The Hindu Business Line : SC upholds Securitisation Act — Banks win freedom to sell mortgaged assets

THE Supreme Court today upheld the constitutional validity of the Securitisation Act thereby allowing banks and financial institutions to sell assets of defaulting borrowers that have been attached under the Act.

The court, however, quashed as unconstitutional the provision that required aggrieved borrowers to make an upfront deposit of 75 per cent of the dues claimed in case they preferred to go on appeal on action initiated against them.

The judgment was delivered by a three-judge bench which included the Chief Justice Mr V.N. Khare, Mr Justice Brajesh Kumar and Mr Justice Arun Kumar disposing of a bunch of petitions filed against the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002 (popularly called the Securitisation Act).

The 2002 Act was challenged in various courts on grounds that it was loaded heavily in favour of lenders, giving little chance to the borrowers to explain their views once recovery process is initiated under the legislation. Leading the charge against the Act was Mardia Chemicals in its plea against notice served by ICICI Bank.

The Government had, however, argued that the legislation would to bring financial discipline and reduce the burden of NPAs of banks and institutions. The Securitisation Act has also been made applicable to urban cooperative banks and housing finance companies.

In the Mardia case, the apex court had earlier said that lenders could proceed with attachment of assets but had to wait for the final order of the court's to proceed with the sell-off.

Top bankers said that the judgment would come as a major relief the entire banking industry. "This would put tremendous pressure on the borrowers to repay. Fresh defaults would also be much less," the Chairman and Managing Director, Punjab National Bank, Mr S.S. Kohli, said.

The judgment would have a deep impact on the financial sector and would enable banks to extend loans at cheaper rates, said Mr B.D. Narang, CMD, Oriental Bank of Commerce.

"Once the gross NPAs come down, we (public sector banks) can remain competitive. Our requirement for high margins would not be there. So we can extend loans at lower rates," he said.

Going forward the entire banking sector could show much healthier profits. "I see a robust and fundamentally strong performance of all banks during the current fiscal," Mr Narang said.

The Canara Bank, CMD, Mr R.V. Shastri, said that the judgment would bring back defaulting borrowers back to the negotiating table. "During the initial period many borrowers came forward to settle their loans but after the cases were filed the response came down. I expect process of negotiations to start once again in a big way," he said.

Mr Narang felt that the striking down of the clause for making upfront payment in case of appeals would not have much impact. "I do not see it as a stumbling block. In any case we were asking for 25 per cent payment before starting negotiations for recovery," he said.

Major impact on BIFR cases

The court's decision on the validity of the Securitisation Act would have a major impact on cases pending before the Board for Industrial and Financial Reconstruction (BIFR).

The Act provides that if secured creditors representing three-fourths of the amount agree then they could seek abatement of the case pending before the BIFR once proceeding under the Securitisation Act starts.

"We were waiting for the judgment. We would now try to initiate discussions among the creditors for individual cases to be taken out of the purview of the BIFR," a senior banker said.

Bankers pointed out that that provision for abatement of BIFR cases could be a major help since many companies had approached the Board only to seek it shelter to defer payments due to lenders.

More Stories on : Non-Performing Assets | Securitisation | Courts/Legal Issues

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