This post aims to make you adept across all details of Debt Recovery & Asset Reconstruction Act Amendments in times of increasing NPAs. Questions pertaining to these topics appear in General Awareness/Banking Awareness section of various banking exams.
Let’s go through these and walk towards success.
Non-Performing Assets of Banks have received much coverage over the last year, during the tenure of Mr. Raghuram Rajan, the RBI Governor. For 2015-16, for the state owned banks the NPAs stood at 09.60% of the total assets. For the ongoing fiscal year, it is expected to rise even further to 10.10%. As major industrialists are named wilful defaulters by banks, it is only obvious that banks and the banking sector regulator either implement the existing laws in a manner such that higher recovery on loans is made possible. Another possible way is to bring in amendments to the Acts for many assets which are not classified as NPAs and the NPA % does not see a steady increase. Taking a step in that direction, the Government introduced a Bill in the Lok Sabha to amend four acts that would grant greater power to the Debt Recovery Tribunals and bring into the picture online recovery tribunals that have never been constituted in the history of Indian debt recovery and asset reconstruction segment of banking and financial sector. Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016 was passed in the Lok Sabha on August 1, 2016. The four acts that the bill amendment would bring about incremental changes to include the Sarfaesi Act, 2002; the Recovery of Debts due to Banks and Financial Institutions Act, 1993, the Indian Stamp Act, 1899 and the Depositories Act, 1996.
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act & Recovery of Debts due to Banks and Financial Institutions Act, 1993 are acts under which recovery of debts due on loans is carried out. Asset Reconstruction companies are the ones to which assets that have been declared NPAs are sold off to, at lower rates than the cost at which these assets were acquired. The fee charged by ARCs was not under the ambit of regulation. Now, post the amendment and the acceptance of the bill in the Rajya Sabha, the same would also be given a pre-specified band or a ceiling.
Debt Recovery Tribunals and Asset Reconstruction companies
Finance Minister Mr. Arun Jaitley proposed in the budget that amendments through a bill be brought into the holding pattern of ARCs. As yet more than 50% stake was not allowed to a single sponsor. Post the amendments, 100% holding would be allowed for even in case of a lone sponsor. Even in case of investors not backed by institutions, it would now be possible to purchase and hold security receipts that are issued by these organizations that have the mandate of buying and leveraging assets that are deemed not viable by banks and other financial institutions.
A major change that has been announced in the proposed amendments allows secured creditors to get operating control of an organization given that they have the requisite minimum stake. This would allow investors to look at a possible turnaround as a viable alternative with them holding the decision making power.
Registry of loans
A central database of loans against property, in the form of Central Registry of Securitisation Asset Reconstruction and Security Interest of India, created in 2002 would now show details of loans against a larger number of properties after further modifications that would enable prospective buyers to carry out the due diligence on a property. The proposed changes would thus enable greater information availability and a chance of revival with a controlling stake for secured creditors. This would enable better judgement in order to reduce NPAs or a turnaround in case the worse does happen. Fee regulation would also cut the cost for banks saddled with NPAs.