The Hindu Business Line : Reorient the SARFAESI Act

The powers conferred by the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act (54) of 2002, for recovery in a fast track mode by lenders notwithstanding, have become arbitrary in their execution, elevating the lender to be Prosecutor, Judge, Jury and Hangman — all in one go.

Surely a person cannot be judge in his own cause as is the case obtaining now.

The Act views all defaulters alike without any distinction as between a wilful defaulter and a defaulter by circumstances beyond his control.

A fast track exit mechanism, one of the intended outcomes of this Act, expected to cut short the inordinate delay of the legal process benefiting the borrower also, has now turned against him. A total of 1,18,980 notices for an outstanding amount of Rs 35,650 crore seems to have been sent till March 31, 2006 under the SARFAESI Act. An amount of Rs 6,376 crore seems to have been recovered from 65,334 cases. This means that only a paltry 18 per cent of the total amounts due have been recovered from out of 55 per cent of the notices sent.

That means that the balance of 53,646 notices would cover the balance outstanding of Rs 29, 274 crore. In effect, a whopping 82 per cent of the amounts which are yet to be recovered are covered by the balance of just 45 per cent of the notices already sent.

Thus, the original statistic bandied about by the then Finance Minister, when the Bill was introduced in Parliament during November 2002, that the largest block in terms of volume of NPAs was from Rs 1 crore to Rs 50 crore, where 49 per cent was the borrowed amount, and that the legislation would actually be effective in its application for the recovery of such NPAs, seems to fall flat on its face.

Big borrowers untouched

The SARFAESI Act seems to be implemented more vigorously, if not selectively, only against the smallest of the small borrowers and against the Micro and Small Enterprises (MSEs) all over the country, leaving the big borrowers relatively untouched, if our feed back and even as a thumb rule, the spate of advertisements daily in the news dailies are anything to go by. The empirical evidence as above would also seem to suggest the same.

More often than not, the assets of the MSEs are seized and sold at throwaway prices, enriching only the middlemen. Both the small borrower and the banks lose out on this score. A recent circular by the Reserve Bank of India has very sharply asked the banks not to dispose of their NPAs at less than their NPV (net present value). The Corporate Debt Restructuring (CDR) mechanism was originally implemented mainly for the large steel industry. Many years later, grudgingly, this was offered to the small borrower. It is still to take off in any meaningful manner. A small borrower is not given any rescheduling/rephasing, revival/rehabilitation as liberally as the large borrower. In fact, the SARFAESI Act acts as a damper to such revival and rehabilitation.

Lenders to blame

An important problem of the borrower is that the banks and financial institutions are themselves, in many instances, the cause for such defaults and for the formation of such NPAs. Their heavy collateral-based lending, more often than not, sacrificed appraisal at the altar of the comfort given by the heavy collaterals. This, coupled with their not lending adequately and in time, is another contributory factor for the formation of such NPAs.

Also, NPAs do not happen overnight. Banks and FIs sanction loans to borrowers after a thorough appraisal. More importantly, after the sanction, there is this duty enjoined on the lender to monitor whether the amount is being utilised for the appropriate purpose. Thus, those who approve the project report carelessly and fail to monitor such loans should ideally also be held responsible for the loans turning into NPAs.

Unfulfilled promises

Also, certain changes in the policies of the Government are the greatest reasons for the NPAs being created. The borrower is lured by the State and Central governments promising him all kinds of facilities such as land, power, infrastructure, raw materials, subsidies etc. But unfortunately many of these promises are often a mirage, contributing a great deal to the birth of NPAs.

In Uttar Pradesh and Maharashtra, for instance, some years back, sugarcane was being burnt. The poor borrower has given his house, tractor, small holdings, personal jewellery etc, and everything in his possession as security to the banks against his loan. As is the case with all MSEs, all of these securities are sold under the provisions of this Act for a paltry sum.

Conditions must be such that if any industry is sold, the purchaser must run/revive the industry. Running an industry is one thing and turning the purchase into a real estate proposition is another. Such real estate benefits neither the banks and FIs nor the borrower; only middlemen stand to gain.

Moreover, the NPAs of the priority sector are often compared only with the advances given by the Scheduled Commercial Banks (SCBs). For a correct barometer to emerge, the advances given by FIs also would have to be taken into account. This has been not seen in perspective for too long, leading to the present situation .

A crucial aspect of lending is the fact of it being bound by a legal agreement between the lender and the borrower. The ground reality, however, is skewed against the borrower as the moral high ground is always loaded in favour of the lender just because of the fact that he is a bank.

More often than not, it is taken for granted that any and every issue arising out of such contract/ agreement has been handled correctly by the lender.

This perspective is actually biased against the borrower. Instead and ideally so, a contract should be viewed in the light of the conditionalities as obtained in such agreement.

Sure enough, there might be some wilful defaulters also. But punishing all other defaulters along with the wilful defaulters is not justified.

Corrective steps

The need of the hour therefore is to reorient the SARFAESI Act with some positive steps as under for the benefit of the MSEs.

A Lenders Liability Act in the place of the existing lame duck paper tiger of a Fair Practices Code for lenders.

Statement of accounts to be more transparent specifying the daily product of outstanding amounts and the rate of interest applied on such product; and thereafter denote the amount separately as principal and interest.

An amendment to the Income Recognition & Asset Classification norm of the RBI specifying an asset to be classified as an NPA only after 180 days, instead of the present 90 days.

An amendment exempting MSEs from the SARFAESI Act; and until such exemption, an amendment to Sec 13 (2) of the Act giving time up to 180 days to the borrower to repay, instead of the present 60 days.

An amendment to Sec.13 (3A) of the Act, so that if any facts or other compelling reasons are put forward by the borrower, it should be considered by the lender and such reply should vest a right on the borrower to approach the DRT under Sec. 17 (1) of the said Act at that stage itself

A clear and categorical differentiation in the treatment of a defaulter by circumstances and a wilful defaulter, as defined by the RBI.

Finally, a white paper on the SARFAESI Act.

(The author is President, Industrial and Financial Reconstruction Association for Small and Tiny Enterprise (IFRASTE). He can be reached at deramakrishnan@gmail.com)

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