Bankers, ARCs laud debt recovery amendment

Conversion of part-debt into equity to work as sop for ARCs

The Lok Sabha on Monday approved an amendment Bill to ease the recovery of bad loans by banks. Opposition parties walked out after the government rejected their demand for referring it to a standing committee.

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

Bankers and ARCs welcomed it, as the amended law will improve the prospects for reviving stressed units and loan recovery. Bankers and ARCs said although delayed, it is a welcome step, as the amendments remove some hurdles and empower them to get more legal protection while restructuring loans and supporting weak units.

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

The Bill was introduced in the Lok Sabha in December 2011. While the Opposition demanded it be referred to a standing committee for scrutiny, Finance Minister P Chidambaram said when the bill was introduced last year, the Speaker had decided against so referring it. Doing so would delay the process further, he said, adding the then minister wanted it to be passed without delay, as the amendments were of a 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 the 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.

According to a senior ARC official, this prevents orders by courts without hearing a bank or ARCs. Many a time, ARCs were not aware that the lender had filed a suit.

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

According to credit rating agency Icra, overall, the credit profiles of borrowers could weaken in 2012-13 due to factors such as moderation or slowdown in demand conditions, project implementation related delays, higher interest rates and foreign exchange losses, compression of operating profitability due to cost pressures, and inability of companies to pass on the higher costs in a scenario of increasing competitive intensity.