dmpq-Discuss the the idea of forming Asset reconstruction Company (ARC) to solve the crisis of Agriculture loan.

In September, 2021 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. The arguments offered in favour of such a mechanism are straightforward.

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, optimising the costs of the recovery. Considering the absence of a unified framework to deal with the enforcement of mortgages created on agricultural land, there is a case for creating an effective mechanism for the recovery of dues. However, this proposal raises several issues that need careful deliberation.

For one, the government has already set up such a framework 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 chalk the way forward. Moreover, if there is indeed a need to provide for a similar framework for agricultural loans, then the same architecture could be employed. Second, as banks also have far greater presence on the ground than a single ARC, they are likely to be more capable of navigating the local terrain to recover their dues.

Local bank officials may be more successful in dealing with hundreds and thousands of these small borrowers than a single ARC. Third, as rural land markets are characterised by lack of clear titles and multiple stakeholders, this is not as straightforward as it may seem, nor comparable to ARCs operating in the corporate loan market, where their performance itself has been mixed. Recovery will prove to be difficult. Moreover, even though land is a mortgageable asset, it is an emotive, political issue. Fourth, 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.

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