The amendments to the Sarfaesi Act and debt recovery tribunal Act are aimed at faster recovery and resolution of bad debts by banks and financial institutions
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| Arun Jaitley (Finance Minister) |
In
an important step aimed to resolve bad loans, the Lok Sabha on Monday passed a
bill to amend the existing Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest (Sarfaesi) Act, and the debt
recovery tribunal (DRT) Act.
The amendments are aimed at faster recovery and resolution of bad
debts by banks and financial institutions and making it easier for asset
reconstruction companies (ARCs) to function. Along with the new bankruptcy law
which came into effect earlier this year, the amendments will put in place an
enabling infrastructure to effectively deal with non-performing assets in the
Indian banking system.
The government had introduced the Enforcement of Security Interest
and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016
in May. The bill was referred to a joint Parliament committee which submitted
its report last month. The bill will amend four acts—Sarfaesi Act, 2002, the
Recovery of Debts due to Banks and Financial Institutions Act, 1993, the Indian
Stamp Act, 1899 and the Depositories Act, 1996.
The bill will now go to the Rajya Sabha for its approval.
Introducing the bill, finance minister Arun Jaitley said the government has
accepted all the recommendations of the joint committee.
“The bankruptcy law is now becoming operational. One of the big
challenges we face is the enforcement of interest and recovery of bad debts.
Securitization law and DRT law need to be amended for quick disposal of
disputes,” he said. “DRTs were envisaged as an alternative to civil courts and
for ensuring quick disposal. But things need to move faster. Procedures in
front of DRTs cannot be similar to civil courts,” he said.
Indian banks have been under stress with many of them reporting
losses and surge in non-performing assets (NPAs) after the Reserve Bank of
India (RBI) pushed lenders to classify visibly stressed assets as NPAs after an
asset quality review in 2015-16. Total stressed assets of state-run banks as of
31 March were at 14.5% of total advances, and according to recent report
released by RBI, this may increase further. The gross non-performing asset
(NPA) ratio of state-run banks may rise to 10.1% by March 2017 from 9.6% as of
March 2016, RBI’s financial stability report said, warning that under a severe
stress scenario, it may rise to 11% by March 2017.
Flaws in the existing recovery process have added to the problem
of bad loans. For instance, more than 70,000 cases are pending before DRTs.
The bill gives RBI powers to audit and inspect ARCs and the freedom
to remove the chairman or any director and appoint central bank officials to
its board. The central bank will be empowered to impose penalties for
non-compliance with its directives, and regulate the fees charged by these
companies to banks at the time of acquiring such assets.
The bill will also pave the way for the sponsor of an ARC to hold
up to 100% stake. It will also enable non-institutional investors to invest in
security receipts issued by ARCs and mandate a timeline for possession of
secured assets.
To be sure, RBI already regulates these entities, but the bill
expands the regulator’s powers. It also increases the penalty amount that can
be levied by RBI to Rs.1 crore from Rs.5 lakh.
The bill proposes to widen the scope of the registry that will
house the central database of all loans against properties given by all
lenders.
It also proposes to bring hire purchase and financial lease under
the ambit of the Sarfaesi Act, and enable secured creditors to take over a
company and restore its business on acquisition of controlling interest in the
borrower company.
As part of the overhaul of DRTs, the bill proposes to speed up the
process of recovery and move towards online DRTs. To this effect, it proposes
electronic filing of recovery applications, documents and written statements.
DRTs will be the backbone of the bankruptcy code and deal with all insolvency
proceedings involving individuals. The debtor will have to deposit 50% of the
amount of debt due before filing an appeal at a DRT. It also seeks to make the
process time-bound. A district magistrate has to clear an application by the
creditor to take over possession of the collateral within 60 days.
However, many members of Parliament said the government should
have the political will to check NPAs rather than enacting one law after
another.
Saugata Roy, MP from All India Trinamool Congress representing
West Bengal, said, “Political will is necessary and that seems to be missing.
Bankruptcy and insolvency code has been passed. In spite of passage of laws, we
have not seen much progress on either curbing black money or on NPAs of banks.
Total stressed assets have crossed Rs.8 trillion,” he said.
The bill also proposes to amend the Indian Stamp Act to exempt
deeds of assignment signed at the time of an ARC buying a loan from a bank from
the levy of stamp duty.
“The amendments carry the work forward done in the insolvency and
bankruptcy code. Automation will help in increasing the pace of recovery, but
this requires an investment. Currently, the problem is that many DRTs from time
to time do not have presiding officers,” Sandeep Singh, senior director at
India Ratings said.
