Home collateral How feasible is a bad bank for the agricultural sector?

How feasible is a bad bank for the agricultural sector?

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Laws on land pledged vary from state to state, but bankers are enthusiastic about the idea as Assembly polls could trigger farm loan waivers and deepen the NPA crisis

When it comes to lending to the agricultural sector, banks are crippled by the lack of a unified mechanism to manage non-productive assets. (Representative image)

On the one hand, farmers are struggling to get bank loans as formal sector lenders have become even more risk-averse amid the pandemic. In another, banks face huge non-performing assets (NPAs) as they are unable to collect agricultural loans. To address the latter problem, the country’s largest banks are looking to start an Asset Reconstruction Company (ARC) exclusively for the agricultural sector, media reported.

As a sign of increasing difficulty for lenders to meet rural credit needs, earlier this year public sector banks held discussions with the Center for a credit guarantee fund. The COVID pandemic has made it extremely difficult to pay poor farmers, putting considerable pressure on banks. This, among other reasons, is a typical example of a bad agricultural loan bank.

Differences from state to state

When it comes to lending to the agricultural sector, banks are crippled by the lack of a unified mechanism to manage NPAs. Because agriculture is subject to the state, each state has a different set of laws governing the recovery of loans made with farmland as collateral. This means that the banks cannot have uniform laws for all their farmer customers, which makes the recovery very difficult.

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In addition, as assembly elections in some states are fast approaching, 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 pledged subsidized interest rates on agricultural loans, among other measures for the sector. In 2019, the then Maharashtra government announced a bank loan cancellation of around 2 lakh each to struggling farmers.

Technically, state governments are supposed to bear the burden of loan forgiveness. However, the money takes a long time – even years – to reach the respective banks from the state government coffers. These are therefore also considered to be NPAs, and new loans are not granted until the outstanding amount is fully cleared.

Planning a farm-based ARC

At a meeting in September, the Association of Indian Banks (IBA) reportedly explored an ARC for agricultural loans. It was considered to provide lenders with a unified collection mechanism. Also, the cost of recovery would be optimized.

It would be like the bad bank proposed for industries. In August 2021, the IBA forwarded a request to the Reserve Bank of India (RBI) for a bad bank. The following month, the Union Cabinet approved a government guarantee of 30,600 crore yen for the National Asset Reconstruction Company (NARCL), which would allow the bad bank to become operational.

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

Since the agricultural sector operates on entirely different bases and state governments regulate land guarantees, replicating the NARCL model for the sector may not be possible. However, the IBA is working on it, media said.