Banks can now confiscate security in case of a loan default
To make debt recovery faster and more effective, the government on Wednesday notified the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016.
The Act amends four laws—the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act, 2002; the Recovery of Debts Due to Banks and Financial Institutions (RDDBFI) Act, 1993; the Indian Stamp Act, 1899; and the Depositories Act, 1996.
It also simplifies the procedure to ensure quick disposal of pending cases of banks and financial institutions by DRTs.
Amendments to Sarfaesi Act
The changes empower banks to confiscate security in case of a loan default. However, it is not applicable to loans for agricultural land as well as student loans. The development assumes significance against the backdrop of industrialist Vijay Mallya, who owes over R9,000 crore to banks, but has left the country to take refuge in London.
Secured creditors can take possession of a loan collateral on default with the assistance of the district magistrate (DM). The law fixes a 30-day timeline for the DM to complete the process and he will also assist the lender in taking over the management, in case the company is unable to repay loans. This will be done only in case banks convert their outstanding debt into equity shares, and consequently hold a stake of 51% or more in the company. This process does not require the intervention of courts or tribunals.
The Act creates a central registry to maintain records of transactions related to secured assets. This includes integration of registrations made under Companies Act, 2013; Registration Act, 1908; and Motor Vehicles Act, 1988.
Secured creditors will not be able to take possession over the collateral unless it is registered with the central registry. Further, these creditors, after registration of security interest, will have priority over others in repayment of dues. It also establishes the supremacy of secured creditors’ claim to assets of a defaulter over any other claims including other debts, revenues, taxes, cesses and rates payable to central government, state governments or local authorities.
The new law confers more powers to RBI to regulate asset reconstruction companies (ARCs). The banking regulator can carry out audit and inspection of these companies and can penalise a company if it fails to comply with any of its directions. It increases the penalty amount that can be levied by RBI to R1 crore from R5 lakh. The amendment to the Stamp Act waives off duty on transfer of assets to reconstruction companies.
Amendments to RDDBFI Act
As part of overhaul of DRTs, the Act proposes to speed up the process of recovery, besides moving towards online DRTs, which will be the backbone of the Bankruptcy Code and will deal with all insolvency proceedings involving individuals.
The Act provides that banks and financial institutions will be required to file cases in DRTs having jurisdiction over the area of the bank branch where the debt is pending. The amendment reduces the time for resolution process by providing for summons, notices, communications or intimation to be served in electronic forms.
It also provides for filing of recovery applications, documents and written statements in electronic forms and display of interim and final orders of DRTs and debt recovery appellate tribunals on their websites.
The amendments increase the retirement age of presiding officers of DRTs to 65 years from 62. It has also increased the retirement age of chairpersons of appellate tribunals to 67 years from 65. It makes presiding officers and chairpersons eligible for reappointments.
Although the RDDBFI Act gave 180 days for disposal of recovery applications, cases have been pending for many years due to prolonged hearings. Almost 70,000 cases involving more than R5 lakh crore are pending in DRTs.
“One of the big challenges that we face is with regard to the enforcement of securities and the recovery of debt by financial institutions … the Bill aims to improve ease of doing business and facilitate investment leading to higher economic growth and development,” finance minister Arun Jaitley had said in the Lok Sabha.
Replying to another debate in the Rajya Sabha, Jaitley had emphasised on the need for “firmness coupled with fairness” in recovering bad loans. “The overall objective of these amendments is to empower the banking system legally and expeditiously to be in a position to get the monies back,” he had said.
Experts have welcomed the changes. “Flaws in the existing recovery process have contributed to the problem of bad loans. The government is now hoping that these amendments will provide faster and a time-bound framework to deal with stressed assets and loan recovery,” according Supreme Court lawyer Mahesh Agarwal.
This legislation comes at a time when there are mounting concerns over loan recovery in view of stressed assets to the tune of over R8 lakh crore in the banking system. As of March 31, 2016, gross NPAs of PSBs stood at R4.76 lakh crore.
As many as 27 PSBs—which constitute 70% of India’s banking sector—have written off R59,547 crore in fiscal year ended March 2016. In the last three financial years, banks have together written off R1.14 lakh crore.
According to advocate Rajat Nair, the government should appoint experienced officers if it wants to fast track debt recovery. “Lack of expertise in dealing with such cases is a big deterrent. These officers are not adequately trained to adjudicate debt-related matters,” he added.
“The law would facilitate expeditious disposal of pending cases of lenders due to simplified procedures,” said Supreme Court lawyer Kevin Gulati. However, he feels that we will have to watch how the changes are rolled out finally. “Implementation is key to such reforms,” he added.