Defaulters Must Deposit 25% Of Loan To Contest Bank Claims

New Delhi, Sept 20 | Updated: Sep 21 2004, 08:33am hrs
Bankers have demanded several changes in the NPA laws, including a minimum deposit of 25% of the outstanding loan amount by the defaulter for contesting a banks claim over its assets.

The Indian Banks Association (IBA) has already submitted to the finance minister P Chidambaram, a detailed report on the necessary fine tuning required in securitisation and reconstruction of financial assets and enforcement of security interest act (Sarfaesi).

The government is in the process of examining these proposals and a bill to amend the act is expected in the winter session of Parliament, official sources said. Without a punitive provision, the Sarfaesi act would not be effective in speeding up recovery of bad assets, a banker told PTI.

There should be a provision that defaulters deposit atleast 25% of the outstanding loan amount with a court to contest the bankers claim, they said.

At present, a defaulter need not deposit any amount with a court to contest a banks claim over its assets.

In its verdict in the Mardia Chemicals Vs ICICI Bank case, the Supreme Court had done away with a provision in the Sarfaesi act that made it mandatory for the companies to deposit 75% of the defaulting amount with the court, if they preferred to appeal there against the order for attaching their assets under the Sarfaesi act.

Although the upholding of the constitutional validity of Sarfaesi act was welcomed by bankers, they felt that the NPA legislations was diluted after the quashing section 17 (2) of the act. Although banks are allowed to take possession of defaulters assets and even sell them off, another banker said the initial fear psychosis among defaulters have weaned away after the act got diluted.

The need to further amend and fine tune the Sarfaesi act comes in the wake of stringent Basel-ii norms coming into force by 2006, which would require banks to make hefty provisions for credit risks apart from market and operational risks.

Although banks are gradually reducing the operational risks through computerisation and other HR initiatives, a banker said credit risk in India is still high as per global standards due to inadequate laws for recovery of NPAs and lack of information sharing database among bankers on the risk profile of the borrowers.