Bad bank for farm loans

Contact Counsellor

Bad bank for farm loans

  • Leading banks have proposed establishing an Asset Reconstruction Company exclusively to deal with collections and recovery of farm loans in order to boost bad loan recovery in the agriculture industry.
  • There is currently no common method for dealing with non-performing assets (NPAs) in the agricultural sector, nor is there a single regulation that governs the enforcement of mortgages formed on agricultural land.
  • Since agriculture is a state matter, recovery regulations differ from state to state when agricultural land is offered as collateral.

What is NARCL?

  • The National Asset Reconstruction Company Limited (NARCL) was established in July 2021 as a ""bad bank"" to assist commercial banks in disposing of stressed assets.
  • The NARCL has selected stressed assets of commercial banks worth Rs 2 lakh crore to be taken up in the first phase.
  • NARCL would begin with a Rs 6,000 crore total capital.
  • NARCL acquired a licence from the RBI in October 2021, allowing it to begin operations as a ""bad bank.""
  • NARCL is 51% owned by public sector banks (PSBs).
  • Banks will pool and consolidate stressed assets for resolution with NARCL.

Need of single body for farm loans

  • Since India's agriculture industry is dispersed, several banks must make efforts to capture and link to these markets, It is felt that if there was only one institution/ARC, the cost of recovery may be reduced.
  • Farm loan waivers announced by states around election time result in a ""deteriorating credit culture"", At least 11 states have announced farm loan exemptions since 2014.
  • Since the actual hardship may be a factor in late payments, the possibility of waivers provides banks with recovery issues.
  • ""The Revenue Recovery Act of states, the Recovery of Debt and Bankruptcy Act of 1993, and other state-specific regulations are used to enforce terms on mortgaged farm land"" These are time-consuming, and in certain places, bank loan revenue recovery regulations have yet to be established.""

Way forward

  • To solve the issue of farm debt recovery, a bill for agriculture land that is analogous to the SARFAESI Act can be enacted.
  • it allows banks and other financial organisations to auction off residential or commercial properties that have been pledged as collateral to recover loans from borrowers.