Why Banks Refrain from Financing Agricultural Land Purchase

Agriculture, often hailed as the backbone of India's economy, remains a sector fraught with numerous complexities. One of the most significant challenges faced by both the buyers and sellers pertains to the intricate nature of land purchase transactions. This article delves into the nuanced reasons why banks in India are not ordinarily interested in providing loans to purchase agricultural land. Moreover, it introduces a viable alternative in the form of revenue-sharing agricultural land options.

Understanding the Complexities of Agricultural Land Transactions

In India, particularly in regions like around Kolkata, the transaction of agricultural land is far from straightforward. The process often involves multiple layers of valuation, adding to the ambiguity and often frustration of the deal. Typically, buyers and sellers agree on a price that includes both white (cash) and black (unofficial) money. This actual transaction price may differ from the formal registered value at the sub-registry office, which, in turn, could vary from the valuation conducted by a professional appraiser.

Furthermore, the loan amount sanctioned by a bank is influenced by the proposed or existing cropping patterns, adding another layer of complexity. With the potential for exploitation and misunderstandings, it seems prudent for bankers to avoid involvement to prevent legal entanglements.

Banking Restrictions and Regulatory Challenges

One of the primary reasons banks refrain from providing loans to purchase agricultural land is the unique regulatory framework governing the sector. Agricultural land in India enjoys certain privileges related to safety and security, as well as specific restrictions under land regulations. These rules stipulate that agricultural land can be bought or sold only by agricultural landholders, meaning one must be a farmer to obtain such land.

Since banks operate outside the agricultural sector, they are unable to secure a lien or charge on the agricultural asset once it’s purchased. This lack of collateral make the process high-risk for banks, hence leading to stringent adherence to non-financing of agricultural land purchases.

Legal and Financial Consequences of Defaulting Loans

In situations where a loan defaults, the recovery process for non-agricultural land is far more expedient under the SARFESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act. Banks in these cases can swiftly resort to the sale of the property without court interventions.

Conversely, the recovery process for agricultural land is significantly more cumbersome and time-consuming. Court interventions are required, and the resolution process can be protracted, potentially stretching over 10-15 years. This prolonged duration makes lending against agricultural land unattractive for banks due to the associated risks and costs.

Government-Backed Schemes for Small Farmers

Notwithstanding the general reluctance of banks, there are government-backed schemes aimed at aiding small farmers to purchase and develop agricultural land. These schemes are designed to extend term loans to small and marginal farmers, share-croppers, and tenant farmers for the purpose of increasing agricultural production and productivity.

The typical eligibility criteria for these schemes include owning no more than 2.50 acres of irrigated land or 5 acres of non-irrigated land. Share-croppers and tenant farmers holding up to 2.50 acres of irrigated land or 5 acres of non-irrigated land are also eligible. Additionally, entrepreneurs with an agricultural background can apply, contingent upon state-specific laws.

The loan amount is determined by the area of the land to be purchased and its valuation. The total project cost includes not only the land price but also stamp duties and registration charges. While the maximum loan amount is capped at 10 lakh (approximately USD 13,000), for amounts exceeding this, the borrower is required to meet a minimum margin of 10% of the project cost.

The repayment period is typically set between 7-10 years, with half-yearly or yearly installments allowing for a maximum moratorium period of 24 months. This period is flexible and can be adjusted based on the gestation period of the project and cash flow needs.

Conclusion

The challenges faced by banks in providing financing for agricultural land purchases are multifaceted, involving regulatory restrictions, legal hurdles, and the higher probability of prolonged disputes. However, initiatives by the government offer alternatives for small farmers and other eligible individuals seeking to invest in agricultural land. Understanding these complexities can help those interested in agricultural land purchase to pursue the most appropriate options.