Parliament passes bill to ease recovery of debt from defaulters

Parliament has passed a bill that empowers creditor banks to expedite recovery of loans and empower banks to confiscate security in case of loan defaults for recovery of money with the Rajya Sabha giving its approval to the bill today.

The Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016, amends four Acts - the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act of 2002, the Recovery of Debts due to Banks and Financial Institutions Act of 1993, the Indian Stamp Act of 1899, and the Depositories Act of 1996.

The bill when passed into law will help expedite disposal of debt recovery applications, and will complement the Insolvency and Bankruptcy Code passed by Parliament in May.

The passage of the bill in the Rajya Sabha assumes significance in view of the episode surrounding industrialist Vijay Mallya and several other high value loan defaults.

The Lok Sabha had passed the bill earlier in the month.

Replying to a debate on the bill, finance minister Arun Jaitley emphasised the need for "firmness coupled with fairness" in recovering bad loans. He said the banks must be empowered to take effective legal action against defaulters and the insolvency law, securitisation law and DRT law are steps in that direction.

"So far the laws were in favour of the defaulters. We tried to correct the balance. There should be firmness, coupled with fairness in recovery of loans," he said.

However, he said, banks should take a "compassionate view" on education loan defaults, but there will be no waiver and somebody will have to pay.

The finance minister allayed fears regarding farm and education loans saying these are "exaggerated".  He said no adverse action will be taken in cases of farm land and that compassion has to be shown in the case of education loan defaults. "Small cases will have to be settled in Lok Adalats.'

Jaitley said banks are supposed to give loans and "if banks start squeezing loans", there will be no economic growth.

"The cause of worry is when loan becomes either NPA or stressed asset or the activity in which the loans are invested is not generating money," he said adding in some cases there will be willful default.

"We cannot have a culture where somebody just takes loan and is under the assumption that it will now be the headache of the banks to recover the money, and banks should be answerable," finance minister Arun Jaitley said in his reply to the debate on the bill.

The bill allows secured creditors to take possession of a loan collateral on default through the SARFAESI Act with the assistance of the district magistrate.

The bill bars debtors from blocking payments through filing of appeals in courts by making it mandatory that the debtor makes a payment before challenging the creditor.

"You can't have a situation-...that the day you get a loan the bank manager has to keep awake and you sleep well," said the finance minister while adding that borrowers wanting to appeal a decision will have to make some deposit.
 
As per the bill, 50 per cent of debt has to be deposited for making an appeal.

The bill also provides for oversight of the Reserve Bank of India over asset reconstruction companies.

The bill fixes 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 per cent stake in the company through conversion of debt into equity.

It 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. Creditors will not have recourse to the stringent recovery laws if they do not register the secured assets.

The bill establishes the supremacy of secured creditors' claim to assets of a defaulter over any other claims including other debts, revenues, taxes, cesses and rates payable to central government, state government or any other local authority.

"The law will simplify the procedure by which there will be quick disposal of pending cases of banks and financial institutions by the debt recovery tribunal," said Jaitley, adding that the overall objective is to empower the banking system legally and expeditiously.