By: Indu Bhan | New Delhi | January 29, 2015 5:00 am
Dismissing appeals filed by around 60 companies, the Supreme Court on Wednesday upheld the amendment to the Securitisation Act that gave power to every financial institution to decide a period after which a bad loan can be declared as a non-performing asset (NPA).
Before the 2004 amendment to the Securitisation Act and Reconstruction of Financial Assets & Enforcement of Security Interest Act, 2002 (Sarfaesi Act), RBI was the regulator for the banking, non-banking and securitisation institutions for deciding the period after which loans could be treated as NPA. Till 2004, RBI had set the NPA period for banks at 90 days and at 180 days for NBFCs.
Power Finance Corporation has a six-month period to classify an asset as an NPA. Besides, there are a few other institutions like Exim Bank, National Housing Bank under NHB Act, Nabard, Rural Electrification Corporation and Indian Railway Finance Corporation who are governed by their own regulations.
The promoters of around 60 companies had moved the Supreme Court questioning every financial institutions power to decide its own NPA period, saying it is a violation of right to equality. They had also challenged the RBI’s competence to regulate all banking and NBFCs in this regard. A bench headed by Justice J Chelameswar, while dismissing the appeals, asked the distressed companies to pay 1% of their loan outstanding amount to the lenders as costs.
The ruling came on two batches of petitions against the high courts of Gujarat and Madras as both the courts have differed on the issue. The Gujarat High Court while striking down the powers of different regulators in defining NPAs (under Section 2(1)(o)(a) of the Securitisation Act, 2002) had restored the power of the RBI to decide the period after which the bad loan can be called as an NPA.
However, the Madras High Court while rejecting petitions of various companies and individuals, including Deccan Chronicle Holdings and Marg, had upheld the constitutionality of Section 2(1)(o) of the Act and the guidelines issued by the RBI on the classification of assets as NPAs. Interestingly, Delhi High Court had upheld this 2004 amendment in the
Challenging the Gujarat HC’s April order that termed the decision of Parliament to take away the power from RBI as wrong, the promoters and companies had alleged that its prudential norms defy the right to equality under Article 14 of the Constitution of India.
Questioning the reason for the difference of NPA periods among financial firms, they argued that the 2002 Act should be applied uniformly across all borrowers and challenged the RBI guidelines on income recognition, provisioning and asset classification under prudential norms as being unconstitutional.
“The RBI guidelines are discriminatory, arbitrary, unreasonable and ultra vires the Securitisation Act and that the definition of the NPA as per RBI is contrary, distinct and contradictory to the definition of the NPA under the Central Act, and hence, the same is unconstitutional,” senior counsel Soli Sorabjee had argued.
Debtors of various banks who have appealed against the Madras HC’s order said that issuing guidelines relating to asset classification is essential legislative function and, therefore, it cannot be delegated. They argued that the guidelines issued by the RBI cannot be used for defining NPAs and there should be a separate legislation in this regard.
Sarfaesi Act gives powers to seize and desist to the banks under which the banks need to send a notice in writing to the defaulting borrower requiring it to discharge its liabilities within 60 days. In case the borrower fails to comply with the notice, the bank can take either take possession of the security for the loan, sell or lease or assign the right over the security or appoint any person to manage the same.
The Prime Minister, Shri Narendra Modi, today called upon India’s banking sector to establish banks which rank among the top banks of the world.
He was speaking at Gyan Sangam – the Bankers’ Retreat in Pune. He said it was perhaps the first time that banks had given tasks to the Prime Minister through a presentation. He said the Gyan Sangam reflected team spirit and a collective will to address issues. He described Gyan Sangam as a unique initiative.
He said the objective in this bankers’ retreat was to find solutions to problems, and this was the first step towards catalyzing transformation. He said informal discussions helped achieve meeting of minds, which in turn enabled strategic goal setting.
The Prime Minister appreciated the efforts of the banks in successfully implementing Pradhan Mantri Jan Dhan Yojana. He said this is going to have multiple effects. He said the Jan Dhan Yojana would help redefine goal setting among banks, due to enhanced confidence levels following the success of the programme.
The Prime Minister said 7 crore families had benefited from direct cash transfers of LPG subsidy in just three days since January 1st. He said this represented one-third of all families India. He said such achievements should boost confidence.
The Prime Minister said the banking sector of a country mirrors its economic rise. Japan and China had banks in the top ten banks of the world during their economic rise.
The Prime Minister said banks would be run professionally, and there would be no interference. But accountability was essential. He said the Government had no vested interest, and public sector banks can derive strength from this fact.
However, the Prime Minister said India is a democracy. He said he is against political interference, but supports political intervention, in the interest of the people. He said political intervention will enable the voice of the common man to reach such institutions.
The Prime Minister said this also highlighted the issue of poor financial literacy in the country. He said today even the common man needed financial literacy. He called upon banks to take the lead in encouraging competitions on financial literacy in schools, much like mock Parliament competitions.
The Prime Minister said banks should develop dedicated teams to fight cyber crime.
The Prime Minister said that with 81% of branches and 77% of deposits, the net profits should improve from current levels of 45%.
The Prime Minister called for developing common strengths among the 27 public sector banks. He suggested this could be done in areas such as software, and advertising. He gave the example of number portability in the telecom sector in this regard. He said this would improve the customer-centric focus of banks. The Prime Minister said public sector banks, as a team, should also be conscious of the direction in which the country is moving, and work towards simplifying procedures to facilitate the common man.
The Prime Minister also called upon banks to trust the common man.
The Prime Minister said the Swachhta Abhiyan has caught the imagination of the younger generation. He called upon each public sector bank to help develop 20,000 to 25,000 Swachhta entrepreneurs. He also asked banks to prioritize loans to students as this would be a very productive investment for the country. He said the country needs skill development for its youth in a big way, and banks need to take the lead in this.
The Prime Minister asked public sector banks to set goals for the 75th anniversary of independence in the country in 2022. He said he had resolved to provide housing for all by 2022, and banks had a huge opportunity here, as 11 crore houses were required.
The Prime Minister said banks should redefine parameters for success. For instance, let them prioritize loans to enterprises which will generate more employment, he said.
The Prime Minister called for an end to lazy banking, and asked banks to take on a proactive role in helping the common man.
The Prime Minister said that as part of Corporate Social Responsibility, banks should take up one sector each year to play a positive role.
Governor of Maharashtra Shri Vidyasagar Rao, Chief Minister of Maharashtra Shri Devendra Fadnavis, Finance Minister Shri Arun Jaitley, MoS Finance Shri Jayant Sinha, RBI Governor Shri Raghuram Rajan, and Secretary Financial Services Shri Hasmukh Adhia were present on the occasion.
United Bank of India (UBI) declared Kingfisher Airlines, Mallya himself and three directors of the company – Subhash R Gupte, Ravi Nedungadi and Anil Kumar Ganguly – as wilful defaulters.
Kingfisher Airlines in July 2014 moved the Calcutta High Court, two months after the bank had in May 2014 identified it and Mallya as wilful defaulters. The court last week dismissed the plea, paving the way for UBI to declare the company and its chairman wilful defaulters.
Last Tuesday the Supreme Court on rejected a plea by Kingfisher Airlines against being declared a wilful defaulter, saying it has become infructuous as the Grievance Redressal Committee of Union Bank of India has already passed an order.
A borrower is classified as a wilful defaulter in any of the following events:
- When there is a default in repayment obligations by the unit (company/individual) to the lender even when it has the capacity to honour the said obligations. There is deliberate intention of not repaying the loan.
- When the funds have been siphoned off and not been utilized for the purpose for which it was availed. Further, no assets are available which justify the usage of funds.
- When the asset bought by the lenders funds has been sold off without the knowledge of the bank/lender.
- The funds are not utilized for the specific purpose for which finance was availed but have been diverted for other purposes.
- Further, in cases where a letter of comfort or guarantees furnished by group companies of wilfully defaulting units are not honoured when they are invoked by the lender, then such group companies are also considered to be wilful defaulters.
The decision to tag a borrower as a willful defaulter is the harshest step a bank can take upon any borrower.
Identifying and Declaring wilful defaulters
Bankers have an internal committee, headed by an executive director that examines cases of wilful defaults. The credit monitoring or recovery departments give their reports on borrowers deemed to have defaulted wilfully to this committee. The committee examines the efforts made by the bank to recover the dues, the repayment capacity of the borrower, end use of the funds before identifying an individual as wilful defaulter. The decision taken on classification of wilful defaulters is well documented and supported with evidence
Once a borrower is identified as a wilful defaulter, the bank sends him/her a notice with the reasons for the same. The borrower is generally given 15 days to make a representation against the decision to the grievance redressal committee. This committee is either headed by the chairman and managing director or by the executive director who is not part of the panel on identification of wilful defaulters. The bank declares a borrower wilful defaulter if he fails to offer a proper explanation or avoids the grievance redressal committee hearing repeatedly despite notices.
Banks also send their list of wilful defaulters to RBI, Securities and Exchange Board of India (Sebi) and Credit Information Bureau India (Cibil). This is aimed at preventing wilful defaulters from accessing capital markets and borrowing from other banks and financial institutions. The penal measures include the following:
- No additional facilities will be granted to listed wilful defaulters by banks and financial institutions
- Promoters of companies that have been identified for siphoning of funds, misrepresentation of accounts and fraudulent transactions will be debarred from institutional finance for floating new ventures for a period of five years
- Legal process against wilful defaulters will be initiated. Lenders may initiate criminal proceedings also
- Banks will adopt a proactive approach for a change of management of the willfully defaulting borrower unit.
- Wilful defaulters will not be allowed to take up board positions in any company
Banks need not report cases
- Where outstanding amount due is below Rs 25 lakh and
- Where lenders/Banks have agreed for a compromise settlement and the borrower has fully paid the compromised amount.
ICRA an independent investment information and credit rating agency estimates that public sector bank’s gross non-performing assets (NPAs) to stand at up to 4.7 per cent at the end of this financial year, compared with 4.4 per cent at the end of FY14 it expects public sector banks’ gross NPAs to be at 4.4-4.7% as on March 31, 2015.
Fresh non-perfoming assets or NPAs of public sector banks are estimated to be at 3.5% of advances during the quarter ended June’14, according to a study by ratings firm Icra. Their gross NPAs increased by 20 basis points (bps) to 4.6% during the quarter. Asset quality of private sector banks too continued to remain under pressure as their NPAs also increased by 20 bps to 2.0% during the quarter.
However, there was a significant drop in the number of fresh cases of loans being refered to the corporate debt restructuring or CDR Cell for restructuring during the first of FY’15.
“The rate of generation of fresh NPAs remained elevated for public sector banks (3.5 per cent) and, as result, their gross NPAs increased by 20 basis points to 4.6 per cent in the first quarter of FY15. During the same quarter, the NPAs of private banks increased by 20 basis points to two per cent,”
The Icra study notes that the level of NPAs in the banking system gets understated as a sizeable amount of loans are sold to asset reconstruction companies or ARCs. It says that the gross NPA percentage would have been higher by 20-30 bps if there were no sales to ARCs . But sale of NPAs to ARCs is expected to decline in the rest of the current financial year ending March’15 as the Reserve Bank of India has prescribed that ARCs must invest and hold 15% in Security Receipts (SRs) as against 5% earlier.
The Department of Financial Services in the finance ministry is considering to incorporate in the Sarfaesi Act the ‘principle of first to register’ a lien on the assets of defaulting companies.
The registration has to be with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (Cersai) set up to eliminate instances of multiple lending on the same property.
According to the changes proposed by the government in the Sarfaesi Act, whoever registers their charge on an asset first with the designated central registry will get priority over others in recovering the dues by attaching the assets. Since lenders practically are the first to do such registration (at the time of giving the loan), this would in most cases lead to their lien getting precedence.
The Income Tax Departments role in Recovery by lenders
Currently, the out-of-the-court mechanism under Sarfaesi Act allows secured creditors to take possession of the assets of a firm under liquidation if their dues are not paid within two months of raising demand. However, in practice, tax authorities and municipal corporations often attach the assets of a defaulting company beforehand, which comes in the way of lenders recovering their dues.
The tax departments draw the powers to attach from their respective laws – Income Tax Act, Central Excise Act and the like. As per the new proposal, the provisions of Sarfaesi Act of 2002, which is a relatively new law, will prevail over those of older statutes and will effectively protect the interest of lenders without any amendment to any other law.
The proposed amendments also include a provision to classify central and state authorities handling income tax, excise and value added tax as well as municipal corporations as secured creditors, so that the moment a taxpayer defaults, the authorities would need to register their charge on the assets. However, if the company has already taken a loan, the lender would have already registered his charge on the assets, giving the tax authorities only second charge on the assets.
Currently, secured creditors include banks, financial institutions, debenture trustees appointed by banks, securitisation companies, asset reconstruction companies and any other trustee holding security. “These changes to the Sarfaesi Act will be a huge leapfrog in terms of reforms in this area. States which agree to this provision may soon be perceived as more investor friendly and therefore would see greater lending by banks and financial institutions,” said an expert in bankruptcy laws.
The changes are in line with international best practices followed by the UK, US, Australia and Canada.
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By SANETTE TANAKA June 5, 2014 9:11 p.m. ET
The Gujarat High Court has restored the Reserve Bank of India’s power to decide the period after which a bad loan can be called a non-performing asset (NPA).
Till 2004, RBI had set the NPA period for banks at 90 days, and at 180 days for Non Banking Financial Companies. But with the amendment, the financial institutions became free to have their own regulations for NPA. The NPA period was decided separately byeach firm.
The High Court’s ruling came on petitions filed by several defaulters of banks and NBFCs who had questioned every institution deciding its own NPA period, calling it violation of right to equality.
The bench of Chief Justice Bhaskar Bhattachrya and Justice J B Pardiwala said that the Section 2(1)(o) of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act is held unconstitutional.
The High Court also observed that Parliament was wrong in taking the power to decide NPA guidelines away from the RBI. Before the amendment in 2004 to the Act, the RBI was the regulator for the banking, non-banking institutions and securitization agencies for deciding the period after which the loans can be treated as the NPA.
The finance ministry has asked public sector banks (PSB) to increase the usage of Sarfaesi Act provisions to quickly recover bad loans.
Data for 2012-13 showed that out of the three methods for NPA recovery — Sarfaesi Act, Debt Recovery Tribunals (DRT) and Lok Adalats – Sarfaesi Act route was the most effective. In 2012-13, around Rs 18,500 crore was recovered through the Sarfaesi Act route, while DRTs helped in the recovery of just Rs 4,400 crore and Lok Adalats only Rs 400 crore.
Under the Sarfaesi Act, lenders have the power to enforce the security interest by taking possession of the assets from the defaulting borrower without court intervention, following the expiry of a 60-day notice period on the loan being classified an NPA.
The ministry has now said wherever possible the PSBs must exercise their rights under Section 13(4) of the Sarfaesi Act, which empowers the lenders to take possession of the secured assets of the borrower (whose accounts have turned NPA) and sell the assets before their value deteriorates. The section also empowers lenders to takeover the management of the business of the borrower and sell the assets if needed.
It also wants PSBs to adopt the latest sophisticated risk management tools (RMT) to effectively measure risks in lending and price loans accordingly so that there is an improvement in the asset quality. These were measures suggested by the new financial services secretary GS Sandhu to the PSB chiefs in a recent letter, banking industry sources told FE.
The ministry also wants PSBs to ensure that the companies do not divert loans for purposes other than the one for which the loans was taken. It has also pointed out the need to have separate RMTs for retail, wholesale, infrastructure and big-ticket loans.
The concern is because of the many instances of ‘quick mortality’, where within six months of the bank extending the loan, the company has become sick.
Further Reading – The Ffinancial Express
The finance Ministry has now increased the no, of NPA accounts it monitors to the top 50 from the previous top 30. It has alsoasked the banks to submit an an action-taken report on recovery for the ‘top 50′ NPA accounts as on December-end 2013.
At June-end 2013, gross NPAs with the top 30 accounts of 26 PSBs were worth R63,671 crore, which is around 35% of their total gross NPAs of R1,82,829 crore.
In the last quarterly meeting to review the performance of PSBs and financial institutions, finance minister P Chidambaram had expressed concerns over high NPAs in two segments — large corporates and small industries. The ministry had in October last year asked PSBs to set up a separate vertical headed by an officer of the rank of general manager for recovering money from bad loans.
GS Sandhu, The the new secretary of department of financial services (DFS), also sought a list of wilful defaulters and findings of prima facie diversion of funds by such borrowers.
Gross NPAs of PSBs had surged to 5.17% of their advances in December-end 2013 from 3.84% at March-end 2013 (and 4.18% in end-December 2012) while their restructured assets increased to 7.44% from 7.18% during the period. A harder look at the NPA data reveals that at December-end 2013, maximum NPAs were in the small and medium enterprises loan segment with 7.21% of advances while agriculture loan NPAs were at 5.99%. NPAs in the corporate loan segment were 5.28%. In retail loans, NPAs were 2.74% and, in real estate, they were 1.83%.
In a report released on Thursday Fitch Ratings expressed concerns over stressed assets in India compared to other Asian emerging markets. Fitch said it “expects Indian banks’ asset quality to weaken further, with stressed assets (NPAs and restructured loans) to rise from 10% (at mid-2013) to around 15% during FY15 (by March 2015).”