Bank recovery process boosted

Sarfaesi amendment to give borrowers a fair opportunity to contest notices

The government's decision to amend the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Sarfaesi) will give a boost to the recovery process in the banking sector. The decision follows the Supreme Court's decision to hold Section 17 sub-section 2 of the Act ultra vires.

According to Section 17 sub-section 2 of the Sarfaesi: "Where an appeal is preferred by a borrower, such appeal shall not be entertained by the Debts Recovery Tribunal unless the borrower has deposited with the Tribunal 75 per cent of the amount claimed in the possession notice."

Following the SC judgment, the borrowers are not required to deposit the amount to file an appeal. This has put a roadblock on the recovery process.

Indian Banks' Association chairman V Leeladhar felt that the proposed revision in Sarfaesi will strengthen the recovery process even as the borrowers will get a fair opportunity to contest banks' claim notices.

"Ater the Supreme Court judgement in the ICICI Bank vs Mardia Chemicals case, borrowers are not required to deposit 75 per cent of the notice amount before going in for appeal before the Debts Recovery Tribunal. This has led to the recovery process of banks getting delayed," said Leeladhar, who is also the chairman and managing director of Union Bank of India.

Finance Minister P Chidambaram, in his Budget speech, observed that the constitutional validity of the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 has been upheld by the Supreme Court, except Sub-Section (2) of Section 17.

In the wake of this judgment, many banks have pointed out the practical difficulties likely to arise in speeding up the recovery of non-performing assets.

"It is proposed to amend the relevant provisions of the Act to appropriately address the Supreme Court's concerns regarding a fair deal to borrowers while, at the same time, ensuring that the recovery process is not delayed or hampered. Related amendments to the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, if necessary, will also be made," said Chidambaram.

Under Sarfaesi, banks' slap recovery notices on willful defaulters for recovery of dues. If, at the end of the 60-days notice period, the borrower does not pay up, the bank takes possession of the security (movable as well as immovable).

The bank then publishes a public notice in newspapers to sell-off/auction the security. At this point the borrower can challenge the bank's decision to sell/auction the security before the DRT.