New Delhi: To make debt recovery more effective, the government has moved amendments to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act, and the debt recovery tribunal (DRT) Act.
It also confers more powers to the Reserve Bank of India (RBI) to regulate asset reconstruction companies (ARCs).
Together with the new bankruptcy law, which Parliament approved earlier this week, the government is putting in place critical building blocks to provide an enabling infrastructure to deal with burgeoning bad debt at banks.
The government moved the amendments in the Lok Sabha on Wednesday, just before the House concluded the budget session; it was referred to a joint parliamentary committee, which is expected to submit it in the first week of the monsoon session.
“The Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016 seeks to amend the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the Recovery of Debts due to Banks and Financial Institutions Act, 1993, the Indian Stamp Act, 1899 and the Depositories Act, 1996," the bill said.
The changes are aimed at a faster and more transparent system to tackle the bad debts in the banking system by fast-tracking the recovery process for banks and other financial institutions.
Flaws in the existing recovery process have contributed to the problems of bad loans.
Listed Indian banks were burdened by ₹ 4.37 trillion of bad loans in the quarter ended December, up from ₹ 2.92 trillion a year ago.
The government is hoping that these amendments, along with the bankruptcy code, will provide a time-bound framework to deal with stressed assets and loan recovery.
It is proposed to give RBI powers to audit and inspect ARCs and freedom to remove the chairman or any director and appoint central bank officials to the board. RBI will be empowered to impose a penalty for non-compliance with its directives, besides regulating the fees charged by these companies to banks at the time of acquiring such assets.
To be sure, RBI regulates these entities but the bill widens the regulator’s powers. It also increases the penalty amount that can be levied by RBI to ₹ 1 crore from ₹ 5 lakh.
The bill proposes to widen the scope of the central registry that will house the central database of all loans against properties given by all lenders.
“The aim is to create a database which will disclose all encumbrance on property across all lenders. A central registry exists, but it is restricted to banks and financial institutions," explained M.R. Umarji, a consultant with the Indian Banks’ Association.
The bill will also pave the way for a sponsor of an ARC to hold up to a 100% stake in the ARC. It will also enable non-institutional investors to invest in security receipts issued by ARCs and lays down a timeline for possession of secured assets.
It also proposes to bring hire- purchase and financial lease under the ambit of the Sarfaesi Act. The bill also proposes to 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 debt recovery tribunals (DRTs), the bill proposes to speed up the process of recovery, besides moving 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 will deal with all insolvency proceedings involving individuals.
The debtor will have to deposit 50% of the amount of debt due before filing an appeal in front of a DRT.
Almost 70,000 cases are pending in DRTs, as per data available with the government.
This is despite the fact that there is a timeline of 180 days for disposal of recovery applications.
It 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.
Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services Llp, said the bill seeks to sync the provisions with the bankruptcy code, besides giving more powers to the central bank.
“The bill seeks to give more powers to RBI. RBI did not have powers to remove chairman of an ARC or to carry out audit and inspection," he said. “Some of the provisions like expanding the scope of the registry to include all lenders will complement provisions in the bankruptcy code which talks about protecting interests of secured creditors. But the key of all these steps is implementation."
Ananda Bhoumik, managing director and chief analytical officer at India Ratings and Research Pvt. Ltd, said implementation of the changes will be critical. “The infrastructure to deal with recovery is inadequate and this has to be addressed," he added.