Livemint,Mumbai, March 1 -- A clutch of state-run banks with significant exposure to the farm sector has initiated discussions with the government to set up a credit guarantee fund to cover defaults by farmers, making lending to the sector less risky, two people directly aware of the development said.

The banks proposed raising an initial corpus of Rs.70,000 crore over the next three years for the fund, which will be structured on the lines of the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). The credit guarantee fund for small businesses makes good losses incurred by lenders up to 85% of the outstanding amount in the event of a default.

"The proposed fund, if approved by the government, will cover the entire Kis...