The Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002, (SARFAESI Act) was born out
of the Narasimham Committee-II recommendations after some modifications.
Asset reconstruction companies are set up, and registered with the
Reserve bank of India (RBI) as a securitisation company (SC) and
reconstruction company (RC) to acquire distressed secured financial
assets (both moveable and immovables).
The banks which transfer the
assets are paid off by way of security receipts (SRs), debentures,
bonds, etc as stipulated in the Act, which are subscribed to by only
Qualified Institutional Investors and redeemed in due course of time,
some of which would mature soon. These are treated as non-SLR securities
and their valuations, provisions against fall in value, etc, are to be
done as per the rules applicable to any other non-SLR security.
ARCs are deemed to be the lenders and have all the rights of the
original lending banks. There are 14 ARCs in India, some of them
promoted by some banks coming together; the first one was ARCIL,
sponsored by SBI, ICICI Bank, IDBI Bank and PNB.
The underlying idea of bringing into fruition ARCs under SARFAESI Act is to enable banks to clean up their balance sheets,
pass on the burden of recovery to an agency which could give full-time
attention to realize a higher amount than what the borrower is willing
to offer and thus generally help faster resolution of NPA.
Where the assets are charged to several banks under multiple banking
arrangements, ARCs endeavour to aggregate them to help better
realisation from the eventual buyers which individual banks might not be
able to get. In the case of security charged to a consortium of banks,
once 75% of lenders (by value) agree to sell the assets to ARCs, other
members do not have option to differ.
Despite the apparent advantages of transfer of assets to ARCs, banks,
after the initial period now seem reluctant to pass on the NPAs to them
for various reasons. There is a feeling that ARCs’ offer price is low
and worse still that the assets are sold by them eventually to original
promoters of the companies or their relatives in some “sweet heart deal”
as they know the value of the assets especially of the land and
buildings. Besides, bank officials have a fear that if the realisation
of NPAs is low, they could be questioned on the deals struck with ARCs.
In a meeting called by the Central Vigilance Commission (CVC) in May
2010, and attended by CMDs of some banks, the Indian Banks Association
(IBA) and CBI officials expressed the opinion that “some ARCs were found
to be directly helping the defaulter in getting back the properties by
paying very low amounts to banks and thereafter mark up and sell the
property back to the borrower”.
It is well-known that sale of land
involves considerable portion of consideration being in paid by way of
unaccounted money. Yet another reason for the luke-warm relationship
with ARCs is that banks which are mostly working capital lenders do not
always have a charge on fixed assets and the ARCs have not been
enthusiastic about selling off current assets.
What is more, the banks have found that when they issue notices to
borrowers under SARFAESI Act, the response is much better. The amount of
recoveries done under the Act has been significantly higher
comparatively speaking than under BIFR, and faster.
The one major problem the banks experience in pursuing SARFAESI
permitted action is that an aggrieved party, generally the borrower, can
make an application to a DRT and get a stay order on sale which is not
difficult to obtain. Nevertheless, the banks have felt use of SARFAESI
has been more effective than other legal provisions.
Under the Sarfaesi Act, only assets that are mortgaged with banks can be recovered, while DRT allows taking possession of any asset held by a defaulting borrower, irrespective of whether these are pledged with banks or not. The DRT process, however, is a long one. While recovering through court cases, without taking help of Sarfaesi or DRT, if a borrower has to contest a claim by a banker, the borrower has to deposit 75% of the contested amount upfront with the court. However, courts frequently waive this requirement.
The bank officials feel that by strengthening the recovery department,
they can show greater success than by handing over NPAs to ARCs. All
said and done, the loyal bank officials definitely have greater
commitment to the health of their bank than the ARCs.
The imperceptible trust deficit between the banks and the ARCs could be
inferred from the fact that the SBI referred just six cases with claims
of Rs40 crore to an ARC during 2010-11 though its bad loans were about Rs40,000 crore. (Source: The Economic Times, 13 March 2012). SBI is one of the sponsors of the first and the largest ARC viz. ARCIL.
Officials of various banks in the recovery departments state that the
ARCs, with their high profile directors, have become a strong lobby to
advocate larger flow of business to them from the banks. Coincidentally
perhaps, in May 2012, the ministry of finance (Department of Financial Services)
directed all public sector banks to designate one or more ARCs as their
“authorised officer to take up recovery of loss assets on behalf of
banks on commission basis”.
It would have been appropriate, say, for the RBI to have studied/
audited the financials and methods of operations of the ARCs and the
reasons for the existing trust deficit between banks and ARCs before the
ministry issued this direction. Besides, the definition of authorised
officer given in the SARFAESI Act does not include ARC, though it can be
an agent.
The distinction between the two seems to have been made purposefully in
the Act and therefore it seems a bit odd that the ministry directed the
banks to designate the ARCs as authorised person instead of as agents.
This confusion needs to be cleared.
The role of an agent is governed by Contract Act; banks being the
principal become liable for acts of omission and commission of the agent
as such. There is no reason for banks to undertake such an onerous
responsibility. It is difficult to escape the feeling that ARCs are
perpetuating their existence with some help from the finance ministry.
Even as the government was planning to introduce a bill in 2001-02 to
assign the BIFR responsibilities to the National Company Law Tribunal,
the RBI took a proactive measure of introducing in August 2001
“Corporate Debt Restructuring
(CDR)” scheme. The objectives are, “to ensure timely and transparent
mechanism for restructuring of corporate debts of viable entities
through an orderly and coordinated restructuring programme outside the
purview of BIFR, DRT and other legal proceedings”.
CDR is a well known mechanism to tackle incipient sickness/possible delinquency of a loan and
restore viability of operations adversely affected by external and
internal factors in the least disruptive manner by minimizing the losses
to the creditors, the concerned corporate and other stakeholders. In
India this is applicable to corporates with loan exposure of Rs10 crore or more to the banks.
CDR is not a part of any statute. However legal strength is provided by
certain prescribed agreements between creditors and between borrowers
and the lenders. The CDR scheme has laid down pretty elaborate system
for appraisal, monitoring and reporting to various levels of
authorities.
A CDR package envisages certain sacrifices and concessions to be given
by lenders to the corporate concerned which could be also obligated to
bring in additional equity and bind itself to the terms of the package
and covenants. The package needs the approval of a majority (called
‘super majority’) of at least 75% (by value) of the lenders in which
case the minority of lenders has to fall in line. In contrast, under the
BIFR dispensation, the minority cannot be forced to follow the
majority.
CDR is a ‘success’ if one were to judge it by the statistics of
progress: As at March 2012, the CDR cell approved 292 cases and another
41 are in advanced stage of approval, involving an aggregate amount of
Rs1.86 lakh crore of debt. The number of cases referred each year has
been moving up and in 2011-12 it reached the highest figure of 87 cases
with a debt of Rs68,000 crore.
Yet lenders are not celebrating this record and perhaps the RBI may be
feeling the “Winner’s curse”. Reasons are not far to seek. In practice,
it appears that some lenders in league with ARCs or the promoters have
referred the cases to CDR cell to avoid immediate classification of the
loans as non-standard in their books.
The promoters of large corporations being influential prefer the CDR
route to salvation than facing SARFAESI action by the lenders.
Considering the large amount of debt sought to be restructured with not
inconsiderable sacrifices by lenders, one would have demanded a more
careful approach in referring the cases under CDR scheme.
One quick action to remedy the current situation of handling NPAs will
be to divest DRTs of all company cases and hand them over to the
National Company Law Tribunal (the relative Act was passed in 2002 but
some amendments are yet to be approved) to be set up in replacement of
BIFR to deal with not only sick undertakings but also such of those
cases which now are dealt with by CDR mechanism beyond a certain debt
level of say, Rs100 crore.
CDR as a non–statutory and voluntary method can remain open for smaller
corporates. Given freedom of action and without the fear of vigilance
enquiries imbued with hindsight, public sector banks themselves must be
able to handle substantially their NPAs by strengthening their recovery
departments. That could minimize the role of the borrowers and their
cohorts masquerading as experts in tackling NPA problem and deriving
undue benefits from a well intentioned scheme at the cost of lenders,
just as they wore down the BIFR and the DRTs.
http://www.moneylife.in/article/indian-banks-npas-ndash-iv-sarfaesi-act-and-its-impact/26995.html
