Indeed, as far as banks and financial institutions were concerned, the ordinance on securitisation was inadequate in many respects but was an important first step, chairman of the Telecom Regulatory Authority of India and of the working group on restructuring weak public sector banks and former chairman, State Bank of India, MS Verma said here on Tuesday.
He was speaking at a seminar on the Securitisation and Reconstruction of Financial Assets and Enforcement of Security of Interest Ordinance, 2002, organised by Ficci.
On industry reservations over the mode of enforcement, Mr Verma felt that the taking over of defaulters’ assets will be exercised by the banks only as the last resort because it will mean taking a loss on the value of the security.
Others felt that the new law could be used by competitors to buy out assets of ailing rivals for a song, though it would also open up secondary market and put pressure both on borrowers and lenders to settle their disputes.
There was apprehension that personal guarantors could be the first in the firing line.
Personally, Mr Verma said, he did not believe in the distinction between wilful and non-wilful defaulters.
He remarked that banks in India and Asia as a whole had been more considerate to borrowers than those in the US. If passed, the Act would help raise the value of the assets of the banks. Credit risks will be assessed better and cheaper credit will be available to the borrowers.
Best of all, banks would be able to take their debts to the capital market, which will impact the entire banking sector positively.
As for its inadequacies, the working capital exposure of banks was not covered under the Bill; under the given dispensation, with a little financial engineering, debtors can perpetually keep an account away from non-performing asset (NPA).
Still, the legislation would contribute a great deal in enabling the banks to access the capital market.
In fact, failure on the part of the banks to enforce the debtor-borrower agreements has led to a situation where even share price of an established bank like the Punjab National Bank is quoted at a discount to weaker banks.
Earlier, Ficci president RS Lodha sought different treatment for wilful and non-wilful defaulters. He also apprehended that the extra authority given to the banks on the mode of enforcement might relegate rescheduling and settlement of debt to the backseat and a new phase of aggression on the part of the lenders might emerge.
The legislation should have been dovetailed with other laws on closing down of business and insolvency, etc.