The RBI’s proposed Public Credit Registry and its implications for the credit reporting system in India
By Darshana Rajendran, IFMR Finance Foundation
An asset becomes non-performing when it ceases to generate income for the bank. In India, a Non-Performing Asset (NPA) is broadly defined as one with interest or principal repayment instalment unpaid for more than 90 days.
There exist defined mechanisms to deal with NPAs of banks and financial institutions today. However prior to 1993, banks had to take recourse to the long legal route against defaulting borrowers, beginning with the filing of claims in the courts. A lot of time was therefore spent in the judicial process before banks could have any chance of recovery on their loans. On average, a civil suit decision took anywhere between 5 to 7 years.
Under the Recovery of Debts to Banks and Financial Institutions Act 1993, Debt Recovery Tribunals (DRTs) were set up for recovery of loans of banks and financial institutions. This led to speedy recovery of loans in about 1 year’s time as against the average time of 5 to 7 years required in civil suits. While initially the DRTs performed well, their progress suffered as they got overburdened with the huge volume of cases referred to them.
To speed up the process of recovery from NPAs, The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) Act was enacted in 2002 for regulation of securitization and reconstruction of financial assets and enforcement of security interest by secured creditors. The SARFAESI Act empowers Banks / Financial Institutions to recover their non-performing assets without the intervention of the Court. The Act provides three alternative methods for recovery of non-performing assets, namely: –
- Securitisation
- Asset Reconstruction
- Enforcement of Security without intervention of the court
Secured creditors are given the power to take possession of the securities in the event of default and sell such securities for the purpose of recovery of the loan. The Act provides for enforcement of Security interest by a secured creditor without intervention of the court, in cases of default in repayment of instalments and non-compliance with the notice period of 60 days after the declaration of the loan as a non-performing asset.
The Act also provides for setting up of Securitisation Companies/ Reconstruction Companies (SC/RC), which acquire the NPAs from banks and financial institutions by raising funds from Qualified Institutional Buyers (as defined by the Act) by issue of Security Receipts (As defined by the Act) representing undivided interest in such financial assets. The Act enables SC/RCs to take possession of secured assets of the borrowers including right to transfer and realize the secured assets. SC/RCs act as debt aggregators or agents of the banks or financial institutions focused in the resolution of NPAs. The SC/RCs buy the impaired assets from banks and financial institutions, thereby cleaning the balance sheets of the banks and permitting them to focus on their normal banking business.
The promulgation of the SARFAESI Act has been a benchmark reform in the Indian banking sector. The progress under this Act had been significant, as evidenced by the fact that during 2002-03 when the Act came into effect, there was an overall reduction of non-performing loans to 9.4 per cent of gross advances from 14.0 per cent in 1999-20001.
Currently, three legal options are available to banks for resolution of NPAs- the SARFAESI Act, Debt Recovery Tribunals and Lok Adalats. The SARFAESI Act has been the most important means for recovery of NPAs. The amount of NPAs recovered under the SARFAESI Act formed over half of the total amount of NPAs recovered in 2009-10. Banks have referred as many as 78,366 loan default cases by end march 2010 under the SARFAESI Act involving a loan amount of Rs. 14, 249 crores. Against this, banks managed to recover Rs. 4,269 crores representing 30% of the loans2.
Recently the ‘Report of the Working Group on the Issues and Concerns in the NBFC Sector’ laid out recommendations to extend the coverage of SARFAESI to NBFCs as well. This move will benefit NBFCs, ensuring quicker recovery of their non-performing assets. This, in turn, could encourage NBFCs to provide access to a wider range of financial products and serve better the cause of financial inclusion.
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1 – Reserve Bank of India on Trend and Progress of Banking India 2002-2003
2 – Reserve Bank of India on Trend and Progress of Banking India 2009-2010
what is the difference between Securitisation & Enforcement of Security without intervention of the court?
Not all secured creditors are given the benefit of protection under SARFAESI Act. In fact, the blogpost wrongly suggests that the secured creditors did not have such protection. Pledgee always had the right of selling the pawned goods and this right they had been possessing since 1872(passage of Indian Contract Act). There are many species of secured creditors and security and SARFAESI does not cover all of them. So, this blogpost really misses the point.
The
SARFAESI Act, for the first time, recognised the concept of comprehensive
security interest. However it is true that it does not have universal
application, it only applies to banks and financial institutions. Also, while
possessory security is covered by the Indian Contracts Act, there were no
provisions in regard to non-possessory securities until SARFAESI was enacted.
Very evidently, you have not read State bank of India V. S.B.Shah Ali, since you say all this. Only serves to highlight how poorly researched this article is.
I agree that in the case you mentioned, the court held that
if a contractual right to repossession is provided, there is no need for court to
interfere. While this case stated that the hypothecatee can take possession of
goods without intervention of the court as per the hypothecation agreement,
there have been other cases where contrary views have been expressed by certain
courts. For example: In case of Tarun Bhargava Vs. State of Haryana & Anr.,
it was held that “If the agreement is held to be a loan agreement and rights of
the creditor are held to be those of a hypothecatee, rights of the parties
under the agreement would be different. A hypothecatee, cannot take possession
of the security without intervention of the Court, though he has a right to
take possession or to sell the hypothecated property through Court or to give
notice to the hypothecator to enforce the security. Permitting a hypothecatee
to physically repossess the hypothecated goods against the wishes of the
hypothecator will enable the hypothecatee to
take law in his own hands, deprive the hypothecator of his defence by
depriving him of the use of goods even when his claim may be that he does not
owe any money”
Hence there were conflicting judgments on the rights of the
hypothecatee. SARFAESI resolved this conflict by conferring powers of
enforcement on banks and financial institutions.
What is the current exact procedure by which Banks initiate a recovery from a debtor after the Loan becomes an NPA? Do banks have an obligation to sell their NPAs to SC/ARCs immediately after a default of 90 days on the debtors part? And how much time does the SC/ ARC give the debtor to make good the installments missed?
Once the
account of the borrower has been classified as an NPA as per the guidelines issued
by RBI, the Bank will proceed to make a demand notice under Section13 (2)
informing the borrower about the outstanding amount in the loan account and
also the consequences. If the borrower raises any written objections to the
Bank’s demand notice under section 13 (2), then the Bank should reply to the
objections. If the Banks rejects the objections raised by the borrower under
section 13 (3A), then the Bank proceeds to issue a possession notice under section
13 (4) of the Act informing the borrower that they have taken symbolic
possession of the property. This is not actual possession of the ‘secured
asset’ or property of the borrower. The possession notice issued by the
Bank under section 13 (4) of the Act provides a right to the borrower to
approach the Debt Recovery Tribunal and file an Appeal if he feels aggrieved. If
the DRT dismisses the application, then the borrower is entitled
to file an appeal to the Debt Recovery Appellate Tribunal.In cases
where the borrower did not approach the Tribunal and in cases where the
borrower fails to meet the demand made by the Bank, the Bank will take steps in taking physical possession of the property under section 14 and can
sell the secured asset in public auction.
Dear Darshana Rajendran,
At the out set I introduce myself as an Ex-banker presently handling DRT and SARFAESI cases as facilitator. I have clients from all over India. I do not know whether you have made a thorough study of SARFAESI ACT. I have written many articles about SARFAESI ACT through which I have brought out how this draconian act has infringed into the human rights, fundamental rights and principles of natural justice. Wherever I have handled the cases, they are still in the trial court of DRT and I am sure if argued properly each case will go to supreme court level. Many of the honest borrowers’ lives have been affected by invoking the SARFAESI ACT by the irresponsible bankers whose many wrong doings have caused loss and damages to these honest borrowers. The bankers do not distinguish between an intentional defaulter and a borrower who became a defaulter because of the circumstances beyond his control and the banks also were and still are mute spectators to the problems and predicament faced by such borrowers. Most of the bakers never follow RBI directives to prevent account becoming NPA. If you need I can send some of the articles I wrote on the subject matter. I am sorry to have expressed my points so blatantly. T.R.RadhakrishnanE-mail: trrk1941@gmail:disqus .com.Mobile:(0) 9229248048
It is indeed a draconian law which has encouraged corruption in Banks.Such laws
and arbitrary/sadistic interpretation is not sparing other Directors who have nothing to do with the borrowings nor they are guarantors.
Thanks for the service being provided by you to the borrowers whose loan accounts have become NPA… Once a notice under SARFAESI Act is issued can the NBFC, for instance the State Financial Institutions, continue to debit such NPA account with normal plus penal interest for ultimate recovery? In Civil Courts, I remember, such accrual of interest once recovery proceedings are initiated.. Even with RBI guidelines the NBFC/Banks are not allowed to debit such interests to such accounts once they become NPAs. NBFC/Banks if they keep a separate account of such accrued interest, they should provide equal amount by creating provision, viz., such interests are not to be treated as income.. Some NBFCs are continued to charge such interest on NPAs without adding them into their income and paying income tax on such income. What is the legal position? Can you clarify by mail to maniadg@yahoo.co.in? G Manivachagam, IRS (C&CE) Rtd Mobile : 09449823664
The SARFAESI Act is a Cibil law which deals with helping Banks/FIs to take possession of Financial Assets for the sake of recovering their dues (NPA). Does Sec. 35 of The SARFAESI Act supercede criminal laws too?
Brief……..But gives a clear understanding with simple language thank u
can the Property bought from the bank under sarfaesi act be sold by the first owner of the land who happens to be the SC/ST. I purchased a property from bank and after 8 years the same property is being claimed by its first owner who is SC .
I feel the Sarfeasi act still has lot of loopholes. There are advocates available in the coridoors of DRTs and DRATs who will ensure the defaulters to sleep for 4 years and nothing will happen. This act needs a review.