Post Ordinance, Collaterals Become A Tough Call

Borrowers will have to be more careful when pledging/ mortgaging assets against taking loans from banks or financial institutions following the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest' Ordinance, 2002.

Banks are also demanding greater fixed assets collateral that can easily be seized and sold in the event of a default on the loan payment.

The need for higher collateral also stems from the tendency in the corporate sector to inflate the purchase value of the assets, which otherwise would fetch a lower resale value.

"The entire process of mortgaging of securities will be taken more seriously and customers will have to take a long term view," said Anil Khandelwal, executive director Bank of Baroda.

Borrowers will be now more averse to staking their flats as collateral for loans, even as bankers will now be more inclined to get securities that "can create an emotional pressure on the borrower to pay up", said a senior bank official at Union Bank of India.

Banks are looking at creating a charge on collateral securities like flats, which can be easily disposed off, unlike plant and machinery or industrial property. Added BoB general manager R V Iyer: "There is problem in industrial property and companies which have gone into liquidation. There are also other legal issues such as what to do with the machinery when the factory is being sold".

On the flip side, Khandelwal added that borrowers have become more cautious in pledging their fixed assets with banks, since they now understand that such assets can easily be seized and sold by banks.

To cite an example, an large industrialist in the steel sector took a Rs 50 lakh overdraft by mortgaging his Rs 7-crore flat. Unable to pay up the overdraft, the borrower was forced to sell his flat to pay up the loan.

However, the ordinance is not seen to be the last word on the subject of properties being seized and sold. Said the Union Bank official: "Customers can still approach the court if they feel that a proper valuation has not been made by the bank, or if the institution has not sold the property at a fair price".

Even as a number of leading banks and institutions have sent out notices to "wilful defaulter", the prevailing low credit offtake is posing as a constraint to banks taking harsh measures to seize assets. Just a handful of the 50-odd institutions have actually taken the first step to send out notices to defaulters.

Khandelwal added: "Banks do not jeopardise the long-standing relationship with their customers".

Banker-customer relationships have become all the more important now as the number of good-quality borrowers are shrinking. Most triple A-rated companies are borrowing directly from the market at very fine rates, which banks are unable to match.

Further, even as the ordinance now gives banks the power to attach and sell property, in the present competitive environment, some banks continue to advance loans without taking any collateral. This puts pressure on other more conservative banks in an effort to retain the customer, said Khandelwal.