Bad loans law worries industry

Micro and small enterprises (MSEs) are urging the Centre to re-orient the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act of 2002, contending that the Act is one-sided and provides arbitrary powers to banks and financial institutions in dealing with defaulters.

Going by industry feedback, the SARFAESI Act seems to be implemented more vigorously, if not selectively, only against the smallest borrowers and MSEs in the country, leaving the big borrowers relatively untouched, says De Ramakrishnan, president, Industrial and Financial Reconstruction Association for Small and Tiny Enterprises (INFRASTE) and member, National Board for Micro, Small and Medium Enterprises.

MSEs admit that while wilful defaulters exist, punishing all others cannot be justified. The Act does not take into account the lender's liability and provide safeguards, particularly for small borrowers, against arbitrary action by the lenders, they add.

Large borrowers negotiate for waivers and rebates on repayments, while MSEs more often have their assets seized and sold for paltry prices, thereby, enriching and benefiting only the middlemen.

"Just because the poor borrower has given his house, tractor, small holdings, personal jewellery and everything else in his possession as security to the banks against his loan "" as is the case with all MSEs "" does not mean that all these securities be sold under SARFAESI Act provisions for a paltry sum," says Ramakrishnan.

"Both small borrowers and banks lose out on this score. A recent circular by RBI has very clearly told the banks to not dispose of their NPAs (non-performing assets) at lower than their NPVs (net present values)," Ramakrishnan adds.

A total of 1,18,980 notices to recover amounts outstanding to the tune of of Rs 35,650 crore are estimated to have been issued till March 31, 2006 under the SARFAESI Act.

Only Rs 6,376 crore is reported to have been recovered from 65,334 cases. The number of small borrowers runs into lakhs, and they account for a paltry 18 per cent of the total outstandings.

This means that the balance of 53,646 notices will cover the balance outstanding of Rs 29,274 crore. In effect, a whopping 82 per cent of the amounts which are yet to be recovered are covered by the balance of just 45 per cent of the notices already sent.

Of the total NPAs, 49 per cent are for amounts between Rs 1 crore and Rs 50 crore and the borrowers would run into a few thousands. Hence, the recovery data shows that most of the cases were filed only against small borrowers, MSEs allege.

MSEs point out that banks and financial institutions are also responsible, in many cases, for the formation of such NPAs. Also, NPAs do not happen overnight.

Banks and financial institutions sanction loans after thorough appraisals, but fail to monitor how the sanctioned loans are being utilised. Thus, those who approve the project reports carelessly and fail to monitor loans should also be held responsible for the loans being converted into NPAs, MSEs point out.

However, bank sources said that the SARFAESI Act has been helpful useful in reducing NPAs substantially, while declining comment on other issues.