The amendments are aimed at
- faster recovery and resolution of bad debts by banks and financial institutions
- making it easier for asset reconstruction companies (ARCs) to function.
- put in place an enabling infrastructure to effectively deal with non-performing assets in the Indian banking system along with the new bankruptcy law which came into effect earlier this year
Why we need these amendments?
- Indian banks have been under stress with many of them reporting losses and surge in non-performing assets (NPAs) after the Reserve Bank of India (RBI) pushed lenders to classify visibly stressed assets as NPAs after an asset quality review in 2015-16.
- Flaws in the existing recovery process have added to the problem of bad loans. For instance, more than 70,000 cases are pending before DRTs
What will the bill do?
- The bill will amend four acts :
- Sarfaesi Act, 2002,
- Recovery of Debts due to Banks and Financial Institutions Act, 1993,
- Indian Stamp Act, 1899 and
- Depositories Act, 1996.
- The bill gives RBI powers to audit and inspect ARCs and the freedom to remove the chairman or any director and appoint central bank officials to its board. The central bank will be empowered to impose penalties for non-compliance with its directives, and regulate the fees charged by these companies to banks at the time of acquiring such assets.
- The bill will also pave the way for the sponsor of an ARC to hold up to 100% stake. It will also enable non-institutional investors to invest in security receipts issued by ARCs and mandate a timeline for possession of secured assets.
- To be sure, RBI already regulates these entities, but the bill expands the regulator’s powers. It also increases the penalty amount that can be levied by RBI to Rs.1 crore from Rs.5 lakh.
- The bill proposes to widen the scope of the registry that will house the central database of all loans against properties given by all lenders.
- It also proposes to bring hire purchase and financial lease under the ambit of the Sarfaesi Act, and enable secured creditors to take over a company and restore its business on acquisition of controlling interest in the borrower company.
- As part of the overhaul of DRTs, the bill proposes to speed up the process of recovery and move towards online DRTs. To this effect, it proposes electronic filing of recovery applications, documents and written statements.
- DRTs will be the backbone of the bankruptcy code and deal with all insolvency proceedings involving individuals. The debtor will have to deposit 50% of the amount of debt due before filing an appeal at a DRT. It also seeks to make the process time-bound. A district magistrate has to clear an application by the creditor to take over possession of the collateral within 60 days.
- The bill also proposes to amend the Indian Stamp Act to exempt deeds of assignment signed at the time of an ARC buying a loan from a bank from the levy of stamp duty.
- The amendments carry the work forward done in the insolvency and bankruptcy code. Automation will help in increasing the pace of recovery, but this requires an investment. Currently, the problem is that many DRTs from time to time do not have presiding officers
Amendments to SARFAESI Act:
- It 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.
- 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.
- 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 will not be charged on transactions undertaken for transfer of financial assets (loans and collaterals) in favour of asset reconstruction companies.
Amendments to the RDDBFI Act:
- Increases the retirement age of Presiding Officers (PO) of Debt Recovery Tribunals (DRTs) to 65 years from 62 years.
- Increases the retirement age of Chairpersons of Appellate Tribunals to 67 years from 65 years.
- Allows PO and Chairpersons eligible for reappointment to their positions.
- Allows banks to file cases in tribunals having jurisdiction over the area of bank branch where the debt is pending.