Govt okays re-promulgation of ordinance for recovering NPAs

NEW DELHI: The government on Friday approved re-promulgation of the securitisation ordinance to enable banks and financial institutions to take possession of securities of defaulters and sell them, in a bid to tackle the problem of non-performing assets estimated at over Rs 1 lakh crore.
The decision, taken at a Cabinet meeting, would also permit banks and FIs to create a market for the securitised assets and help improve their asset-liability management.
The re-promulgation of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance 2002 would enable banks and FIs to set up Asset Reconstruction Companies which would buy NPAs from banks and securitise them in exchange for debenture units.
"This step is necessary to tackle the problem of non-performing assets with the bank and will mark major reforms in the financial sector," an official spokesperson told reporters after the meeting.
The ordinance would, however, not cover agricultural loan and small loans.
The re-promulgation of the Ordinance was necessitated in view of the disruption in Parliament as a result of which the Bill to replace the ordinance could only be introduced in Lok Sabha but could not be passed.
The Bill, introduced by Finance Minister Jaswant Singh, in the recently concluded monsoon session was undiluted and contained stringent provisions to hasten recovery of defaulting loans and mounting non-performing assets of banks and FIs.
The legislation was aimed at changing the legal system for securitisation and empowering banks and financial institutions to take possession of the securities and to sell them without the intervention of the court.
Based on the recommendation of Narasimham Committee report on financial sector reforms, the bill would enable banks and financial institutions to realise the long-term assets, manage problems of liquidity, asset-liability mis- matches and improve recovery.
According to statement of objects and reasons of the Bill, banks and financial institutions are empowered to take over the management of companies in the event of default of loans.
The Bill, which was to be initially applicable to banks and financial institutions, empowered the Central government to extend it to non-banking financial companies and other entities.
It will, however, not be applicable to security interests in agriculural lands, loans not exceeding Rs 1 lakh and cases where 80 per cent of the loans are repaid by the borrower.
There is also a provision to set up a central registry by the Central government for registration of transactions relating to securitisation, asset reconstruction and creation of security interest.
The legislation also provides for appeal against action of any bank or financial institution to the concerned debt recovery tribunal and second appeal to the appellate debt recovery tribunal.
Introducing the Bill, Singh said, "Our existing legal framework relating to commercial transcations has not kept pace with the changing commercial practices and financial sector reforms."
This, he said, has resulted in the slow pace of recovery of defaulting loans and mounting levels of non-performing assets. Also it had become necessary as unlike international banks, the banks and financial institutions in India do not have powers to take possession of securities and sell them.