Enforcement of Security Interest and Recovery of Debts Laws Amendment Bill, 2016

Parliament has passed Enforcement of Security Interest and Recovery of Debts Laws Amendment Bill, 2016. It was first introduced in Lok Sabha on May 11, 2016. It was first passed in Lok Sabha and then later in Rajya Sabha. The Bill seeks to strengthen the debt recovery laws, improve financial health of the banks and improve ease of doing business.

Key features of the bill

• The Bill seeks to amend four laws:
  • Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002
  • Recovery of Debts due to Banks and Financial Institutions Act (RDDBFI), 1993
  • Depositories Act, 1996 and
  • Indian Stamp Act, 1899.
• Amendments to SARFAESI Act:
  • Taking possession over collateral: SARFAESI Act provides for the takeover of collateral against which a loan has been sanctioned upon a default of payment. This process does not require the intervention of courts and tribunals and is undertaken with the help of District Magistrate (DM). The bill allows District Magistrate (DM) to take possession over collateral within 30 days for securing the creditors. It empowers DM to assist banks to take over the management of a company, in case the company is unable to repay loans.
  • Creation of database: It creates a central database to integrate records of property registered under various registration systems with central registry meant for maintaining records of transactions related to secured assets. Unless collateral is registered with the central registry, secured creditors will not be able to take possession over it.
  • Audit and inspection: The bill empowers the RBI to carry out audit and inspection of Asset Reconstruction Companies (ARCs) and penalize them if they fail to comply with any directions issued by it.
  • Stamp duty exemption: Stamp duty will not be charged on transactions undertaken for transfer of financial assets (loans and collaterals) in favour of asset reconstruction companies (ARCs).
• Amendments to the RDDBFI Act:
  • Presiding officer and chairman: The RDDBFI Act has established Debt Recovery Tribunals and Debt Recovery Appellate tribunals. The bill increases the retirement age of Presiding Officers (PO) of Debt Recovery Tribunals (DRTs) to 65 years from 62 years and increases the retirement age of Chairpersons of Appellate Tribunals to 67 years from 65 years. It also allows PO and Chairpersons eligible for reappointment to their positions.
  • Filling of cases: The bill allows banks and financial institutions to file cases in tribunals having jurisdiction over the area of bank branch where the debt is pending. Earlier the act required banks to file cases in tribunals having jurisdiction over the defendant’s area of residence or business.
  • Procedures: The bill provides that certain procedures like presentation of claims by parties and summons issued by tribunals to be undertaken in electronic form.

Joint Committee on the Enforcement of Security Interest and Recovery of Debt Laws and Miscellaneous Provisions (Amendment) Bill, 2016

The Enforcement of Security Interest and Recovery of Debt Laws and Miscellaneous Provisions (Amendment) Bill, 2016 was referred to a Joint Parliamentary Committee of both the Houses under the Chairmanship of Bhupender Yadav. The committee submitted its report along with a modified Bill on July 22, 2016. The government has accepted all the recommendations of the committee and the bill was passed by the Lok Sabha previously and finally in the Rajya Sabha on August 9, 2016.

Significance

• Along with the new bankruptcy law which was passed earlier in the beginning of this year, amendments proposed in this bill will help to create an enabling infrastructure to effectively deal with non-performing assets (NPAs) in the banking system. The bill will help the financial institutions and banks to effectively recover their bad loans.
• The bill will encourage more Asset Reconstruction Companies (ARCs) to set up their business and will also help to revamp Debt Recovery tribunals (DRTs).
• As the present laws are lopsided in favour of the defaulters, the bill will help to legally strengthen the banking system.
• The bill has empowered RBI with more powers. RBI can audit and inspect any ARC and remove the chairman or any director and appoint its officials to its board. It can also impose penalties for non-compliance and regulate fees charged by these companies. It has enhanced the penalty amount from Rs 5 lakh to Rs 1 crore.

Background:

Indian banks are in continuous stress. With rising NPAs many of them have been reporting losses. The gross NPA ratio of state run banks is 9.6% as of March 2016, which is likely to increase to 10.1% by March 2017. RBI’s financial stability report has even predicted that it may even rise to 11% by March 2017. Given the stock of NPAs in Indian banks the amendments have addressed certain bottlenecks in the recovery and are expected to improve the pace of recovery.