Govt’s Push to Reduce Non-Repayment of Loans: The Enforcement of Security Interest and Recovery of Debt Laws and Miscellaneous Provisions (Amendment) Act

On August 17, 2016, the President gave his assent to The Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 (the “Act”). The Act was introduced in Parliament by the Finance Minister on the back of some entrepreneurs / large business houses wilfully defaulting payments. The Act seeks to end the non-repayment of loans, by giving Banks and other creditors greater rights in situations of bad loans or non-performing assets. To ensure this, the Act introduces a number of measures that simplify and quicken the debt recovery process in India.

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It is also important to note that this Act and the new Bankruptcy Code do not overlap. The Bankruptcy Code made it easier for creditors to take collective action against a defaulter. The Act however, streamlines the process for creditors to individually take action against debtors. Further, none of the amendments in this Act apply to agricultural and educational loans. These are two areas where the Government recognised the need for leniency for defaulters.

In order to achieve its objectives, the Act amends four legislations –

  1. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI”),
  2. Recovery of Debts due to Banks and Financial Institutions Act, 1993 (“RDDBFI”),
  3. Indian Stamp Act, 1899 and
  4. Depositories Act, 1996.

The bulk of the amendments lie in the first two acts.

SARFAESI

The SARFAESI allows secured creditors stuck with a bad debt to take possession of the security given to them in return for the loan. By taking possession of the property, the creditors have the option of selling it in order to recover a part of, or all of, their money. However, in order to do this, the creditors have to make an application before the District Magistrate, who then authorises the creditor to take possession of the property. Since there is no provision under the SARFAESI that requires the District Magistrate to pass such an order within a stipulated time frame, it has been noticed that there is often a large delay before the creditors can actually take possession of the security. In order to rectify this, the Act has imposed a thirty-day time-limit within which the District Magistrate must pass an order.

The SARFAESI also plays an important role in the regulation of Asset Reconstruction Companies (“ARC”). These companies are an important part of the loan ecosystem, as they buy the bad debts from banks at a discounted price and take possession of the secured properties. The onus of recovering the debt then lies with the ARC, while the bank is able to continue maintaining liquidity. However, recently there have been concerns regarding the high transaction costs involved in running an ARC, caused especially due to the stamp duty levied on ARC’s during the transfer of the secured property. Recognising the need to solve this problem, the Act removes the stamp duty as long as the asset/property is being transferred for the purpose of securitisation or reconstruction. Consequently, the Act has appropriately amended the Stamp Act as well.

The Act also provides for the creation of two new central registries/databases. One registry maintains a record of all transactions involving secured loans. The other central database maintains a record of all property registered under different systems in the country (immoveable, moveable, intangible). These registries help in quickly and efficiently cross-checking the various properties against a debtor’s name at the time of a default. Further, in order to ensure that both registries are maintained meticulously, the Act provides that creditors are not allowed to take possession over any security, unless the transaction was first recorded in the initial registry.

Lastly, the Act gives greater powers to the Reserve Bank of India (“RBI”) to regulate and monitor the activities of ARC’s. In pursuance of these new powers, the RBI may carry out audits and inspections in ARC’s, and even penalise them in cases of non-conformance with RBI guidelines.

RDDBFI

The RDDBFI was responsible for the establishment of Debt Recovery Tribunals, which were meant to be fast-track courts for creditors to recover bad debts in cases of defaults, insolvency, or bankruptcy. It has been observed however, that these DRTs have been failing to meet their objectives. Not only has the stipulated time-frame of 6 months for case disposal been breached a number of times, but the number of pending cases before the DRT has increased from 43,000 in March, 2013 to 70,000 in December, 2015. In order to stop this trend, and to prevent the DRT from becoming a redundant mechanism, the Act has sought to introduce measures which will increase the strength of the officers presiding over this tribunal.

The measures taken to achieve the above objective are:

  1. Increasing the retirement age of Presiding Officers of the DRT from 63 years to 65 years.
  2. Increasing the retirement age of Chairpersons of the Debt Recovery Appellate Tribunals from 65 years to 67 years.
  3. Allowing Presiding Officers of the DRT and Chairpersons of the Appellate Tribunal to be reappointed.
  4. Allowing Presiding Officers from other tribunals established under other national laws (for e.g., the Securities Appellate Tribunal, the Company Law Tribunal and the National Green Tribunal) to act as Presiding Officers of the DRT.

Previously, the RDDBFI stipulated that for the recovery of bad debts, the banks/financial institutions needed to file the case in the DRT that had jurisdiction over the borrower’s place of residence or business. In order to ease this requirement, the Act has provided that these cases may also be filed in the DRT that has jurisdiction over the area of the bank branch where the debt is owed.

Lastly, the Act has aimed to quicken the process in DRT’s by allowing certain processes to be carried out in the electronic form. For example, the presentation of claims by parties, as well as the issue of summons by the DRT itself, can now be done via the DRT website.

Conclusion

The intent behind the Act certainly suggests that the Government is committed to reforming debt recovery laws in India. Starting with the Bankruptcy Code, the Government has been in the process of introducing wide changes to financial laws, in an attempt to meet global standards and to make India a more attractive option for foreign investors. However, the efficacy of some of these changes still remains to be seen. For example, the benefit to be obtained by allowing Officers from other tribunals to sit on the DRT is uncertain. Whether simply increasing the size of the manpower at the disposal of the DRT will help reduce the pending cases or should active support in infrastructure such as technology support will help.

While prescribing time-limits is a good step forward, it has had its history earlier with 2005 case of Salem Advocate Bar Association-II (2005 (6) SCC 344), while the Supreme Court had to reiterate that the restriction as not curtailing the court’s power to allow more than three adjournments or it is directory guidance and not mandatory etc. With the legislature stepping in, it would be interesting to see efficiency in the proceedings.

Authors: Madhav Rangrass, Associate and Sohini Mandal, Junior Partner

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