A level field

The Supreme Court's decision on the Securitisation Act must be wholeheartedly welcomed.

The virtue of the Act lies in the fact that it radically alters the balance of power between lenders and borrowers, giving sweeping powers to lenders to recover their dues. Earlier, banks could sell pledged assets only if the slow-moving courts allowed it, which meant years of litigation. By the time the bank gained possession of the asset, it was often worthless. The crucial change that the Act made was to allow banks to sell the assets without the intervention of the courts.

Unfortunately, the new law was too radical, allowing an appeal against any order attaching assets only if the borrower deposited 75 per cent of the amount in default. Since few defaulting companies would be in a position to pay up 75 per cent of their dues, this provision effectively denied borrowers an appeal against the bank's order. Small wonder the Supreme Court has struck this down, while upholding the validity of the Act. The law in its amended form therefore creates a level playing field between borrowers and lenders.

Some industry associations have said that the Act does not take into account the difference between wilful defaulters and those unable to repay loans due to genuine difficulties. The criticism misses the whole point of the law. Firstly, wilful defaulters are in any case dealt with by the criminal law.

Secondly, the rationale for the Securitisation Act is to free up assets locked up with weak or sick units and transfer it to stronger hands, thereby benefiting the economy. The sooner this is done, without the asset degenerating into junk, the better. Moreover, banks are unlikely to indiscriminately use the Act against those who have defaulted in paying one or two loan instalments, since acquiring and selling the asset is by no means an easy task.

As a matter of fact, the entire sorry history of the BIFR suggests that rehabilitating sick units often works only in theory, and putting the assets to more productive use is often the best course of action. In spite of the BIFR experience, however, the huge amount of assets that have been restructured under the corporate debt restructuring mechanism proves that banks are far from averse to rehabilitating companies that stand a chance of turning around.

On the other hand, bankers have welcomed the court decision, but have complained that borrowers will try and stall the recovery process by going to the debt recovery tribunals, and, if necessary, to the appellate tribunal. But that's part of natural justice, and the remedy would be to increase the number of such tribunals.

Other critics have pointed out that banks have no experience of selling assets, and there is no market for distressed debt in the country at present. But specialist agencies will soon fill that gap if banks are unequal to the task, acting as intermediaries between banks and buyers.

Also, the threat of enforcing the Act would often be enough to force recalcitrant borrowers to repay, or at least seek a compromise settlement. In short, the Act strengthens the lenders' hands considerably and allows them to put pressure on borrowers to repay.

Considering the easy time defaulters have had till now, that is no mean achievement.