A report of the legal working group, constituted by the government-owned central mortgage registry called the Central Registry of Securitisation Asset Reconstruction and Security Interest (Cersai) and IFC (a member of the World Bank Group), was submitted to the finance ministry on Thursday, recommending the expansion of Cersais centralised electronic collateral database. The working group was chaired by MR Umarji, chief legal advisor of Indian Banks Association.
If the plan materialises, banks and financial institutions would be able to extend credit to genuine borrowers from the SME segment without worrying about fraudulent multiple borrowings on the same asset. This is because the proposed policy change would give lenders access to a centralised electronic database of collateral with details of movables and immovables already pledged as collateral.
If the suggestions are implemented, the Cersais database will enable the filing of the particulars of security interest on non-possessory securities, including hypothecated plant and machinery, movable assets, book debts; intangible properties including know-how, patent, copyright, trademark, licence, franchise or any other business or commercial right of similar nature; title retention contracts. Currently, Cersais database has only details of immovable (and tangible) assets such as residential or commercial buildings.
The central database of Cersai helps in preventing multiple borrowings using the same property as collateral. This is done with the Cersai recording details of mortgages including the collateral used and then sharing it with banks, financial institutions and housing finance companies that are registered with the regulators. This helps in mitigating risks and helps in efficient pricing of assets, in turn ensuring transparency and security to the loans, said Cersai CEO and MD RV Verma.
According to legal expert and member of the panel Sumant Batra, reforming the secured transactions law, particularly to include registration of security interest on movable properties assumes greater significance in India as the MSMEs, which form a substantial part of the economy, rely on their movable assets to offer as security to obtain credit.
Around 95% of industrial units in the country are small and medium enterprises and about 40% of the value addition in the manufacturing sector takes place in the sector. A centralised registry for movable properties is set to enhance credit flow to the SME sector that roughly accounts for about 9% of the over $1-trillion economy.
The registration of security interest in movable assets would also result in the creation of a wide range of financial products, such as collateral management and asset valuation agencies, he said. This will also help in advancing the objectives of the recently launched Bharatiya Mahila Bank as women would be able to obtain credit by offering movable assets as security, Batra added.