Tightened recovery laws will help banks deal with bad loans
Lenders will be allowed to purchase collateral, if public auction fails
MUMBAI, JUNE 13:
Key amendments to recovery laws such as restricting the number of adjournments that defaulting borrowers can seek in the Debt Recovery Tribunal are likely to help banks to step up their bad loans recovery drive.
Another amendment allows banks to purchase collateral (pledged with the bank by a defaulter-borrower) at the reserve price in case no party comes forward to bid at the auction.
With the Finance Ministry asking banks to intensify their bad loan recovery efforts, the above mentioned amendments, which were carried out in December 2012, are expected to come in handy, say bankers.
Under the amendment to the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, a Tribunal can grant adjournments if sufficient cause is shown.
But such adjournment can be granted no more than three times to a party and where there are three or more parties, the total number of adjournments cannot exceed six.
According to M.R. Umarji, Chief Legal Adviser, Indian Banks’ Association, due to the adjournments given by the Debt Recovery Tribunals (DRTs), banks were facing long delays in getting orders for recovery.
So, to restrict the adjournments given by the DRTs, the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, has been amended.
“This provision (restriction on adjournments) is already there in the Civil Procedure Code. When the amendments were made in the Civil Procedure Code, the lawyers went on strike. “There were objections to that amendment, which was made to ensure that the delays in our system are curtailed and justice is given expeditiously,” said Umarji.
FACING HURDLES
Before the amendment to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act, 2002, banks were facing hurdles in selling the collateral/security of influential defaulter-borrowers as the latter ensured that no local party bid for their assets at the auction.
However, after amendment to the Sarfaesi Act, which was also carried out in December 2012, the above mentioned manipulation has been taken care of as banks can themselves purchase the collateral/security at the reserve price in case no bidder comes forward. “Prior to the amendment, there were cases whereby banks took possession of securities under the Sarfaesi Act and put them up for auction. But the auction failed as nobody came forward to purchase the securities.
“Banks repeated the exercise again but the outcome was no different. In many cases, the borrowers are able to spread the word around that this is my property, so nobody should bid and purchase it. Locally, they (borrowers) are powerful,” said Umarji.
Now, under the amended Sarfaesi Act, if the public auction to sell the property fails, the bank itself can purchase it at the reserve price and recover the debt to the extent of the reserve price.
India has lower capital adequacy, more bad loans than other emerging markets
CHENNAI, JUNE 13:
India has a higher gross non-performing assets-to-gross advances ratio than other emerging markets like Indonesia, Korea, Mexico and Turkey. The ratio – which is a measure of the overall quality of loans made by the country’s banks – was 3.6 per cent in India in 2011.
In comparison, it was just 1.6 per cent in Korea, 1.8 per cent in Indonesia, 2.4 per cent in Mexico and 2.7 per cent in Turkey.
Even China had a higher gross NPA to gross advances ratio of 1 per cent, while it was 2.4 per cent in Japan. But the ratio was higher in the case of developed economies like the USA and UK, which were in the grip of an economic slowdown.
But the capital to risk-weighted assets ratio, or capital adequacy, was lower in India than in these developed economies. This implies that Indian banks had less capital to tide over any shocks to their business than their counterparts in developed economies. What is more, it was also lower than it was in other emerging markets.
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