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 ₹ 1 crore from ₹ 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 ₹ 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.