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The Enforcement of Security Interest & Recovery of Debts Laws & Miscellaneous Provisions (Amendment) Bill, 2016

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The Indian banking system has undergone significant transformation following financial sector reforms. It is adopting international best practices with a vision to strengthen the banking sector. Several prudential and provisioning norms have been introduced, and these are pressurizing banks to improve efficiency and trim down NPAs to improve the financial health in the banking system.

In the face of rising NPAs in banking sector, various mitigatory steps have been initiated in the recent year by RBI and Government. Some of the major initiatives can be highlighted as under RBI

  1. Strategic Debt Restructuring (SDR):— Will allow lending banks to to convert loans into equity if a borrower fails to adhere to set deadlines
  2. Revamped the 5/25 scheme:– Allows the banks to extend the re-payment schedule of loans to 25 years, with an option to re-finance them at the end of 5 years
    — Will enable banks to mitigate “asset liability management” risks in funding long gestation projects
  3. BASEL III norms conformance: Bank to mandatorily comply with all the capital provision and risk management norms within the stipulated time frame
  4. Joint Lenders’ Forum (JLF): borrowers and lenders have to reach a conclusion for a corrective action. After the corrective action, all lenders under JLF must collectively hold 51% or more of the equity shares issued by the company

GOVERNMENT
1. Recapitalisation:
— Has announced a recapitalisation package (of Rs. 80,000 crore for PSBs)
—  This capital injection has been made as an incentive to the better performing banks.
— Govt. has announced to bring down its stake in some PSBs to 51% for generating necessary capital.

  1. Bankruptcy Code:
    — This will supplement RBI’s efforts by speeding legal solutions
  2. Granting more Autonomy:
    — The 7-point directive “Indradhanush” has been a confidence building measure among the Govt, RBI and PSBs
    — The setting up a “Bank Board Bureau” that will help identify and appoint MDs and other senior executives of banks
  3. Split CMD post for PSBs:
    — For better allocation of tasks and management
    — Now, Chairman will be the “Custodian of Governance” and CEO/MD will be the “Custodian of assets and efficiency”

Despite the many measures, the NPA problem remains unsolved due to ample number of bottlenecks at different stages and involvement of various interpretations in different platforms. Delay in systems and procedures in all reform measures are the major concerns for the financial sectors and regulators in our country. There is always debates and discussions at different institutional levels to get rid of the delays involved in existing systems and processes to resolve the Bad debts menace. Though we are not able to completely avoid the delay but due to various innovations and amendments we are able to minimize the delay in carrying out the processes involved in resolving issues pertaining to NPA. The Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016 is one such vital reform measure initiated by our Government to resolve some of the legal issues involved in various legal measures of tackling NPA.

ORIGIN OF THE BILL:

  • Bill was introduced by the Minister of Finance, Arun Jaitley, in Lok Sabha on May 11, 2016.
  • Bill was passed in Lok Sabha on 1st Aug 2016
  • Bill was passed in Rajya Sabha on 9th Aug 2016
  • Notifications was passed to bring into force the provisions of Act on 1ST SEPT 2016 (VIDE NOTIFICATION NO 3/5/2016-DRT)

OBJECTIVE OF THE BILL:

Despite enactment of various laws enabling banks and FIs to recover NPAs expeditiously, the NPAs are continuously mounting and the clamour for stricter debt recovery laws is ever increasing.The Bill seeks to Strengthen the debt recovery laws which will Improve financial health of the banks and it will lead to ease of doing business in our country.Ultimately this will facilitate investment leading to higher   economic   growth and development.

Why is the Act important ?

This Amendment Act is important in present perspectives due to following reasons

  • Mounting concerns over loan recovery in stressed assets to the tune of over Rs.8 Lakh crore in banking system.
  • There are 70,000 cases involving more than Rs.5 Lakh crore pending in various DRTs. The Act will facilitate expeditious disposal of recovery applications.
  • 27 PSUs which constitute 70 % of Indian banking sector have written off Rs.59,547 Cr in financial year ended March 2016 and in last 3 years (FY13,14&15) banks had together written off 1.14 Lakh Crore.
  • Banks have failed in most of the cases to make any recovery from the borrowers, mainly large corporate clients.
  • The Act will help banks to step up their recovery efforts, in turn saving taxpayers’ money.

This bill has brought amendments in 4 important Acts

  • SARFAESI ACT,2002
  • RDDBFI ACT,1993
  • DEPOSITORY ACT, 1996
  • INDIAN STAMP ACT, 1899

SARFAESI Act,2002  Amendments: 

  • SARFAESI Act allows secured creditors to take possession over a collateral, against which a loan had been provided, upon a default in repayment. This process is undertaken with the assistance of the District Magistrate, and does not require the intervention of courts or tribunals.
  • The Bill provides that this process will have to be completed within 30 days by the District Magistrate.
  • The Bill empowers the District Magistrate to assist banks in taking over the management of a company, in case the company is unable to repay loans.  This will be done in case the banks convert their outstanding debt into equity shares, and consequently hold a stake of 51% or more in the company.

EMPOWERMENT TO RBI UNDER THE ACT:

The Act empowered the Reserve Bank of India (RBI) to examine the statements and any information of Asset Reconstruction Companies related to their business. The Bill further empowers the RBI to carry out audit and inspection of these companies.  The RBI may penalise a company if the company fails to comply with any directions issued by it.

Depository Act 1996:

“Depository” means a company formed and registered under the Companies Act, 1956 (1 of 1956), and which has been granted a certificate of registration under sub-section (1A) of section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992). A depository enter into an agreement with one or more participants as its agent.“participant” means a person registered as such under sub-section (1A) of section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992).Every depository shall, on receipt of intimation from a participant, register the transfer of security in the name of the transferee.All securities held by a depository shall be dematerialized .A depository shall be deemed to be the registered owner for the purposes of effecting transfer of ownership of security on behalf of a beneficial owner.

There are two sorts of depositories in India. One is the National Securities Depository Limited (NSDL) and the other is the Central Depository Service (India) Limited (CDSL).

Every Depository Participant (DP) needs to be registered under this Depository before it begins its operation or trade in the market.The beneficial owner shall be entitled to all the rights and benefits and be subjected to all the liabilities in respect of his securities held by a depository.

Amendments to the Depository Act 1996   

  • This will integrate records of property registered under various registration systems with central registry.
  • This includes integration of registrations made under Companies Act, 2013, Registration Act, 1908 and Motor Vehicles Act, 1988.
  • The Bill provides that secured creditors will not be able to take possession over the collateral unless it is registered with the central registry.
  • The Bill seeks to set up a central database of security interest on property rights, to enable present and future creditors to have a clear picture of ownership or encumbrances against security offered.
  • After registration of security interest, secured creditors will have priority over others in repayment of dues.

 RDDBFI Act, 1993

 The RECOVERY OF DEBTs DUE TO BANK AND FINANCIAL INSTITUTION ACT 1993 created Debt Recovery Tribunals (DRTS) to adjudicate debt recovery cases.  This was done to move cases out of civil courts for reducing time taken for debt recovery, and for providing technical expertise.  This was aimed at assisting banks and financial institutions in recovering outstanding debt from defaulters.

Need for Amendments to RDDBFI Act, 1993

Over the years, it has been observed that the DRTs do not comply with the stipulated time frame of resolving disputes within six months. This has resulted in delays in disposal, and a high pendency of cases before the DRTs.Between March 2013 and December 2015, the number of pending cases before the DRTs increased from 43,000 to 70,000.  With an average disposal rate of 10,000 cases per year, it is estimated that these DRTs will take about six to seven years to clear the existing backlog of cases.DRT officers, responsible for debt recovery, lack experience in dealing with such cases.  Further, these officers are not adequately trained to adjudicate debt-related matters.

Amendments to the RDDBFI Act 1993

  • The Bill increases the retirement age of Presiding Officers of Debt Recovery Tribunals from 62 years to 65 years.
  • It increases the retirement age of Chairpersons of Appellate Tribunals from 65 years to 67 years.
  • It also makes Presiding Officers and Chairpersons eligible for reappointment to their positions.
  • This will allow the existing DRT officers to serve for longer periods of time for quick resolve of pending cases.
  • The Act now allows banks to file cases in Debts Recovery Tribunals having jurisdiction over the area of bank branch where the debt is pending, in addition to filing cases in tribunals having jurisdiction over the defendant’s area of residence or business.
  • The Bill provides that certain procedures under the Act will be undertaken in electronic form to save time and energy. These include Electronic filing of recovery applications, summons, documents and written statements; (such as filing them on the DRT website).

The Bill provides details of procedures that the tribunals will follow in case of debt recovery proceedings. This includes the requirement of applicants to specify the assets of the borrower, which have been collateralised.  The Bill also prescribes time limits for the completion of some of these procedures.

 Amendments to Indian Stamp Act 1899

The SARFAESI Act 2002 regulates the establishment and functioning of Asset Reconstruction Companies (ARCs).  ARCs purchase Non-Performing Assets (NPAs) from banks at a discount.  This allows banks to recover partial payment for an outstanding loan account, thereby helping them maintain cash flow and liquidity. Setting up of ARCs, along with the use of out-of-court systems to take possession of the collateral security, has created an environment conducive to lending. The major concerns related to the functioning of ARCs are limited number of buyers and capital entering the ARC business, and high transaction costs involved in the transfer of assets in favour of these companies due to the levy of stamp duty.

Amendment Bill provides for exemption of stamp duty on transfer of financial assets in favour of ARCs. This benefit will not be applicable if the asset has been transferred for purposes other than securitisation or reconstruction (such as for the ARCs own use or investment).

Consequently, the Bill amends the Indian Stamp Act, 1899.

IMPACT OF AMENDMENT BILL:

In the context of the deterioration in the asset quality of banks, recent amendments made through this Bill propose a corrective action plan that offers timely revamp of accounts considered to be unviable and prompt steps for recovery or sale of assets in the case of loans which are NPAs. There will be a spurt in the sale of NPAs by banks to Asset Reconstruction Companies (ARCs) which can substantially reduce the NPA portfolio of Banking industries. Several amendments made to the SARFAESI Act, 2002 will make it more empowered to resolve the NPA problems quickly as compared to existing rate at which the cases are being disposed.All the stake holders including general public are very much hopeful of some radical changes in the reform measures in the Banking sector through these amendments but only time will say the real impacts if things are implimented in true spirit.

 

About the author

Bidhu Bhusan Lenka
Chief Manager
Union Bank of India
Staff College, Bengaluru 
080-22639010, 09678235001 (M) 
Fax – 080-22639098 ; IP No. 530409 

 

 

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