A dead letter

The recent decision of a debt recovery tribunal in Ahmedabad to stay the sale of Mardia Chemicals' assets by ICICI Bank has confirmed the worst fears of bankers.

In April, the Supreme Court, while upholding the constitutional validity of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act, had struck down the provision in the Act that required borrowers to deposit three-quarters of the amount in default before appealing to the Debt Recovery Tribunal (DRT).

In the judgement, the Supreme Court had recognised that the Act was in the public interest but it had, at the same time, pointed out that the Act cannot be one-sided and could not shut out reasonable legal remedies available to borrowers.

Moreover, the court empowered the DRTs to grant stays on the sale of assets in deserving cases. Bankers had at the time forecast that, since there was no penalty for appeal, borrowers could flock to debt recovery tribunals on even flimsy grounds, and the DRTs would routinely order a stay of asset sales, leading to inevitable and expensive delays.

The Supreme Court judgement treads a fine line between the public interest and the need to uphold individual rights.

However, one important point appears to have been overlooked "" the question of delay. The entire rationale of the Sarfaesi Act was to ensure that the thousands of crores worth of sick assets that are currently locked up in litigation are put back in productive use as early as possible.

Consider what happens when a bank calls in a loan: the borrower pleads inability to pay, the banker approaches the court, and the case drags on for years, sometimes decades, with appeals usually being made to higher courts.

Even when decrees are obtained and receivers appointed for the sale of the assets, the sale process could take years, especially when unscrupulous borrowers have no compunction in bribing receivers.

Meanwhile, the fixed assets turn into junk while stocks are surreptitiously sold and the proceeds diverted. The banker, more often than not, is left with nothing.

More importantly, thousands of crores of assets are wasted, assets that could have found profitable use in more capable, or less venal, hands.

Note that the crux of the matter here is delay "" the value of these assets deteriorates with time, and the longer a case takes the higher the loss to the economy.

The DRTs therefore have a duty to speedily dispose off these appeals. That should not be difficult, since most of the evidence in these cases is documentary: borrowers have pledged their assets in return for loans and all that needs to be established is whether the documents were signed, whether the loan was disbursed and the assets pledged. The circumstances that led to the default are of no consequence.

In short, the routine grant of stay orders must be stopped. Further, it's a fact that DRTs are severely overburdened, and the Supreme Court judgement will see even more borrowers rushing to them.

All the more reason, therefore, for increasing the number of DRTs substantially. Bankers have also suggested that borrowers may be asked to deposit a small amount, say a quarter of the amount in default, to deter borrowers approaching the DRTs in frivolous cases, and the government should consider this proposal.

In sum, the government must finds ways and means of ensuring that the Sarfaesi Act is not rendered toothless because borrowers use the judicial process to delay the denouement.