FOCUS-Cheap loans, commodities rally fire up Indian farmers

* Farmers borrow more on govt incentives, higher food prices

* Govt debt relief scheme makes more farmers eligible

* Weakest monsoon in 37 years fails to damp sentiment

By Rajendra Jadhav & Tamajit Pain

MUMBAI, Feb 3 (Reuters) - Until a year ago, Subash Motke was against borrowing money for farming, but this year the 65-year old sugarcane farmer in the western Maharashtra state has cheerfully taken a loan of 50,000 rupees.

Rising food prices and government incentives to increase farm loans such as lower interest rates and waiver of some loans, have encouraged farmers such as Motke to consider increasing investments in the farm using borrowed funds.

"This year sugarcane price is high. It is an opportunity for me to earn more by increasing production. But I need to invest more as seed and cultivation costs have gone up," he explains.

Financial institutions have disbursed loans of 1.65 trillion rupees in April-October 2009, up 43.5 percent compared to the same period a year ago, said S.K. Mitra, executive director at National Bank for Agriculture and Rural Development (NABARD).

Prices of agri-commodities soared in 2009 as the weakest monsoon in nearly four decades cut summer-crop's output and higher global prices also influenced rates as the government struggled to bridge the demand-supply gap in the country.

To encourage domestic production, bank farm loan targets were raised 16 percent to 3.25 trillion rupees in 2009/10, while the rates on such loans dropped to 6-7 percent across states from 12-16 percent four years ago.

"The government has determined to boost the farming sector by giving farmers subsidies, making them available to more funds so that productivity would increase, overall output will increase," Harish Galipelli, head of research at JRG Wealth Management, said.

The government in 2008/09 budget announced 710 billon rupees debt waiver scheme and it was extended by six months till December 2009 in the current year's budget.

DEBT WAIVERS

"Debt waiver has made more farmers eligible for borrowing. This is one of the main reasons for higher borrowing by farmers," said Niranjan Parsha, general manager, agriculture business at State Bank of India (SBI.BO), the country's biggest lender.

In earlier years, the government raised the minimum support price of key crops like wheat, paddy, lentils and cotton to prompt farmers to boost yields, says Mitra of NABARD.

Industry observers, like Galipelli say, the change in the government policy led to higher farm loans, but it didn't translate into agriculture output because of the poor monsoon.

Moreover, cost of cultivation has also gone up, leading to higher demand for farm loans, said Balasaheb Patil, former chairman of Maharashtra State Co-operative Sugar Factories Federation Ltd.

"There was no impact on farm credit owing to the drought. It had been growing at a steady pace of 20-25 percent," Parsha added.

The banking sector is anticipating farm loans will grow in coming years as well, as many farmers are still out of the net of institutional finance.

"The increment (in credit growth) what we have seen is because of input costs and higher prices. But in spite of prices coming down, if this goes up then that would be a healthy scenario," JRG's Galipelli says.

(Editing by Ramya Venugopal)