenders.

The farm economy accounts for nearly 18% of India’s gross domestic product or GDP and nearly half the population depends on a farm-derived income.

In February 2019, the central bank had raised the limit for collateral free agricultural loans from the then existing level of ₹1 lakh to ₹1.6 lakh.

As per the RBI’s extant guidelines on lending, 40% of adjusted net bank credit (ANBC) or credit equivalent amount of off-balance sheet exposure (OBE), whichever is higher, of any scheduled bank must go to priority sectors.