Central Registry under the SARFAESI Act: Boon or bane?

The whole process of creation of a Central Registry (CR) under the SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act smacks of callousness on the part of the bureaucracy.

The CR was set up on March 31, 2011, to fulfil the declaration of the Finance Minister in his Budget speech on February 28, 2011. To be sure, the SARFAESI Act has made a wholesome provision in legislating the formation of a CR.

According to the RBI, “the objective of setting up a Central Registry is to prevent frauds in loan cases involving multiple lending from different banks on the same immovable property.”

Equitable mortgage

This happens in cases where the mortgage on the property is created by deposit of the relative title deeds, commonly known as “equitable mortgage”. The simple act of depositing the title deeds with a lender (in notified towns), with the borrower's intention that the relative property should be held as security for the loan, creates the mortgage under Section 58(f) of the Transfer of Property Act.

Such a mortgage need not be recorded in the registry of land records. Therefore, if the property is again mortgaged by a registered deed to another lender to whom a representation might have been made that the relative title deeds are lost or not traceable, the second lender would not be aware of the earlier mortgage.

But then, for creating a second equitable mortgage, the borrower has to get back the title deeds from the first lender, but that lender will not part with it, because that Act cancels the mortgage.

Fraudulent borrowers, however, often take colour photocopies of the title deeds and pass them off as original to the subsequent lenders. Also, there have been problems in creating mortgage of apartments in multi-storied buildings.

In some cases, when the bank officer is ignorant, the borrower creates the equitable mortgage by depositing certified copy of the title deed after swearing by an affidavit and/or publication in newspapers that the original title deeds are lost.

The Tamil Nadu Government has considerably helped lenders in the above cases by providing for registration of equitable mortgage on payment of a nominal fee, not exceeding Rs 10,000.

All banks and financial institutions in Tamil Nadu have made use of this facility and the fraud cases referred to by the RBI should not arise in the State. In other States, the fee for registration of equitable mortgage is ad valorem and a heavy burden, which the borrowers would naturally avoid.

To circumvent this perennial problem, Section 22 of the SARFAESI Act laid down that all charges (other than pledge) created on properties and assets of borrowers favouring banks, notified financial institutions, and securitisation and asset reconstruction companies shall be registered with a Central Registrar appointed by the Government.

To give effect to these provisions, the Central Government, on March 31, 2011, appointed the Chairman and Managing Director of the National Housing Board (NHB) to hold additional charge of Central Registrar.

The office of the CR will be situated in the local chapter of Indian Banks' Association. To begin with, only mortgages should be registered and not hypothecation or other charges.

A mystery

It has been stated that the function of the Central Registry has been entrusted to a government company licensed under Section 25 of the Companies Act.

When that company was formed, what are its objects, and so on, are shrouded in mystery. Notifications in the Central Government Gazette — be they ordinary, extraordinary, special, and so on — are elusive to even government departments and the RBI, not to speak of banks and the common man.

Even the May 26, 2011, notification/circular issued by the RBI, which is supposed to contain the entire rules published in the GoI Gazette of March 31, 2011, does not contain Forms I to IV, said to have been appended to the said rules.

In making such a purely ad hoc arrangement, the powers that be are blissfully unaware of the massive task involved.

The CR has to record each and every transaction involving mortgage of properties favouring banks and others.

The Government has appointed a part-time Central Registrar with a temporary office.

Possibly, other supporting staff are in the process of being appointed. In fact, the transactions need to be reported electronically and registered at various offices of the Central Registrar to be set up at different cities. Even the IT infrastructure will take quite some time.

Further, the SARFAESI Act needs to be amended to provide that registration could be done at the head-office or at designated branches of the CR. Otherwise, the CR would be bogged down with massive work, which it will find extremely difficult, if not impossible, to do.

It is hoped that the authorities would wake up to the enormity of the task and set up the necessary infrastructure and staff to effectively implement the objective behind creation of the CR.

Timeframe, penalty

There is another anomaly. The mortgage or other charges, under Section 23 of the Act, are required to be filed/registered within 30 days from the date of their creation. An extension of further 30 days alone is available after the initial period of 30 days on payment of 10 times the fee prescribed for the initial registration.

In view of this, it will be well-nigh possible to register all those mortgages, modifications, and so on, which happened in April and May 2011, now.

There is another relevant provision that could affect the bankers. This pertains to the penalty for not reporting the transactions in time. It is provided that every bank and every officer of the bank who is in default, shall be punishable with a fine up to a maximum of Rs 5,000 a day of delay.

Two objections come to mind. One, if the bank is in default, there may be a case for the Government to penalise the bank, but to penalise also the officer of the bank is draconian.

Bank, a corporate entity, is a legal person and by fining both bank and officer, does it not amount to fining a person and also a limb of the person?

The second objection is to the inherent time involved in submitting the transaction details to the CR for registration. Obviously, the CR cannot get the data from the 70,000 bank branches.

It has to ask banks to identify nodal offices — say, regional or zonal offices, not exceeding 30 for big banks, 20 for medium-sized and 10 for small banks — which should be authorised to submit the information to the CR.

Nodal offices would, in turn, be fed by a large number of branches. Inevitably, 30 days (including bank holidays) would be insufficient. This needs to be reviewed by the authorities.

If penalty is to be levied on individual bank officers in addition to the banks, many officers could go bankrupt if the authorities were to seriously enforce the law.

It must be admitted that a similar provision exists in the Companies Act in regard to filing of particulars of charges created on the company's property and assets, but the authorities do not appear to have levied any fine on any officer of a company in default.

If, in practice, over the past five decades no officer of a company was penalised by the Government for civil lapses of the company, why retain the provision even in company law?

To conclude, the whole objective of creating the CR could be defeated by gigantic procedural lapses and problems. And, to fine bank officers, besides fining banks, is iniquitous. Will the banks and association of officers take up the matter with the authorities before it is too late?

Mammoth task

All existing mortgages need to be recorded in the Central Registry to make the record complete, although this does not appear as a requirement under the SARFAESI Act.

This is a gigantic task, given the fact that there are 69,160 bank branches as on March 31, 2010, and each and every branch will have some mortgages coming under the purview of the SARFAESI Act.

There should be at least a few lakh mortgages created in favour of banks and financial institutions. And, after the first creation, every change, whether it be an increase or reduction in the loan amount, has to be recorded.

Even without reckoning the task of creating a record of all the existing mortgages, the number of on-going mortgages should be sizeable. The total housing loans of commercial banks was Rs 21,620 crore as on March 2010 and this sector has been growing at over 10 per cent every year.

Assuming, on an average, the loan size (fresh plus existing after part repayment) is around Rs 25 lakh, the total number of housing loans should have been around 80,000 and could easily be over a lakh now. Besides these loans, every SME borrower is asked to mortgage title deeds as collateral security for the loan granted by banks for business purposes.

And, easily, during every month the number of transactions to be registered with the CR could exceed 10,000.

(The author is a former Deputy Managing Director of State Bank of India.)

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