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Tuesday, May 04, 2004

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SC judgment on Securitisation Act — Recovery follow-up to be tough for lenders

Sarbajeet K. Sen

New Delhi , May 3

THE many thousands of notices sent by lenders to defaulting borrowers under the Securitisation Act asking them to pay up their dues are threatening to boomerang into a major headache for the banks and institutions themselves.

The lending community, which had gone into an overdrive in serving recovery notices under the Act, is now preparing for sending fresh follow-up communication to all defaulting borrowers who have sent replies raising objections to the notices.

The follow-up communication is to be sent to comply with a less-publicised portion of the recent Supreme Court judgment upholding the validity of the Securitisation Act. The apex court had said that in each case where borrowers have raised objections to the notices, it would be compulsory for the lender to communicate in writing their reasons for not accepting the objections before initiating further recovery action.

"On the face of it, the requirement of communicating our views to the objecting borrower might appear to be an innocuous one but it has a potential to create a major headache with a large number of borrowers having already expressed disagreement over the action initiated by the bank," a senior banker in a nationalised bank dealing with recovery said.

The Supreme Court in its order had said "so as to demonstrate that the reply of the borrower to the notice under Section 13(2) of the Act has been considered after applying mind to it, the reason howsoever brief that may be for not accepting the objections, if raised in the reply, must be communicated to the borrower."

The court has said that this would be a reasonable requirement in view of the fact that the stringent nature of the Act which allows initiation of recovery process without the intervention of courts.

"The entire banking industry has sent out several thousand of notices to defaulters. Now we would have sent a fresh round of communication to majority of them. Even those who had not raised objections earlier might do so on frivolous grounds only to buy some time," bankers said.

However, they point out that this requirement would not create any obstacle in the long run in the recovery process. "In most cases where banks have sent notices they have solid grounds for initiating action for recovery. In most cases, there should be no problem in providing explanation for overruling the objections raised by the defaulter," bankers said.

The Securitisation Act allows lenders to take over the assets of defaulting companies and auction them to recover their dues. They can also choose to take over the management of companies. However, a 60-day period has to elapse from the time of sending the notices before such action can be initiated.

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

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