What’s next in the farm sector reforms: A special bankruptcy law for farmers?

Even as the government push for farm sector reforms, the indebtedness of farmers in India continues to be a pestering problem for which there seems to be no immediate solution at sight despite. Such is the enormity of the problem that it drives thousands of farmers commit suicide every year. According to the latest National Crime Records Bureau (NCRB) data, 10,281 farmers committed suicide in 2019, down from 10,357 in 2018.

As the government is talking about farm sector reforms, it is only pertinent to take a serious look at this problem. A large part of the problem stems from farmers’ inability to pay back loans in the years of inclement weather or bumper crops. The government so far has tried to address this issue by waiving loans of farmers. But while loan waivers are considered bad for inculcating a good credit culture in the farming community, they are at best one-off temporary solutions.

The problem of farmers’ distress needs a permanent solution – at least indebtedness of farmers. While the issues facing Indian farmers are unique or different in many ways – very small farm holdings, high dependence on Monsoon and government procurement – Indian policymakers can learn a lot of lessons the way farmers’ indebtedness and loan defaults in the farming sector are handled in other countries.

Though not many countries have special bankruptcy provisions for farmers, India can take cue from the US which has a special bankruptcy provision for farmers — Chapter 12 Bankruptcy provisions.

Probably, it is time to introduce a similar ‘special’ bankruptcy laws for farmers as the government is planning to roll-out individual bankruptcy laws in India.

Chapter 12 bankruptcy in the US

Chapter 12 bankruptcy in the US specially deals with bankruptcy of family farmers and fishermen. It has provision for a family farmer or fisherman, who has 50% (for a farmer) or 80% (for fisherman) of his/her debt due to farming or commercial fishing, to voluntarily apply for bankruptcy.

 Under Chapter 12, the farmer or an individual in commercial fishing can offer to repay the creditor in installments running into three or five years.  One important feature of Chapter 12 bankruptcy is that this can be initiated only by the farmer and not any creditor.

There are some basic minimum requirements for filing for a chapter 12 bankruptcy like the applicant should have a regular income, the total debt should not be more than a certain threshold — $4,153,150 (for farmers) or $1,924,550 (for individuals in commercial fishing).

Once an individual fulfills all the criteria for filing for bankruptcy, he/she can file for bankruptcy under chapter 12 by paying the court fee and charges. Court fees can even be paid in four installments.

 It is the responsibility of the applicant to compile the list of all creditors, amount and nature of their claims, debtor’s own source and amount of income, the list of his/her properties and detailed list of farming or fishing expenses.

Once the chapter 12 application has been filed, the debtor is given immunity from any recovery action by creditors. The bankruptcy proceedings are overseen by a court appointed trustee, who calls the meeting of the creditors.

The debtor must, within 90 days of filing the application, present a repayment plan to the creditors. The debtor must pay 100% of the priority claims like taxes, cost of the bankruptcy process, etc. Then there are secured and unsecured creditors. Secured creditors must be paid at least as much as the value of the collateral pledged against the loan.

Unsecured creditors must be paid at least the liquidation value of the debtor’s assets.

Loan Restructuring

Of course, another way of dealing with the farmer indebtedness is to have restructuring provisions for farmers depending on state-wise or district-wise weather conditions. Banks should be asked to make special restructuring provisions for farmers in the flood/draught-affected districts, states.

Not that state governments and the Reserve Bank of India (RBI) have not such tried such restructuring schemes earlier, may be a more evolved mechanism should be in place to deal with farm loan distress.

With a special bankruptcy plan at place for farmers, a loan restructuring could be a first step to a court-approved bankruptcy plan for farmers. As the government is pushing for farm sector reforms by setting farmers free from government-run agriculture markets and allowing them to sell directly to private sector, a bankruptcy law for farmers should be an ideal way of taking these reforms to the next stage.