A half-step

By requiring borrowers to deposit between 25 per cent and 50 per cent of their outstandings with banks before filing an appeal to the Debt Recovery Tribunal against the attachment of assets under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act, the Union Cabinet has tilted the scales of justice in favour of banks.

Earlier, the Supreme Court had struck down the clause that required borrowers to deposit 75 per cent of the outstanding amount before filing an appeal.

The grounds for rejecting the clause were that 75 per cent was not a small amount, that it would amount to double security, because the assets were already secured in favour of the lender, that the borrower would not be in a position to raise the funds, and that it was to be imposed "while approaching the adjudicating authority of the first instance, not in appeal."

The Supreme Court decision had been seen by banks as opening the floodgates of unending litigation by borrowers, which is why the finance minister has said that the government's aim in amending the Act is to dissuade borrows from adopting delaying tactics.

It's worth noting, however, that while the government has now decided to reduce the amount of the deposit, the other objections to the clause remain.

The Supreme Court had also said that bank managements must apply their minds to the reasons given by borrowers in their replies to notices under the Act, and that "it would only be conducive to the principles of fairness on the part of the banks and financial institutions in dealing with their borrowers to apprise them of the reason for not accepting the objections or points raised in reply to the notice served upon them before proceeding to take measures under sub-section (4) of Section 13."

That point was driven home when the Bombay High Court ruled in favour of the borrowers in respect of three writ petitions in September, pointing out that the bank had not properly attended to the objections raised by the borrowers.

The High Court had also ordered the bank to pay damages to the borrowers. In essence, the courts have been pointing out that borrowers need to be given a level playing field with lenders.

It certainly is true, as borrowers have contended, that banks have sometimes been the reason for units falling sick, due to delay in taking lending decisions or by taking the wrong decisions. But that is no reason for denying banks the right to enforce their security.

If a bank alienates good borrowers, competition will ensure that it has no customers. As the Supreme Court has observed, the SARFAESI Act needs to be upheld in the larger national interest, and the seizure and sale of secured assets will ensure that crores of rupees locked up in sick assets are put to profitable use.