Lenders' liability law in offing to balance harsh NPA laws

NEW DELHI: Hardly two months after promulgating the Securitisation Ordinance, the government is now drawing up a lenders'' liability law to ensure that the NPA laws are not misused by banks and financial institutions while taking over management control of defaulting companies.
A committee has been set up under Shekhar Agarwal, joint secretary in the Ministry of Finance, to look into the legislation on lenders'' liability, informed sources said.
The sources said that Section 19 of the Securitisation and Reconstruction of Finance Assets and Enforcement of Security Interest ordinance, promulgated by government recently, has certain provisions which were harsh and can go against borrowers.
"The lenders liability law will prevent mismanagement by an Asset Reconstruction Company when it takes over assets of a defaulting company," eminent lawyer Shardul S Shroff said on the sidelines of a Assocham seminar.
Shroff, who was part of the committee under Finance Ministry that drew up the Securitisation ordinance, said the new legislation would also provide for compensation in case the banks and ARCs commit any wrong-doing while taking over assets of defaulters.
The move to come up with a lenders'' liability law comes after hectic debates and parleys by India Inc on the provisions of the Securitisation ordinance.
The ordinance that was repromulgated a month ago provides for banks and FIs to take over control of a company by appointing an administrator in the board who would initiate winding up of the firm and recovery of NPAs.
Although the government has repromulgated the securitisation ordinance, the bill is expected to be presented only in the next session of Parliament.
Meanwhile, the Reserve Bank of India has set up two working groups to frame norms for Asset Reconstruction Companies and on securitisation of assets under the proposed laws.
The development assumes importance in the light of two ARCs being promoted by FIs. While IFCI has set up its Asset Care Enterprise (IFCI ACE), another ARC has been floated jointly by ICICI Bank, IDBI, SBI and other banks.
Armed with the securitisation ordinance, many PSU banks have already slapped notices on defaulting companies threatening them to take over management control if they do not pay up outstanding loans within a stipulated time.