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Debt recovery law amendment to hasten loan recovery

Conversion of part debt into equity to work as sop for asset reconstruction companies

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Providing flexibility for lenders and asset reconstruction companies (ARCs), the amendments to will improve prospects for reviving stressed units and loan recovery.

Bankers and ARCs said though delayed, a change when they become law is a welcome step. They remove some of the hurdles and empower to get more legal protection while restructuring loans and supporting weak units.

The Lok Sabha today approved an Amendment Bill to make easier recovery of bad loans by banks amid walkout by the BJP, Left and some other parties after the government rejected their demand for referring it to the Standing Committee.

The Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Bill, 2011, was approved by voice vote in the Lower House. It seeks to convert any part of debt into shares of defaulting company by ARC.

PH Ravikumar, managing director of Invent ARC, said: “ARCs were running risks associated with equity when supporting revival of sick unit. But returns were those linked to debt. That situation will get corrected, indicating better returns at time of exit.”

The Bill was introduced in Lok Sabha in December, 2011. While the Opposition demanded that the Bill be referred to the Standing Committee for scrutiny, Finance Minister P Chidambaram said when the Bill was introduced last year the Speaker decided against referring it to the Parliamentary committee.

Referring it to the committee now would delay the process further, he said, adding the then minister wanted it to be passed without delay as amendments were of technical nature. "The Bill was introduced in 2011 and should not be referred [to Standing Committee] now after 12 months... It would defeat the very purpose the Bill. In the interest of banking sector, it is necessary to pass the Bill in 2012," he said, adding the move would quicken the process of loan recovery.

The Bill also seeks to enable banks or any person to file a caveat so that before granting any stay, the bank or person is heard by the Debt Recovery Tribunal.

Senior ARC official said this prevents orders by courts without hearing bank or ARCs. Many times ARCs were not aware that lender has filed a suit in case which would only postpone recoveries.

On the issue of rising non-performing assets (NPAs) of banks, Chidambaram said the banking sector is well regulated and the gross NPA, which is around 3.5% of total loans, was not high and the situation would improve with economic recovery.

Overall, the credit profiles of borrowers could weaken in 2012-13 due to factors like moderation/slowdown in demand conditions, project implementation-related delays, higher interest rates and foreign exchange losses.

Compression of operating profitability because of cost pressures, and inability of companies to pass on the higher costs in a scenario of increasing competitive intensity.

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