How bankruptcy code can help fix India's agrarian crisis

By Aishwarya Satija

Historically, farm loan waivers have been used as a quick-fix solution to agrarian distress in India. Commonly used by political parties before elections, they have a long history at both central & state levels. However, the efficiency of waivers in actually resolving the debt burden of farmers is questionable.

Waivers may work as a temporary remedy to provide relief from debts in times of extreme economic distress. But they don’t go far in providing any structural relief to resolve problems of the agricultural sector. In August 2017, RBI’s Monetary Policy Committee (MPC) noted that the implementation of farm loan waivers could hurt the finances of states, undermine the quality of public spending, and stoke inflation. Apart from burdening the public exchequer, waivers have also been criticised for having limited benefits in practice.


A 2013 Comptroller and Auditor General (CAG) report revealed large-scale mismanagement of the national Agricultural Debt Waiver and Debt Relief Scheme, 2008. Such waivers may, therefore, fail in living up to their promises due to lapses in implementation.

Additionally, even if implemented perfectly, waivers usually only give relief to farmers from formal sources of credit such as bank loans. So, a farmer will still have the burden of paying debts he undertook from informal sources, like moneylenders, after a loan waiver. In line with this, in December 2018, NITI Aayog pointed out that farm loans waivers essentially only benefit 10-15% of farmers, since the rest don’t have access to institutional loans. Further, the process of selection of beneficiary farmers may not be objective, making the system susceptible to leakages.

Keeping all these points in mind, is there, then, a surer method of providing relief for the distressed Indian farmer? The Insolvency and Bankruptcy Code (IBC) that was enacted in 2016 could be the answer.

IBC provides three insolvency procedures for individuals. While the insolvency resolution and bankruptcy processes are available to all, IBC provides a ‘fresh start’ process for individuals who fall below certain asset and income-based thresholds. The aim is to enable certain debtors to get their debts waived — after adjudication under a time-bound process and taking the creditors’ views into account. A debtor who qualifies the threshold limits can file for a ‘fresh start’ order.

If her application is admitted, a resolution professional is appointed to her case to examine objections that any creditor may have to discharge of the debtor’s debts. Based on this, the resolution professional submits a final list of debts to the adjudicating authority (AA). The AA can then write off these debts, giving the debtor a ‘fresh start’. However, the AA can refuse this waiver if there is any change in financial circumstances of the debtor, or any noncompliance by the debtor.

Instead of being plagued with political motivations and uncertainty in implementation of farm loan waivers, the IBC’s ‘fresh start’ process provides a systematic manner of waiving debts overseen by a judicial body. It places the opportunity to access the system with an individual farmer, instead of placing it with the government. This will provide a farmer autonomy to choose the effect a debt waiver will have on his credit history.

More importantly, the ‘fresh start’ process only excludes some kinds of debts from being capable of discharge. These include any fine imposed on the debtor by courts, student loans, maintenance to be paid under any law, and secured debt. So, unlike farm loan waivers, a ‘fresh start’ process may actually provide the debtor relief from most of her debts and not just bank loans. Additionally, the effect on creditors will also be considered when the resolution professional examines creditor objections to the debt waiver.

Though IBC has been in operation for over two years now, the provisions relating to the ‘fresh start’ process have not been notified yet. One reason for the delay could be that the designated AA for the process, the Debt Recovery Tribunals (DRTs), are currently overburdened with debt recovery cases under another legislation. To make the provisions operate effectively, GoI may consider setting up designated benches for the ‘fresh start’ process, or vesting jurisdiction with other judicial or quasi-judicial authority with local presence.

Further, given that resolution professionals will play a key role in the process, GoI can consider recognising a special category of resolution professionals (who understand the microfinance and agricultural credit sectors) and develop a system that encourages them to take up ‘fresh start’ cases. The debt, credit and asset thresholds in IBC may have to be reviewed to ensure proper coverage.

(The writer is research fellow, Vidhi Centre for Legal Policy, New Delhi )