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Introduction
The last one decade has seen vigorous attempts on the part of the
legislature to enact a law which could effectively curb the menace
of ever growing Non Performing Assets, which today stand at more
than Rs 1,00,000 Crores. The Civil Courts were not found effective,
hence came the Recovery of Debts Due to Banks and Financial Institutions
Act, 1993 (RDDBFI Act). The desired results did not come from this
Act, hence came The Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002 (Securitisation
Act). The big question is Whether the Securitisation Act is likely
to improve the banking recovery?
Essentials of
Debt Recovery
Recovery
of debts of Banks & Financial Institutions through the process
of law has two essential aspects: -
(a) Adjudication/
ascertainment of dues as reflected in Decree/Certificate and
(b) Execution
of Decree/Certificate for realization of amount stated in Decree/Certificate.
To successfully
realize the money it is necessary, that an Act of law must address
both the essential aspects mentioned above in equal proportion.
Uneven emphasis will disturb the equilibrium of the Act of law and
will certainly not achieve the desired results.
Civil Courts
Era- Cause of failure
Prior
to 1993, the Banks had to approach Civil Courts for recovery of
dues. The process of law guided by the Code of Civil Procedure,
1908 was time consuming and did not adapt to the changing demands
of the economy. There was a total disconnect between the law and
Economics. The result of which was pendency of about 15 lakhs cases
filed by the Banks and Financial Institutions till 30th September
1990. The fund blocked in the litigation was about Rs.5,622 crores
of Public Sector Banks and about Rs 391 crores of Financial Institutions2
. Civil Courts failed to deliver both in ascertainment of dues &
execution of decree. The cause of failure was time-consuming proceedings
up till the stage of grant of decree and old and ineffective laws
of execution as defined in Order XXI of Code of Civil Procedure,
1908.
RDDBFI ACT 1993-
An incomplete Law
Failure
of Civil Courts led to promulgation of Recovery of Debts Due to
Banks and Financial Institutions Act (RDDBFI Act) w.e.f. 27th August
1993. The RDDBFI Act envisaged summary procedure for ascertainment
of dues and certainly brought down the time span for adjudication
of dues. It, however, failed to execute the Decree/Certificate in
an effective way. This is evident from the fact that till about
30th September, 2001, 22 Debt Recovery Tribunals (DRTs) of the country
had adjudicated 9814 cases, thereby issuing the Certificate/Decree
for Rs.6265 crores, however, actual recoveries could be made only
of Rs.1864 crores3 . More important is the fact that Banks despite
a special legislation failed to recover about Rs.4104 crores. Of
the two ills of the Civil Courts, the first ill, that is non ascertainment
of dues in an expeditious manner was cured by the RDDBFI Act, but
failed to cure the other ill, i.e. effectively executing the decree.
The DRTs
employed Second & Third Schedule of Income Tax Act, 1961 and
Income Tax Certificate Proceedings/Rules 1962 to recover the decreed
amount. Second & Third Schedules of Income Tax Rules are pari
materia same as Order XXI of Code of Civil Procedure. The legislature
while enacting the RDDBFI Act did not realize, when Order XXI had
failed to deliver for the Civil Courts, how could its miniature
version do wonder for Banks under the RDDBFI Act? The legislature
needed to frame new laws for executing the Certificate/Decree, peculiar
to the requirement of Banks and Financial institutions.
Securitisation Act 2002- Revolution in waiting
Discouraged
by the results of DRTs in filling the coffers of Banks and financial
institutions, legislature enacted Securitisation and Reconstruction
of Financial Assets and Enforcement of Security Interest Act (Securitisation
Act) w.e.f. 21st day of June 2002. This Act lays the emphasis on
recovery of the money, even without the intervention of Court. The
Banks were empowered under Section 13(4)4 of Securitisation Act to
take possession of Secured Assets5 of the Borrower6 including the
right to transfer by way of lease, assignment or sale for realizing
the Secured Asset. The role of the Court was limited to challenge
the measures under Section 13(4), by way of Appeal, that too on
deposit of 75% of amount claimed on the notice under Section 13(2)
of Securitisation Act.
In effect
the Securitisation Act, 2002 did away with the first aspect of recovery
of dues i.e. ascertainment of dues but concentrated only on the
second aspect i.e. executing the decrees. The first aspect was put
to impossible conditions for challenge like pre-deposit of 75% of
amount ascertained by the Banks & not Courts of law. The result
of which is Hon'ble Supreme Court in Mardia Chemicals Vs. The Union
of India7 strikes down the condition for deposit as ultra vires of
the Constitution, which makes the Securitisation Act, 2002 almost
redundant for recovery of dues.
Securitisation
Act 2002- A bubble about to burst.
By March
31, 2003 the banks and financial institutions had issued about 28,886
notices to the defaulters involving an amount of Rs 10,171 Crores.
The total amount recovered till the end of March 2003 was only Rs
440 Crores8 . The figures till June, 2003 improved only by Rs 59
crores, raising the amount recovered to Rs 499 Crores9 , accounting
for just 4.1% of the total outstanding amount for which the notices
were issued. This indicates banks may have succeeded in capturing
small fishes, Sharks are still at large.
.
Securitisation
Act 2002- Causes for failure
The legislature's
failure to incorporate the aspect of ascertainment of dues, ahead
of aspect of execution of ascertained figure may be single most
important factor for failure (likely failure) of the Secrutisation
Act. It has also not addressed both the aspects necessary for recovery
of dues.
Besides
the striking down of provision of deposit of 75% of amount before
entertaining the appeal has led to greater confusion & complication
in the legal proceedings. The appeal has become cheaper to prefer.
Moreover the Judgment by the Hon'ble Supreme Court in Mardia Chemicals
that remedy under Section 17 of the Securitisation Act 2002 is not
appellate proceedings but initial proceedings like filing a suit
in a civil court has taken away the sharp edge of the Securitisaton
Act.
Diagnose of a
problem
It must
be understood the problems of NPA is a problem of Modern India and
must be tackled with contemporary solutions. The RDDBFI Act has
taken care of the delay in the disposal of the matters quite effectively.
The DRT's have successfully brought down the time needed for disposal
of Original Application/Suit till the stage of preparing the decree/
Certificate. The legislature need not bother about this stage.
The problem
lies in execution of the Decree/Certificate, which must be addressed.
What is needed is a new Law for the execution of the decree/ certificate
passed in favour of the Banks and Financial Institutions. The current
available laws like Income tax Rules and Code of Civil Procedure
are outdated and do not contemplate the problems faced today.
Current Problems
The current problems
faced by the Banks in recovering their dues after the Decree/Certificate
is passed inter-alia include:
a. Difficulty in taking
possession of the properties of the defaulters;
b. The properties are in the possession of third parties, who
are not the defaulters;
c. Inability to fetch the market price as against the White declared
price in auction sale;
d. Failure to attract bidders at the auction sale;
e. Disposal of objections takes eternity; and
f. Recovery officers are not trained in law, hence unable to deal
with difficult questions of law.
Preferable Remedy
Possibly,
after a decree/ certificate is passed, the copy of the Judgment
is pasted on the properties, which were secured by the Banks at
the time of grant of loan. Also an Advertisement shall be given
in the local newspaper declaring the details of the secured properties.
It shall, thereafter be incumbent upon the Judgment Debtor or third
parties to file objections within three months thereafter to the
sale of the said secured properties. If the objection is not received
within three months of the advertisement, an objection shall not
be entertained thereafter.
It would
be necessary to find ways to encourage people to participate in
the auction sale and pay the market price of the same, as against
usually understood as the white amount. It may be necessary to amend
the property tax laws and discount on the income tax for the auction
purchaser.
Possibly
the readers may also be able to suggest viable ways to effectively
recover the dues of Banks and financial institutions in addition
to the ones suggested by the author.
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