Amendments to debt recovery law will ensure banks get ‘right pricing for assets on sale’

B L :MUMBAI, DEC. 14,2012

Allowing asset reconstruction cos to convert a part of debt into equity is a positive

The amendment to the debt recovery legislation will, among others, allow multi-state co-operative banks to assign their bad loans to asset reconstruction companies (ARCs), proving a win-win for banks as well as the companies

Currently, these co-operative banks are not allowed to sell bad loans to ARCs. “This (amendment to the debt recovery legislation) will open the opportunity for ARCs to tap the sector which has so far not been targeted for debt recovery,” P. Rudran, MD and CEO of Arcil, country's largest asset reconstruction company said.The amendment to the debt recovery legislation will, among others, allow multi-state co-operative banks to assign their bad loans to asset reconstruction companies (ARCs), proving a win-win for banks as well as the companies.

The Enforcement of Security Interest and Recovery of Debt Laws (Amendment) Bill, 2011 was passed in the Lok Sabha on Monday. Rising non-performing loans has prompted the Finance Ministry to look at alternative ways to help banks mitigate the bad loans problem. The amendments if passed by Rajya Sabha will be notified by the Reserve Bank of India. ARCs buy bad loans from banks and financial institutions at a discounted rate and recover the dues from the borrower.

IMMOVABLE PROPERTY

The amendments also allow banks to acquire immovable properties from the borrower so that they can sell them at a later date.

Sometimes there are no buyers for a property or there is cartelisation from bidders, who deliberately quote a lower price thus undervaluing it. “The amendment will ensure that banks do not get into the situation of distress sale and get the right pricing for the assets on sale,” Rudran said. The amendment states that banks will be heard in Debt Recovery Tribunals (DRTs) before granting any stay on recovery of loans from borrowers. This will ensure that the law is not misused by borrowers to delay the settlements and payment of dues.

Also, the amendment allows ARCs to convert a part of the debt into equity. This could be a win-win situation for the borrower as well as the ARC. The borrower stands to gain because his outstanding liability decreases to the extent of equity conversion and the ARC can exit the company when it has made good of the liability. Further, the ARC will also get some amount of management control in the borrowing company so as to aid in the turnaround of the stressed company.

Law changes to help revive stressed firms

 F C :Manju AB Dec 11 2012 , Mumbai

Give asset reconstruction firms more options

After the amendment to the SARFESI Act and the debt recovery tribunal in the Lok Sabha on Tuesday it will now be easier for banks and financial institutions to help revive companies and recoup their advances as no opposing bank or party can file a caveat in the debt recovery tribunal to obtain a stay unless both parties to the case are heard. Under the present DRT regulations it is possible for a bank or a borrower, which is opposed to the restructuring to file a caveat in the DRT and stall the revival or recovery process.

The asset reconstruction companies can also convert their debt into equity during  a restructuring so that the cost will come down for the company and the ARC gains by buying into the equity of the company. Until now it was not allowed to convert into equity.

P Rudran, MD and CEO, Arcil said, “By allowing the banks and FIs to file caveats and to be heard in DRTs before granting any stay, will ensure that the process of law is not misused by unscrupulous borrowers to delay the settlements and payment of dues. Similarly, allowing 15 days (instead of 7 days) to reply to the borrower’s objective under section 17 of SARFAESI act is also a good change so that the lenders can meaningfully analyse the issues raised by the borrowers.”

The amendments are to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFESI) Act of 2002, and the Recovery of Debts Due to Banks and Financial Institutions Act of 1993.

M Narendra, CMD, Indian overseas banks said, “No one can get a stay order from the tribunal unless all the parties to the case are heard which is a big step forward for resolution of cases. Allowing banks to acquire immovable properties towards the settlement of the dues is another big step, which will help banks buy back the property that is unsold in the auction. Now we had to hold it as non-current asset in our book for nearly seven years, now it can be acquired and will form a part of our fixed assets. These amendments will help in speedier resolution of cases.”

The amended law will allow the asset reconstruction firms to convert fully or in part their loan to a stressed entity into equity. This is specially useful in the initial stages when the company is under stress and the option of converting debt into equity will reduce the interest cost for the company in the initial stages where costing is an important factor.

According to rating agency Icra report the gross non-performing assets (NPAs) likely to cross Rs 2,00,000 crore and reach 3.6-3.8 per cent of gross advances as on March 31, 2013, up from 2.8 per cent as on March 31. Standard restructured advances could move up to Rs 3,70,000-4,20,000 crore by March 31, 2013 as against Rs 2,30,000 crore as on March 31.

Bankers, ARCs laud debt recovery amendment

BS Reporter / Mumbai Dec 11, 2012, 00:58 IST Conversion of part-debt into equity to work as sop for ARCs The Lok Sabha on Monday approved an amendment Bill to ease the recovery of bad loans by banks. Opposition parties walked out after the government rejected their demand for referring it to a standing committee. The Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Bill, 2011, was approved by voice vote in the House. It seeks to convert any part of debt into shares of the defaulting company by an asset reconstruction company(ARC). Bankers and ARCs welcomed it, as the amended law will improve the prospects for reviving stressed units and loan recovery. Bankers and ARCs said although delayed, it is a welcome step, as the amendments remove some hurdles and empower them to get more legal protection while restructuring loans and supporting weak units. P H Ravikumar, managing director of Invent ARC Ltd, said, “ARCs were running risks associated with equity when supporting revival of a sick unit. The returns were those linked to debt. That situation will get corrected, indicating better returns at the time of exit.” The Bill was introduced in the Lok Sabha in December 2011. While the Opposition demanded it be referred to a standing committee for scrutiny, Finance Minister P Chidambaram said when the bill was introduced last year, the Speaker had decided against so referring it. Doing so would delay the process further, he said, adding the then minister wanted it to be passed without delay, as the amendments were of a technical nature. “The Bill was introduced in 2011 and should not be referred (to Standing Committee) now after 12 months. It would defeat the very purpose the Bill. In the interest of the banking sector, it is necessary to pass the bill in 2012,” he said, adding the move would quicken the process of loan recovery. The Bill also seeks to enable banks or any person to file a caveat so that before granting any stay, the bank or person is heard by the Debt Recovery Tribunal. According to a senior ARC official, this prevents orders by courts without hearing a bank or ARCs. Many a time, ARCs were not aware that the lender had filed a suit. On the issue of rising non-performing assets ( NPAs) of banks, Chidambaram said the sector was well regulated and the gross NPAs, around 3.5 per cent of total loans, were not high and the situation would improve with economic recovery. According to credit rating agency Icra, overall, the credit profiles of borrowers could weaken in 2012-13 due to factors such as moderation or slowdown in demand conditions, project implementation related delays, higher interest rates and foreign exchange losses, compression of operating profitability due to cost pressures, and inability of companies to pass on the higher costs in a scenario of increasing competitive intensity.

Debt Recovery Act passed amid opposition walkout

B S :Aditi Phadnis / New Delhi Dec 10, 2012, 19:57 IST

Bill seeks to convert any part of debt into shares of defaulting company by Asset Reconstruction Company

A bill to make technical changes in the system of debt recovery was today passed in the form of the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Bill, 2011, with Finance Minister P Chidambaram assuring the House that problem of mounting Non Performing Assets (NPAs) of banks was not insurmountable and was certainly not alarming.

However, several members questioned the rationale for the hurry shown by Chidambaram in having the law passed to the extent that the legislation bypassed the Standing Committee on Finance. The BJP led by former Finance Minister Yashwant Sinha walked out in protest.

The bill seeks to convert any part of debt into shares of defaulting company by the asset reconstruction Company (ARC).

Chidambaram said when the bill was introduced last year the Speaker decided against referring it to the Parliamentary committee.     Referring it to the committee now would delay the process further, he said,

Trinamool Congress’ Saugata Roy said he had no serious differences with the government on the bill

A Sampath (CPIM) pointed out the misutilisation of public sector financing institutions like NABARD.

Pinaki Mishra (Biju Janata Dal) raised the issue of inefficiency of the public sector banks. “The NPAs of all nationalised banks in India stand at a staggering figure of Rs.1,23,462 crore,” he said.

Critiquing the legislations for their “inefficacy” he said, “There are 67,524 cases are pending before the Debt Recovery Tribunals.” There is just no accountability in the public sector banking institutions he added.

Mishra argued that Asset Reconstruction Companies should  be able to pass on debt to one another. “The purpose of SARFAESI was to ensure the expeditious recovery of debts. Therefore, if Section 5 of SARFAESI could be suitably amended and there could be an inter se re-assignment of debt, this could be much more expeditious and efficacious way of settling these issues.

Mishra also said a codified structure  was needed by which banks  can show complete transparency in their assignment of debts to ARCs.“So far, this has been done in an extremely cloak and dagger fashion which does not inspire any confidence”.

He also said one of the difficulties being faced by the secured creditors under SARFAESI Act is the determination of the priority of debts.

“There is a complication because the State Sales Tax Act always have a provision in their various State enactments that their’s shall be the first charge on the assets. Therefore, on realization of debts, the secured creditors are left high and dry and the purpose of SARFAESI Act is not served” he said. He argued for an in the SARFAESI Act so that it has overrding effect on all statutory dues including Sales Tax, Income Tax, Central Excise so that other secured creditors will have priority in realization of debts, of course, pro rata with workers,” Mishra said

He also pointed out that the Stamp Act is inconsistent across states. “the Stamp Act must be uniform in all the States that have the SARFAESI Act” , he said . Gurudas Dasgupta (CPI) raised the issue of Kingfisher Airlines and lauded the State Bank of India was refusing to lend any more to the ailing airline.  In his reply, Chidambaram said no leinency would be shown to anyone.

While conceding that Non Performing Assets of banks had indeed been going up – it was no approximately 3.5% -  the Finance Minister said this was a function of the performance of the economy. “Because the RBI is very strict inrequiring the banks to make provision, the net NPA is still only 1.62%. The effort is to ensure that sectors which are under stress are helped to get out of this difficult time and units which are making money, we must recover the loans. Units which are genuinely stressed must be helped.

“I said that there must be some hand-holding in a time of stress so that they all do not become bankrupt or insolvent. They come out of the stress. We have to protect employment; we have to protect jobs; and we have to protect manufacturing. They will come out of the difficulty, once the economy recovers. We are going through a difficult time. And it is this difficulty which is reflected in this rising gross NPAs. But let me tell you, thanks to the RBI, thanks to the strict vigilance, thanks

to the provisions made, the net NPAs are well under control. There is no reason to think that our banking system is in difficulty. In fact, many Members rightly complimented the banking system. When over a thousand banks failed in the United States, not one bank in India failed.…” Chidambaram said.

He was clear that no special favours would be shown to anyone including individual cases referred to by other members, he said. “A particular case was mentioned, where there was a huge NPA; the strictest action is being taken by the banks, in asking them to put up the money upfront before any kind of accommodation can be given; no fresh loans are being given. In fact, the Tax Department has taken severe action in attaching those assets. So, no favours are being shown to any one, irrespective of whoever he may be. The law is taking its course”.