Auction Sale of Properties by Indian Bank - October 2009

RBI against PPP model for central loan registry

Vrishti Beniwal

The Reserve Bank of India (RBI) has expressed
its reservations on the government’s proposal
to set up a computerised central registry for
keeping records of loans mortgaged against
securities in a public private partnership (PPP) mode.


The banking regulator is of the view that a
government official should head the registry
and that a PPP model will not be suitable
for running it.

The registry, once operationalised, would
help check frauds in the sale and mortgage
of properties by providing details to the
bank or the buyer at the click of a mouse.
“Both the Indian Banks’ Association (IBA)
and the finance ministry are proposing PPP
for the registry. However, RBI has some issues
on the way we want to structure it. So, we have
suggested that it could be a special purpose
vehicle (SPV) headed by a government servant,”
said a senior government official.

IBA’s chief legal advisor MR Umarji said as
the database would be similar to a corporate
registry, private sector participation
would bring in the expertise required to
handle electronic records.

The registry is proposed to be implemented
in two phases. In the first phase, all the
securities of banks will be registered to
help the lenders verify the documents while
giving loans against properties.

In the second phase, the registry
will provide a link to the database
of state governments and municipalities.
A customer planning to buy a house will get
the details about the property by paying a small fee.
Work on the first phase has already started.
And, states like Karnataka, Tamil Nadu,
Andhra Pradesh, Madhya Pradesh and
Maharashtra have even begun computerising
their records in preparation for the second
phase. The concept of a central registry was
introduced in the Section 20-26 of the SARFAESI
(Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest) Act.
The Act came into force in 2002, but the government
has not yet notified the above sections on
establishing the registry.

A central registry is maintained in most
countries.

In India, the absence of such
a registry has led to borrowers taking loans
from other banks using duplicate title deeds.

Also, there have been complaints of banks
losing the deeds and/or not returning the same
in case there is any other loan outstanding.

Banks will soon be in a better position to recover ...

Lenders may tighten stand on defaulters

Banks will soon be in a better position to recover
their dues from defaulters.
The Reserve Bank of India (RBI) and the government have

agreed to give claims by secured lenders priority
over similar claims made by a
state sales tax authority.

The government is also considering an amendment
to the Debt Recovery Tribunal Act or DRT Act, which
will make it necessary for the tribunal to hear the
lenders before it issues a stay order on
attachment of assets.

The government has agreed to amend the Securitisation and
Reconstruction of Financial Assets and
Enforcement of Security Interests
(Sarfaesi) Act and the DRT Act to bring
about these changes, said a person
with knowledge of the matter.

Once the amendments are in place, any secured
lender who disposes assets
of a defaulter will be able to use the proceeds
to settle the loan outstanding.

Currently, the sales tax authorities in states
such as Madhya Pradesh, Maharashtra,
Rajasthan and Kerala have staked a first
claim on the sale proceeds. The amendment
made in the Sarfaesi Act and the DRT will
supersede state laws, thus helping the lenders.

However, to protect the interest of the
sales tax authority, it has been proposed
that the sales tax authority will have
the first right over sale proceeds
if they have made a claim
on the company before the security
was created by the bank.
Banks create a security over
assets at the time of granting
a loan to the company.

“This will not only speed-up the recovery
process but also bring our foreclosure
standards on par with developed nations,”
said AC Mahajan, chairman and
managing director of Canara Bank
commenting on the proposed amendment.

Often when a bank tries to dispose the
assets (of defaulting borrowers),
the sale tax authorities stake first
claim over the sale proceeds.
As a result,
the bank is able to recover just
a small part of its due even though they put
in a lot of effort to recover the money.

The other issue facing lenders was that of
exp-parte hearings. Banks have
complained to the central bank that many
defaulters are obtaining ex-parte
orders which delay the recovery process.

“Recovery efforts through the Sarfaesi Act has
been very successful and it
helped in reducing the level of bad loans.
But at the same time defaulting
borrowers are cornered and they are trying
to find way to delay recovery
process by creating such irritants.
Hence there is a need plug these loopholes
so that a conducive environment is
created for speedy recovery of dues,”
said Mr MR Umarji, former executive
director of the Reserve Bank of India
and now legal advisor to the
Indian Banks’ Association (IBA).

The government has agreed to amend the
recovery act following suggestions
made by IBA relating to the loopholes
in the Sarfaesi Act and the DRT Act.

Till March 2009, under the Sarfaesi Act,
banks have issued 3.41 lakh notices
for an amount of Rs 68,127 crore. Of this
the lenders have recovered
Rs 19,396 crore involving 2.10 lakh notices and while settling

Auction Sale of Properties by Banks - 1st week of October 2009