How feasible is a bad bank for farm sector?

Laws on land placed as collateral vary across States, but bankers keen on idea as Assembly polls may unleash farm loan waivers and worsen NPA crisis

When it comes to lending to the farm sector, banks are hamstrung by the lack of a unified mechanism to handle non-performing assets. (Representational image)

At one end, farmers are struggling to get bank loans, as formal sector lenders have become even more risk averse amid the pandemic. At another, banks are challenged by huge non-performing assets (NPAs) as they’re unable to recover farm loans. To address the latter, the nation’s top banks are looking to float an asset reconstruction company (ARC) exclusively for the farm sector, media reports said.

In a sign of lenders’ rising difficulty in addressing rural credit needs, earlier this year, public sector banks had held talks with the Centre for a credit guarantee fund. The COVID pandemic has made it immensely hard for poor farmers to make payments, putting sizeable pressure on banks. This, among other reasons, makes a case in point for a farm loan bad bank.

State-to-State differences

When it comes to lending to the farm sector, banks are hamstrung by the lack of a unified mechanism to handle NPAs. Since agriculture is a State subject, each State has a different set of laws governing the recovery of loans taken with farm land as the collateral. This means banks cannot have uniform laws for all their farmer-customers, which makes recovery very difficult.

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Also, Since Assembly elections in some States are round the corner, banks are even more worried about rising NPAs. This is because there is a tendency to wait for waiver announcements, which impacts recovery. Already, the Adityanath government in Uttar Pradesh has promised subsided interest rates on farm loans, among other sops for the sector. In 2019, the then Maharashtra government had announced a bank loan write-off of around ₹2 lakh each to distressed farmers.

Technically, the State governments are supposed to bear the burden of loan waivers. However, the money takes a long period — even years — to reach the respective banks from the State government’s coffers. These are also hence considered NPAs, and fresh loans are not given out till the outstanding is fully cleared.

Plan for a farm-focussed ARC

At a meeting in September, the Indian Banks’ Association (IBA) reportedly studied an ARC for farm loans. It was seen to provide the lenders with a unified recovery mechanism. Also, the cost of recovery would be optimised.

This would be like the proposed bad bank for industries. In August 2021, the IBA had moved an application to the Reserve Bank of India (RBI) for a bad bank. The next month, the Union Cabinet approved a ₹30,600 crore government guarantee for the National Asset Reconstruction Company (NARCL), which would enable the operationalisation of the bad bank.

Under the scheme, the NARCL will pay up to 15% of the agreed value for the loans in cash. The balance 85% will be government-guaranteed security receipts.

Since the farm sector operates on entirely different lines, and the State governments govern the collateral on land, replicating the NARCL model for the sector may not be possible. However, the IBA is working on it, said media reports.