Legal bug removed

The Supreme Court's decision to uphold the constitutional validity of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002, will give a shot in the arm of banks, which will now be able to seize and sell the assets of loan defaulters.

However, the judgment has come with a rider. The court has struck off Section 17(2) of the Act, which made it mandatory for borrowers to deposit 75 per cent of the claim as a pre-condition for challenging the lenders' action at the Debt Recovery Tribunals. This will encourage borrowers to move the DRTs against lenders' action.

Consequently, the entire process will get delayed. So, the court judgment has not gone entirely in favour of the banking industry. It has, in fact, created a win-win situation for both lenders as well as borrowers. While lenders can now seize and sell assets, borrowers can challenge their action freely as they won't need to cough up funds for that.

There is yet another dimension to the court judgment.  As the original Act provided for the condition of 75 per cent claim to be deposited before moving the DRTs, it was easy for banks to recover their funds.

In other words, even without selling assets they could have realised at least 75 per cent of their claim""had they won the case""as the money would have already been deposited with the DRTs.

Since the clause has been struck down, now the lenders will have to actually sell assets to get the money. This will delay the entire realisation process and depending on the time taken, the assets may decay and lose a substantial portion of their value. Besides, banks will also need to build expertise for the upkeep and sale of assets.

Incidentally, in normal DRT cases, if a defaulter is not satisfied with the tribunal's judgment it can file an appeal with the ADRT after depositing 75 per cent of the disputed amount with the tribunal.

The difference is that, in this case a defaulter is challenging the tribunal's judgment while in case of the Securitisation Act it challenges the action of a bank or financial institutions.