Friday, August 21, 2015

Our Decrepit Debt Recovery System

A consolidation of laws and legal processes is called for at the earliest

India’s debt recovery apparatus is an alarming mess. Consider this: we have four Acts, two sets of tribunals, ₹2 trillion worth of debt recovery tribunal (DRT) cases and ₹6 trillion in NPAs. These NPAs are a subject of labyrinthine discussions, appraisals and reappraisals – carried out by the RBI, Finance Ministry and even TV channels. None of all this seems to be getting us anywhere.
To get a fix on the debt problem, we need to understand the tangle of laws dealing with it and the system of courts and tribunals responsible for the implementation of these laws. The four Acts in question are: Sick Industrial Companies Act, 1985 (Act 1 of 1986), Recovery of Debts Due to Banks and Financial Institutions Act (RDDBFA), 1993, The SICA Repeal Act, 2003, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act (Sarfaesi), 2002.
Apart from Debt Recovery Tribunals we also have the National Company Law Tribunal under Companies Act (Second Amendment) 2002 to settle BIFR cases.


Plethora of laws
First, let’s take the laws concerned. The Sick Industrial Companies (Special Provisions) Act, 1985, was enacted with a view to securing the timely detection of sick and potential sick public and private sector firms (not SSIs or ancillary undertakings), the speedy determination by a body of experts of the preventive, ameliorative, remedial and other measures which need to be taken, and the enforcement of these steps.
Preventive and remedial measures include legal measures, and financial and managerial restructuring. The Act provided for constitution of Board for Industrial and Financial Reconstruction (BIFR) and the Appellate Authority for Industrial and Financial Reconstruction (AAIFR).
Once a unit is declared sick and referred to the BIFR, promoters conveniently, under section 22 of the Act, escape their responsibilities; they do not pay statutory dues such as provident fund and ESI to their employees or their debtors. Government and bank debts are accorded priority for recovery. Workers get second preference. AC Jose, MP from Kerala, discussing the matter in Parliament, said political interference was responsible for delays in declaring enterprises sick and rehabilitating them.
While tabling the Repeal Bill 2001, it was revealed that 1498 cases were pending before the AAIFR and BIFR. At the end of 2013, there were 929 pending cases. No more than 15 per cent of cases were settled, 20 per cent rejected and around another 20 per cent were issued winding up proceedings over the years. The rest are pending, the status — whether they are sick or not — yet to be determined.
It is strange that the BIFR should continue even after the repeal of SICA!
Tribunal travails
Now, to the tribunals. The DRTs were set up under the RDDBFA to help the banks and FIs recover dues fast. The amount recovered from cases decided in 2013-14 under DRTs was ₹30,950 crore, while the outstanding value of debt sought to be recovered was ₹2,36,600 crore. In other words, recovery was only 13 per cent of the amount at stake. While the law demands that the cases be disposed of in six months, this hardly ever happens.
Mere declaration of debt as wilful default does not entail recovery. Proving it beyond doubt requires the presence of knowledgeable
bankers, advocates and judges. Cases are frequently adjourned either because the judge is new, or the field officer of the bank is new to the case, or the advocate is under instruction to adopt delaying tactics. There is a clash of jurisdiction between the official liquidators appointed by various courts.
Delays became the norm as courts or tribunals or quasi judiciary bodies are not accountable. Besides, their infrastructure is poor. The cost to the economy due to the rise in NPAs on such counts is huge. Banks would be justified in demanding a credit risk premium of at least 6 per cent in the rehabilitation loans.
Out-of-court option
Banks had virtually no recourse to claiming leasehold properties due to some States prohibiting recovery agencies access to such properties. In the meantime, the number of cases at the DRTs increased by about 70 per cent in just one year (2013-14). Despite the fact that the existing legal framework is unsuited to recovery, the new government has provided for six more DRTs.
Meanwhile, to circumvent the inefficiency of DRTs, the Sarfaesi Act came into being. Banks were given powers to sell the declared bad assets without having to wait at the doorsteps of courts.
Banks jumped in joy immediately after the passage of the Sarfaesi Act. However, they have used this Act more against the vulnerable, such as micro and small enterprises, and not the large enterprises.
In this digital age, why not have virtual DRTs? Filing of cases can be done online. Summons can be issued online. Arguments can be heard on video conference calls. Doing this, of course, requires some change in our existing statutes
An advocate appearing for a large number of such cases said that at least 25 per cent of borrowers in DRTs would have agreed to settle out of court through arbitration. But we lack clear arbitration procedures. It is important to decide on a panel of competent arbitrators and specific time limit — say no more than three months for settlements under the Arbitration Act.
Vibrant associations of banks and clients can resolve issues. The recent experiment of SBI advertising for compromise petitions that speeded up resolution of several NPAs should be a pointer in this regard. When client is willing to come forward for resolution, banks should seize the opportunity.
It is time the laws dealing with bankruptcy, sickness, winding up and recovery are brought under one single statute. The NPA problem is too serious for legal and structural reforms to be put on the backburner for much longer.
The writer is a risk management specialist