New Delhi, Nov. 19: Nationalised banks have turned down a proposal of the National Bank for Agriculture and Rural Development (Nabard) for a further reduction in interest rates of Rural Infrastructure Development Fund (RIDF).

The Indian Banks? Association (IBA) has written to Nabard saying that banks would ?rather accept prepayment of RIDF loans from state governments demanding a further reduction in interest rates. Banks have already reduced their rates by 3 per cent in the recent past?.

The RIDF, which has a total corpus of Rs 42,000 crore, was set up by the Centre in 1995-96 for financing ongoing rural infrastructure projects and has been maintained by Nabard. Domestic commercial banks contribute to the fund to the extent of their shortfall in stipulated priority sector lending.

While the interest on RIDF deposits (paid to banks for their contribution) were rationalised in November 2003 and brought down to 6 per cent, some earlier deposits continued to carry higher interest rates in the range of 8.5 per cent to 11 per cent.

Under the debt-swap scheme, the Centre had permitted a number of state governments to prepay their high-cost borrowing, including RIDF borrowing. This has resulted in Nabard repaying some of the RIDF deposits in the recent past.

As state governments have been seeking options available for reducing interest burden, Nabard suggested that banks could agree to accept lower interest on earlier deposits so that they in turn could reduce the interest charged to state governments.

In January this year, the banks had agreed to reduce the RIDF interest rates charged to state governments to 7.5-8 per cent. Subsequently, the Reserve Bank of India restructured the deposit rates payable to banks in respect of amount disbursed under RIDF IV and RIDF VII tranches to 7.5-8 per cent effective from April this year.

Nabard has again requested IBA to examine the possibility of a further reduction in interest rate on RIDF deposits. IBA sources said the Nabard request was triggered by Housing and Urban Development Corporation (Hudco)?s loan offering to the UP government at ?very competitive rates?.

?The IBA managing committees, represented by the top executives of the nationalised banks, have intimated Nabard last month about their inability to further reduce the rates. The interest rates, in fact, are moving northwards, and given the reduction of over 3 per cent only this year, it is impossible for banks to reduce it more,? a source in the IBA said.

The banks, instead, would be willing to accept pre-payment of RIDF loans by state governments if they (state government) can organise cheaper refinance from other agencies. The cumulative sanctions and disbursements under the 10 tranches of RIDF until now stands at around Rs 40,000 crore.