India's bank loans recovery move raises misuse fears
Wednesday, 27 November 2002, 08:00 Hrs
NEW DELHI: While welcoming the Indian government's move to help banks and financial institutions recover long outstanding dues, experts have sought safeguards against misuse of provisions in the new legislation. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Bill 2002, passed Tuesday, is the first substantial economic reform to cross the legislative hurdle in Parliament this session. The legislation provides for banks and financial institutions to issue 60 days' notice to wilful defaulters on the basis of guidelines issued by the Reserve Bank of India (RBI) before proceeding with debt recovery. A statement made by Finance Minister Jaswant Singh in Parliament said so far 25 banks have issued notices for recovery of non-performing assets worth 32.60 billion, while financial institutions have issued notices for another 36 billion of overdue loans. "While the legislation is welcome, it has mixed up a lot of issues which leave the debtor vulnerable to misuse of powers by banks. There are a lot of issues on the accounting and tax fronts that are not clear," said Pradeep Rathi, a chartered accountant and deputy secretary of the Associated Chambers of Commerce and Industry of India (Assocham). An interactive session on the Securitisation Bill earlier this month at the chamber had brought forth apprehensions of experts and industry on several counts, said Rathi. "Non-performing assets (NPAs), which is essentially a debt instrument or commercial tool in the West, is now to be used as a debt recovery tool," said Rathi. With industry vulnerable to cyclical trends, Rathi said, there should be provision in the legislation for suitable timeframe for industry to reorganise and pay back dues. "While wilful defaulters should be dealt with in a harsh manner, banks should be more lenient with genuine defaulters," he said. Following the limited success of an offer last year for a one-time settlement of outstanding loans, availed of by only 19 borrowers, Sinha said the government is coming up with another offer for borrowings of less than 100 million. "We have reason to expect that with the enactment of the legislation, borrowers would now feel more inclined for settlement of outstanding dues," said Singh. The RBI will be issuing detailed guidelines in this regard. Welcoming the legislation, a spokesperson of the Confederation of Indian Industry (CII) said: "India has always had a bias against creditors." At the same time, a CII economic expert said there has to be a market for asset recovery, which will take time. The government's plans to set up an Asset Recovery Commission (ARC) would be a step in the right direction. Senior banking officials say there are several lacunae in the legislation that leave the debtors vulnerable to misuse of powers by bank employees. "The provisions are heavily loaded in favour of banks and financial institutions, as all documents are undated. In the case of some assets like heirloom, while the banks take only the notional value, for the debtor it has far more intrinsic value that will not be considered in the event of asset recovery," said a senior official, who did not want to be identified. Some sort of safeguards would have to be issued by the RBI in the notification or else it could lead to misrepresentation and misinterpretation of facts, said officials. "With many banks having pegged the promotion and discretionary powers of officials to the position of NPAs, there is a chance of the provisions being misused," said Chitra Roy, a retired RBI official. Many a banks are known to stop final retirement benefits of officials depending on the position of NPAs.