Parliament approves changes in Sarfaesi Act

In a move expected to empower debt recovery by lenders, Parliament on Monday approved the Bill to amend the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Sarfaesi Act).

The Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Bill, 2011, amends two Acts — Sarfaesi Act 2002, and Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (DRT Act).

According to the amendments proposed, banks and asset reconstruction companies (ARCs) will be allowed to convert any part of the debt of the defaulting company into equity. Such a conversion would imply that lenders or ARCs would tend to become an equity holder rather than being a creditor of the company.

"Bankers may not be too keen on converting their debt into equity, since the share prices of such defaulting companies fall drastically, resulting into losses for the bank," said a senior official of a public sector bank, requesting anonymity.

Moreover, the amendments also allows banks to bid for any immovable property they have put out for auction themselves, if they do not receive any bids during the auction. In such a scenario, banks will be able to adjust the debt with the amount paid for this property. This enables the bank to secure the asset in part fulfillment of the defaulted loan.

Banks can then sell this property to a new bidder at a later date to clear off the debt completely. However lenders will be able to carry this property on their books only for seven years, as per the Banking Regulation Act, 1949.

Most PSBs showed a fall in their asset quality during the three months ended July-September, and had announced aggressive recovery procedures for the fiscal, even if it meant sacrificing growth.

"The Bill was introduced in 2011 and should not be referred to the standing committee now after 12 months... It would defeat the very purpose of the Bill. In the interest of banking sector, it is necessary to pass the bill in 2012," finance minister P Chidambaram said, adding the move would quicken the process of loan recovery.

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