Bankers hail ruling on foreclosure law

Indian bankers heaved a sigh of relief as the Supreme Court upheld the constitutional validity of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

"It's a very positive move for banks as it will help speed up our recoveries," said ICICI Bank Deputy Managing Director Kalpana Morparia.  ICICI Bank last year issued around 50 notices to defaulters for a total sum of over Rs 2,500 crore.

For over a year, banks could only seize defaulters' assets but not sell them on account of the Mardia Chemicals vs ICICI Bank case in the apex court.

"Today's development is a welcome move for banks as willful defaulters will have no refuge under the law," said B Gopalakrishna, senior vice-president (law), UTI Bank.

Even as the verdict is seen to be a positive step, bankers fear that the striking down of Section 17 (2) of the Act will lead to a large number of appeals being filed before the Debt Recovery Tribunals (DRT). This could encourage frivolous appeals by corporate borrowers, said ICICI Securities Managing Director and CEO S Mukerjee.

With the abolition of the deposit amount, one has to ensure that frivolous litigation do not hinder the sale of securities, said IDBI Bank Managing Director and CEO GV Nageshwar Rao. IDBI Bank has served notices to two companies, Ahura Building and AR Computers.

Reiterating the concern, MR Umarji, chief legal adviser of the Indian Banks' Association (IBA), pointed out that the judgment recognised the power of the lender to enforce the contractual terms entered into with borrowers.

"Borrowers may, however, be inclined to go in for appeals before the DRTs to stall the possession and sale of their assets," he added.

"As the DRTs are reeling under the workload, if borrowers are allowed to appeal without depositing at least a part of the outstanding they owe the banks, they will be emboldened to go in for rampant appeals. The DRT infrastructure is just not equipped to handle this kind of pressure," said a senior public sector bank official.

Public sector banks have issued 32,043 notices under the Securitisation Act till May 2003, to recover an outstanding amount of Rs 11,447 crore. The recoveries by the state-run banks till May were Rs 436 crore from 8,676 cases.

Nine financial institutions (FIs) served notices to 182 companies for outstanding dues of Rs 946 crore till February 2003. Their recoveries till February-end amounted to Rs 25.2 crore.

The Union Bank of India tops the list of 27 PSBs recovering Rs 117.51 crore. The bank had issued 1,388 notices worth Rs 486.34 crore. The IDBI Bank issued notices to 41 borrowers till March 31 to recover Rs 1459 crore.

Among the private sector banks, UTI Bank has served notices to 15 companies, of which three companies "" Global Infrastructure, SPK Auto and Varman Carriers "" filed suits in the high court.

UTI Bank has taken constructive possession of the assets of Global Infrastructure worth Rs 5 crore, SPK Auto worth Rs 60-70 lakh and Varman Carriers worth Rs 60-70 lakh, added Gopalkrishnan.

Next, more appeals

* The court has struck down Section 17(2) of the Act which made it mandatory for borrowers to deposit 75% of the claim amount as a precondition to challenging the lenders' action at Debt Recovery Tribunals. This will encourage borrowers to move DRTs against the lenders, delaying the entire process

* Till now, banks could realise at least 75% of their claim "" had they won the case "" without selling assets as the money would have already been deposited with the DRTs. Lenders will now have to actually sell the seized assets to realise their money