The Parliament passed a bill to amend debt recovery laws and make them more time-bound and effective in yet another step to address the problem of rising bad loans on August 9.
What is Sarfaesi Act ?
The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 aka sarfaesi act is an Indian law, which allows banks and other financial institution to auction residential or commercial properties to recover loans. The first asset reconstruction company (ARC) of India, ARCIL, was set up under this act.
- Under this act secured creditors (banks or financial institutions) have much right for enforcement of security interest under section 13 of SARFAESI Act, 2002.
- If borrower of financial assistance makes any default in repayment of loan or any installment and his account is classified as Non Performing Asset by secured creditor, then secured creditor may require before expiry of period of limitation by written notice to the borrower for repayment of due in full within 60 days by clearly stating amount due and intention for enforcement.
- Where he does not discharge dues in full within 60 days, then without intervention of any court or tribunal Secured creditor may take possession of secured asset, or take over management of business of borrower or appoint manager for secured asset or without taking any of this action may also proceed against guarantor or sell the pledged asset.
- It is noted that The act was amended by “Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016“, passed by Lok Sabha on 2 August 2016.
What is Debt Recovery Tribunal ?
The Recovery of Debts Due to Banks and Financial Institutions Bill having been passed by both the Houses of Parliament received the assent of the President on 27th August 1993.
- It came on the Statute Book as THE RECOVERY OF DEBTS DUE TO BANKS AND FINANCIAL INSTITUTIONS ACT, 1993 (51 of 1993).
- Banks had very hard time recovering bad loans. Because often, borrowers (loan takers) would file frivolous cases in civil courts. So 1993, Government established Debt Recovery Tribunals to deal with NPA matters.
- Now borrower cannot approach civil court, they’ve to go to special Debt Recovery Tribunal (DRT). This led to some relief, but then DRTs clogged down by truckload of cases.
- This two new bills imparts two new rectifications namely gives 180 days for disposal of recovery applications and also provides a 30-day timeline for the district magistrate to complete this process and he will also assist the lender in taking over the management if the lender has secured more than 51% stake in the company through conversion of debt into equity.
- The Act provides for setting up of a central registry that will maintain records of transactions related to secured assets, which will help prevent fraud by providing clear rights over the assets.
- 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 bill approved by Lok Sabha and cleared by Rajya Sabha amends four laws — Sarfaesi Act, DRT Act, Indian Stamp Act and Depositories Act.
- The bill will 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 toRs.1 crore fromRs.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.
- Once it gets the President’s nod, the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016, will help banks and financial institutions recover loans more effectively, encourage more asset reconstruction companies (ARCs) to set up business in India and revamp debt recovery tribunals (DRTs).