Small and medium enterprises (SMEs) have always had a host of problems that they have had to deal with, and now, there is a new one upon them. Under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, bank notices and newspaper advertisements for sale of immovable property mortgaged to a commercial bank for debt recovery has become common, especially in the southern states.

The amount, in some cases, may not even exceed Rs 30 lakh?Rs 35 lakh. But then, the borrower?s name, details about the property, terms and conditions, place and time of auction are also given. The search for the person in debt, whose name and property is placed in the public domain, will take one to a small or tiny industrial shed somewhere outside of town, a house or to an apartment. The person will be in a state of shock, helplessness and end-of-the road situation for the financial loss and damage to self- respect.

The SARFAESI Act, passed in 2002, ?enables the banks and financial institutions to realise long-term assets, manage problems of liquidity, asset liability mismatch and improve recovery by exercising powers to take possession of securities, sell them and reduce non-performing assets by adopting measures for recovery, for reconstruction.?

The Act provides for ?setting up of asset reconstruction companies which are empowered to take possession of secured assets of the borrower including the right to transfer by way of lease, assignment or sale and realise the secured assets and take over the management of the business of the borrower?.

Indeed, the small enterprise borrower has been more of a victim under the Act. Says VS Narasimhan, national president of the newly-formed, ?All-India Micro Agro Rural and Small Industries Association?, ?This Act, which, is aimed at reducing the non-performing assets of commercial banks has been more often, than not, used against the small borrowers rather than the big enterprises. The recovery of outstandings from one big borrower can cover the outstandings of the entire small-and-micro borrowers in a state, if not two.? Over 70 associations from across the country have joined it and this particular Act has been of serious concern. According to DE Ramakrishanan, president, National Confederation of Small Industries Association, the discrimination in the application of the SARFAESI Act can be understood from the statistics on non-performing assets (NPAs) and the Reserve Bank of India circulars issued pertaining to the Act in recent months.

Up until March 31, 2006, from the commencement of the Act, 1,18,980 notices were issued for the recovery of Rs 35,650 crore. But only Rs 6,375 crore has been recovered from 65,300 cases. From over 53,000 cases, the banks have to recover over Rs 30,000 crore. The number of small borrowers runs into lakhs and they account for only 17% of the total NPAs. Over 49% of NPAs are between Rs 1 crore and Rs 50 crore. The borrowers would run into a few thousands. ?The large number of NPA cases and small amount of recovery reveals the fact that most of the cases were against the small borrowers and the banks are yet to touch the bigger ones,? he said.

The small industry leaders said that almost the entire auction notices and sale of property pertain to loans ranging from Rs 1.10 lakh to Rs 35 lakh. The SARFAESI Act threshold is Rs 1 lakh. Mr Narasimhan said most of the banks have a three-tier structure for the implementation of the Act?at the branch-regional office level, general manager?s-level and head office-level. The hierarchy depends on the quantum of NPA. ?The branch-regional offices deal with small borrowers who have neither money power nor political clout. The banks proceed against them fast and very strictly. Actions at the general manager or head office levels are few, slow and selective. The small and micro sectors are sitting ducks for the banks,? he said.

However, the bankers say that SARFAESI Act has been useful in managing NPAs irrespective of whether it concerned big or small borrowers. They do not want any dilution or relaxation in the threshold limit. As a branch manager, who wished to remain anonymous, told FE, ?The SARFAESI Act has created an effective and speedy system to reduce the non-performing assets of the banks substantially. We are not real-estate dealers. We use the Act only to pressurise the borrowers to keep their accounts live and make repayments regularly so that we can service other needy customers.?

He said that of the more than 100 notices of property acquisition, only two or three had gone to the level of auction. ?Others came forward to make payments and keep the account live.? But problems persist. Ramakrishnan told FE that when the Bill was introduced in Parliament by the former Union finance minister Jaswant Singh, he had promised to introduce ?Lender?s Responsibility Bill? as well. ?But this Bill had never been introduced. Instead the Reserve Bank issued a guideline outlining a fair practices code for the banks in May 2003,? while adding that this circular has been a paper tiger as is evident from the circulars RBI issued subsequently to the banks, especially those in May, August and October 2007. The October circular, in fact, warns the banks against sale of properties without reference to the market price, corroborating our complaints about the under-valued sale of mortgaged properties.? Among other demands, the small-scale sector wants the threshold limit of the application of SARFAESI Act to be raised to Rs 25 lakh from the current Rs 1 lakh as also the time frame for the application of the NPA norm and the notice period to be raised from 90 days to 180 days.

?The banks do not distinguish between willful defaulters and defaulters who have valid reasons for defaulting on payment which is beyond the control of the micro and small entrepreneur,? Ramakrishanan said.

The small-scale sector says that the Union finance ministry should come out with a ?lenders liability Bill? that would replace the RBI code by incorporating all RBI circulars pertaining to the implementation of SARFAESI Act. ?The Act has elevated banks to the level of prosecutor, judge and executor and even the appellate authority, as any appeal against excess interest charges, wrong application of interest rate and any other accounting lapses have to be made to the bank only,? small-scale industrialists say on condition of anonymity.

Bankers, however, insist that decision-making is taken at different levels and there is no individual course of action. Banking sources say, ?The Act itself has curtailed or restricted the eligibility condition to accounts wherein the amount due exceeds Rs1,00,000. This itself has taken care of the borrowers in the lower strata and there is no requirement to increase the ceiling.?