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Business News/ Politics / Policy/  Supreme Court upholds existing definition of non-performing assets
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Supreme Court upholds existing definition of non-performing assets

A bench dismissed several petitions challenging the constitutionality of Section 2(1)(o) of the Sarfaesi Act

The law enables creditors to seize and dispose of collateral pledged by loan defaulters to recover their dues. Photo: MintPremium
The law enables creditors to seize and dispose of collateral pledged by loan defaulters to recover their dues. Photo: Mint

New Delhi: The Supreme Court on Wednesday upheld the definition of bad loans as amended in 2004 under the securitization Act, handing a victory to creditor banks and a setback to borrowers who had challenged the definition.

A bench comprising justices J. Chelameswar and S.A. Bobde dismissed several petitions challenging the validity of Section 2(1)(o) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act, 2002.

They also directed the borrower companies that had challenged the definition of non-performing loans (NPAs) amended in 2004 under the Act to pay 1% of their outstanding amounts as costs to the creditor banks and other non-banking financial institutions.

The Sarfaesi Act enabled borrowers to seize and sell the assets of defaulting borrowers to recover their loans among other measures.

The amended definition was challenged by borrowers because by the amendment it was possible that different sets of guidelines made by different bodies could be followed by different creditors depending upon who is the administering or regulating authority of creditors while determining what was an NPA.

The order comes at a time when banks’ profitability has been under pressure from a rising tide of bad loans after two years of sub-5% economic growth, delayed project approvals that stalled investments and crimped corporate cash flows, making it difficult for borrowers to pay back debts.

“Recovery of money from a debtor by resorting to the filing of a suit takes painfully long time in this country, for various reasons," the apex court observed in its judgement.

“Huge amounts of money are lent by various banks and other financial institutions. Speedy recovery of the monies due to such institutions is an important element determining the efficiency not only of such institutions, but also becomes an important factor for the financial health of the country".

Bankers, while finding the ruling a positive one, spoke of loan recovery in a similar strain.

“The recovery process is very lengthy. What we really want is that the defaulting companies should be given less loopholes to exploit so that we can quickly enforce the proceedings," said Ranjan Dhawan, executive director of Bank of Baroda.

He said the judgement acts as a morale booster, but did not want to comment on the nitty-gritties of the judgment because he hadn’t seen the order yet.

In its 52-page ruling, the apex court analysed decisions from two high courts that had opposing views in relation to the definition of NPAs.

Last year, the Gujarat high court and Madras high court had given contradictory decisions regarding the validity of the amendments to the Section 2(1)(o) of the Sarfaesi Act.

The Gujarat high court had on 24 April found the amendment to this provision gave banking and non-banking financial institutions arbitrary powers to declare what could be termed an NPA.

It struck down the amendment and restored it to its original form. However, the Madras high court, in a decision dated 18 May, upheld its validity

The apex court held that “Parliament is only stipulating that the expression ‘NPA’ must be understood by all the creditors in the same sense in which such expression is understood by the expert body i.e., the RBI or other regulators which are in turn subject to the supervision of the RBI".

It also stated that “all the creditors do not form a uniform/homogenous class" as “there is nothing uniform about these creditors or their activities".

It noted that it would be “impracticable" to define NPAs in a way which would be applicable to “the millions of cases of loan transactions of various categories of loans and advances, lent or made by different categories of creditors for all time to come".

The petition challenging the definition was initiated by companies including Hyderabad-based publisher Deccan Chronicle Holdings Ltd.

T. Venkattram Reddy, chairman of Deccan Chronicle Holdings, could not be contacted after office hours. His office said he had left for the day.

Yogendra Kalavalapalli in Hyderabad, Anup Roy and Akansha Seth in Mumbai contributed to this story.

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Published: 28 Jan 2015, 01:40 PM IST
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