The Telegraph
Since 1st March, 1999
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Lenders live with toothless recovery law

Calcutta, April 27: The Securitisation Act 2002, which empowered banks and financial institutions to take defaulting companies to task, will lose its sting, at least for the next few months.

Last week, Reserve Bank asked banks and financial institutions to “refrain” from taking over the management of defaulting companies and disposing of their assets (possible under Section 9 of the Act) till it lays down “a set of standard guidelines” for such actions.

A spokesperson for the apex bank clarified that status quo should be maintained even in cases where banks and financial institutions have already initiated the process of selling a defaulter’s assets, till RBI frames the norms.

Asked how long this could take, the RBI spokesperson said: “It would not have taken us too long to frame these guidelines, but we would like to take into account what the Supreme Court says in this matter.”

Several defaulting companies have moved the Supreme Court disputing the acquisition and proposed sale of assets by institutional lenders. These cases are pending with the apex court and further hearing in these matters will take place after the summer vacation.

The fiat gives a breather to the promoters of companies that have been put on the block by lenders. These are mostly small firms, but banks and institutions have trained their guns on the big houses as well.

Senior bankers say it is “a setback to the enforcement” of the Act, but it does not prevent them from “taking possession of assets of defaulting companies”.

Bhaskar Ghosh, managing director of IndusInd Bank says: “The RBI directive says banks cannot take over management of, sale or lease a defaulter’s business. But this doesn’t prevent us from taking possession of a defaulter’s assets, though we may not be able to sell or lease them out. For that, we may have to wait for the Supreme Court to clear cases and the RBI to announce the guidelines.”

However, the problem with this situation is that banks will have to bear the cost of maintaining these assets till RBI has withdrawn the spanner it has thrown in the recovery of sticky loans, explains Ghosh.

What is more, banks would also have to bear the responsibility for, and the consequences of, any depreciation in the value of the assets in the interim period that could happen due to an accident — say fire — or changes in market conditions.

Despite all these concerns, banks are raring to go ahead and gain possession of defaulters’ assets, which helps them pare their losses, even without selling them.

Ghosh explains: “Lenders can evaluate the assets that they grab, and set off their losses to the extent of the estimated value of these assets.” However, if they fail to realise the same value from the sale of these assets, they would again have to provide for the difference.

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