[Editorial] Bad Banks for Farm Loans

What is a bad bank for farm loans?

  • Bad bank for farm loans refers to an ARC/ asset reconstruction company, exclusively for the agriculture sector. This idea came up at the recent meeting of the Indian Banks’ Association, held in September.
  • This bad bank is for improving the recovery from bad loans in the farm sector. It is to address the challenge being faced by banks due to the heavy NPA burden.

What are the pros?

  • An ARC as a single institution (instead of multiple banks) for dealing with the collection and recovery from farm loans is better suited for the Indian agriculture market with its dispersed nature.
  • Such a bad bank would help optimize the recovery cost.
  • It could be an effective mechanism for recovering agriculture dues, especially given the lack of a unified framework for enforcing mortgages created on farm lands.
  • The pandemic has made it difficult for the poorer farmers to repay the loans and this has been increasing the stress on the banks.

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What are the cons?

  • The performance of ARCs in the corporate loan market has been mixed.
  • There aren’t many clear titles in the rural land markets and there are multiple stakeholders. Hence, the situation presented here is not as straightforward as in the case of the corporate loan market. In the farm loan market, recovery will be more challenging.
  • Land is a mortgageable asset but it is also a political and emotive issue.
  • The banks have a greater on-ground presence than a single ARC. They are more capable of navigating the local area for recovering the dues, compared to the bad bank.
  • A single ARC is less likely to be successful in dealing with the thousands of small farmers who have borrowed from the banks, than the local bank officials.
  • The idea may be perceived as an encroachment upon the states’ rights as agriculture is a state subject.
  • There are also state-to-state differences with regards to the laws governing farm loan recovery. Hence, an ARC with uniform set of operating procedure may not work smoothly.

What is the way ahead?

  • The government has already established a bad bank framework for dealing with corporate sector loans.
  • The effectiveness of the bad bank architecture is still being mooted. In such a case, it is more prudent to assess the experience with the corporate loans’ bad bank and then proceeding with the bad bank for farm loans, if deemed necessary.
  • Several states are to go into election in the coming period. This increases the possibility of political parties announcing loan waiver schemes.
  • This increase the prospects of strategic default.
  • According to the Financial Stability Report of RBI, gross NPAs for the agriculture sector in March 2021 stood at 9.8%. In comparison, the industry sector’s NPA stood at 11.3% and the service sector’s NPA stood at 7.5%.
  • Yet, strategic default would be financially ruinous for the states and it would also end up destroying the credit culture. It would make the banks more reluctant to lend to the agriculture sector.
  • Ensuring credit access with favourable terms and in a timely manner is a better way of helping the farming sector.
  • The broader policy framework should focus on making agriculture a remunerative occupation.

Conclusion:

The agriculture sector operates on completely different lines from the corporate sector and the collateral on land is governed by the state government. Hence, replication of the National Asset Reconstruction Company concept for the farm sector may not be possible. There are other ways of helping the sector.

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