The Recovery of Debts Due to Banks and Financial Institutions Act was passed in 1993 with fond hopes that the problem would be controlled. But by 2002, the non-performing assets (NPAs) stood at the phenomenal figure of Rs 1,10,000 crore (Rs 1,100 billion). Then another law was passed with an unwieldy name, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act.
The validity of the law was challenged in the Supreme Court and the law was cleared in the Mardia Chemicals Ltd judgement in 2004.
Another controversy arose soon after over the interpretation of some provisions of this law, with some high courts ruling in favour of the debtors. Last week, the Supreme Court came to the rescue of the banks and the financial institutions and interpreted the law in their favour in a batch of appeals, Transcore vs Union of India.
The borrowing companies argued that once the banks moved the debt recovery tribunal, it should await its verdict and could not take action under the Securitisation Acts without the permission of the tribunal.
Such two-pronged attack on the debtors are not allowed, especially when the Debt Recovery Act has been amended in 2004 to emphasise that such action can be taken only with the tribunal's permission. The Indian Banks Association and several individual banks countered this, contending that they were entitled to take recourse to both remedies to get back their money. They had an option to choose the course and no permission of the tribunal was required before taking action under the Securitisation Act.
The Supreme Court pointed out in its judgement that the existing laws providing for recovery of debts have proved to be time-consuming. Therefore, the Securitisation Act provided for non-adjudicatory procedures without the intervention of the courts. The Act proceeded on the basis that security interest in the banks needed to be enforced speedily without the intervention of courts and tribunals.
"One cannot lose sight of the fact that even an application for withdrawal (of case from the debt recovery tribunal) takes time for its disposal," the judgement emphasised, and added: "With inflation in the economy, the value of the pledged property/asset depreciates on a day to day basis. If the borrower does not provide additional asset and the value of the asset pledged keeps on falling, to that extent the account becomes non-performing. Therefore, the banks have to move expeditiously by taking measures under the Securitisation Act."
Though both the Debt Recovery Act and the Securitisation Act provide cumulative remedies to the secured creditors, the latter law goes further and removes all fetters on the rights of such creditors. They are given a right to choose one or more of the cumulative remedies.
There is no inconsistency in the objectives of the two legislations, according to the Supreme Court. The Securitisation Act merely accelerates the process of debt recovery by removing deficiencies and obstacles in the way of realisation of debts.
This interpretation of the two key central legislations has put enormous powers in the hands of the banks and financial institutions. The Securitisation Act provides for the setting up of asset reconstruction companies, special purpose vehicles, asset management companies and other institutions.
They are empowered to take possession of secured assets of the borrower, including the right to transfer by way of lease and sale. It also provides for the takeover of the management of the borrower company. The Debt Recovery Act did not go that far and did not provide for asssignment of debts to securitisation companies. Consequently, the secured assets could not be liquidated in time. The Securitisation Act removed several fetters on the rights of the secured creditors.
Following this judgement, the debt recovery tribunals might find that their importance has diminished. The secured creditors would tend to take action under the Securitisation Act rather than choose the tedious route to the tribunal.
Civil courts had already failed to give speedy remedy under old laws like the Transfer of Property Act. Even the State Financial Corporation Acts, on which the Securitisation Act was partly modelled, had not succeeded in giving effective help to the banks and financial institutions.
The debt tribunals, a special Act to tackle the situation, also had become slow. Therefore, the present judgement has come as a blow for the secured creditors. How this will change the debt recovery scenario will be revealed in the coming months.