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New govt begins battle against wilful defaulters

LiveMint logoLiveMint 02-06-2014 Remya Nair

New Delhi: In its battle against rising bad loans in the banking system, the government is looking to amend two Acts to bring to task wilful defaulters—borrowers who don’t pay back bank loans although they have sufficient money to do so.

The government is looking to amend the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) and the Debt Recovery Act (Recovery of Debts due to Banks and Financial Institutions Act, 1993) to make the recovery process easier for banks, said a senior finance ministry official who requested anonymity.

The SARFAESI Act empowers banks to recover their non-performing assets without the intervention of the courts. The Debt Recovery Act was formulated to help banks recover pending dues from defaulters and enabled the setting up of debt recovery tribunals for disposal of loan related disputes. However, these tribunals are saddled with long delays and pending cases, necessitating the amendment.

At present, although the government has asked banks to change the managements of companies in case they are found to be wilful defaulters, banks are unable to do so because of a clause in the SARFAESI Act that requires them to reinstate the old management once the recovery process is completed.

“Though we have directed banks to change managements of companies to deal with wilful defaulters, so far no management takeovers have taken place,” the official cited above said.

M.R. Umarji, chief legal advisor of the Indian Banks’ Association, the banking industry lobby group, said banks weren’t finding anyone interested in taking over the managements of entities deemed to be wilful defaulters.

“Why would anyone agree to take over the management if they know that it has to be returned at a later date,” he asked.

Umarji added that the change in management should be coupled with a transfer of shares to the new management.

As of now, there is no provision in the SARFAESI Act for transfer of shares.

Bad loans in the banking system have surged as economic growth that slumped to less than 5% for two consecutive years, high interest costs and delayed project approvals that crimped corporate cash flows made it difficult for many borrowers to repay debt.

State-run banks have borne the brunt of the bad loans. Gross non-performing assets in the March quarter at state-run banks made up 4.44% of the loan book, declining slightly from 5.07% as of 31 December, according to government estimates.

The Reserve Bank of India has been concerned about wilful defaults. Former finance minister P. Chidambaram asked banks to aggressively pursue cases of wilful defaults, stating that there cannot be cases where there is an affluent promoter and a sick company.

The strategy to tackle NPAs also formed an important part of the presentation made by the department of financial services to the new finance minister Arun Jaitley.

“Any modification in laws that encourages restructuring of business and management should be encouraged, as in most of the instances the underlying collaterals are fairly productive,” said Ananda Bhoumik, senior director at India Ratings and Research Pvt. Ltd.

He added that it may be too early to say that the NPA situation is improving.

“NPAs have eased only in the March quarter and that could be attributed to the aggressive recovery by banks in the last quarter. We will have to wait for a couple of quarters to say the worst of NPAs is behind us,” he said.

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