Bad debt ball in banks' court

With the Supreme Court upholding the constitutional rights of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Act, 2002 (Sarfaesi or Securitisation Act), the next question is, how fast can banks recover and settle their bad debts?

There is an overload of cases before the Debt Recovery Tribunals (DRTs). There are only 30 DRTs and 5 DRATs across India.

The southern zone has seven DRTs, while over 25,000 cases were filed with it. And on an average, it takes about two years for a case to be settled in DRTs.

Sources from DRT say that due to the overload of cases pending with each DRT, it takes much longer for cases to be settled. If more DRTs are established it would help matters. It takes about Rs 50 lakh annually to maintain a DRT.

Harihar P Chaturvedi, presiding officer, DRT-I Chennai, said it is expected that the future filing of regular suits by banks with the DRT will reduce while appeal from defaulting borrowers will increase with the recent verdict of the Supreme Court on constitutional validity of the Securitisation Act.

About 9,900 cases were filed under the DRT-I of which 3,712 cases were disposed and has so far recovered about Rs 932 crore as on 29 February 2004.

Under the Recovery of Debt Dues to Bank and Financial Institution Act 1993, the cases taken-up by DRT should be concluded in 180 days. For faster clearances pending with DRTs the Narasimham Committee had recommended that each DRT should handle about 500 to 600 cases annually.

Kalpana Morparia, deputy managing director, ICICI Bank told Business Standard, "Now the onus is on the banks as how fast they can act on recovery and settlement of the NPAs. The Securitisation Act will definitely act as deterrent for borrowers who will be defaulting in the future."

Banks can serve a 60-day notice before proceeding with the seizure and sale of assets of a defaulting borrower. On the bank serving the notice, the defaulting borrower will have to repay the loan or give a valid reasons for non-repayment of loan to the bank.

Failing this, the bank can take possession and sell the asset. Only when the banks initiate such an action against under the Securitisation Act can the borrower go in for an appeal to the DRT. The DRT will give a stay on the notice if it borrowers' appeal is genuine as an interim measure.

Prior to the supreme court's recent verdict on the Securitisation Act, Mardia Chemicals had filed a case challenging the constitutional rights of the Act.

Therefore the banks could take possession of the defaulter's assets attached as collateral but could not go ahead and sell the assets. As the supreme court had put a hold on the Securitisation Act, before it could clear the case pending before it.

Ashok Kumar Anchalia, senior advisor, Surana and Surana International Attorneys said that majority of the cases pending before DRTs, are on defaulting amount to be settled between banks and borrowers. The DRT would give a stay only if it finds the validity on the claims made by the borrower otherwise it will dismiss the case.

After which the bank can go ahead and sell the assets of the defaulting borrower. The borrower can still go in for a second appeal to Debt Recovery Appellate Tribunal (DRAT) failing which he can approach the High Court with a writ petition.

V V Sivakumar, resident partner, Kochhar & Co, Advocates & Legal Consultants, said though the cases pending will now be settled much faster.

The supreme court has struck down as unconstitutional the provision requiring the borrower to deposit in advance 75 per cent of the loan before he goes in for an appeal before the DRT. This will encourage a large number of defaulting borrowers to go in for an appeal to the DRT when the banks move on their assets. He adds at present there is a huge backlog of cases pending before DRT, DRATs and the high courts.

M B N Rao, CMD, Indian Bank, said, " The realisation of the assets depends on the nature of collateral given as security by the defaulting borrower. It is expected that DRT would clear cases faster and give a stay only on cases which have valid reasons. Therefore it is expected that banks can settle and recover their bad debts much faster now. Previously it would take about two years to reach for settlement with a defaulting borrower but now it is expected to be quicker."

S C Gupta, CMD, Indian Overseas Bank, said that by the recent verdict of the supreme court defaulting borrowers will now come in for negotiations with the banks to settle their dues. With the passing of the Securitisation Act 2002 itself, there were a large number of defaulting assets which had come in for negotiations."