Proposal to create bad bank for farm loans raises several issues that need careful deliberation

News: Recently, at a meeting of the Indian Banks’ Association, the idea of floating an asset reconstruction company (ARC) to improve the recovery from bad loans in the agricultural sector was discussed.

As per the RBI’s Financial Stability Report, bad loans for the agricultural sector stood at 9.8% at the end of March 2021.

In comparison, they were at 11.3% and 7.5% for the industry and services sectors, respectively.

What are the arguments in favour of this idea?

Optimising the costs of the recovery: As agricultural markets are dispersed, a single institution, as opposed to multiple banks, would perhaps be more suited to deal with collections and recoveries from farm loans.

Need for creating an effective mechanism for the recovery of dues: Currently, there is an absence of a unified framework to deal with the enforcement of mortgages created on agricultural land.

What are the issues/concerns with a bad bank for farm loans?

Firstly, the government has already set up such a framework (under NARCL) for the resolution of corporate sector loans that have turned bad.

Considering that doubts have been expressed over the effectiveness of this architecture, a more prudent approach would be to assess its experience and then decide.

Moreover, if there is indeed a need to provide for a similar framework for agricultural loans, then the same architecture could be employed.

Secondly, banks have far greater presence on the ground than a single ARC. Hence, local bank officials may be more successful in dealing with hundreds and thousands of these small borrowers than a single ARC.

Thirdly, rural land markets are characterised by lack of clear titles and multiple stakeholders, so recovery will prove to be difficult. Moreover, land is an emotive and political issue.

Fourthly, there is also the possibility that since these issues are state subjects, such an approach could risk being seen as encroaching on the rights of states.

What is the way forward?

There are better ways to help farmers –

First, ensuring timely access to credit on more favourable terms for farmers.

Second, the broader policy framework should facilitate farming becomes a more remunerative occupation.

Source: This post is based on the article “Proposal to create bad bank for farm loans raises several issues that need careful deliberation” published in The Indian Express on 17^th Nov 2021.