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बेसिक इंग्लिश का दूसरा सत्र (कक्षा प्रारंभ : 22 अक्तूबर, शाम 3:30 से 5:30)
Amendments in SARFAESI, DRT Acts
Aug 19, 2016

In the recently concluded Monsoon Session, the Parliament passed a bill to amend debt recovery laws and make them more time-bound and effective in yet another step to address the problem of rising bad loans.

The Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016, will help banks and financial institutions recover loans more effectively, encourage more Asset Reconstruction Companies (ARCs) to set up business in India and revamp Debt Recovery Tribunals (DRTs).

Along with the new bankruptcy law, which came into effect earlier this year, these amendments will put in place an enabling infrastructure to effectively deal with Non-Performing Assets (NPAs) in the Indian banking system.

The bill will amend four Acts—the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, the Recovery of Debts due to Banks and Financial Institutions Act, 1993, the Indian Stamp Act, 1899, and the Depositories Act, 1996.

Key Features

  • The amendments, along with the bankruptcy code, will legally strengthen the banking system. The current law was lopsided in favour of defaulters and that there was a need to correct this.
  • Under the amended law, RBI will get more powers to audit and inspect any ARC as well as the freedom to remove the chairman or any director and appoint central bank officials to its board.
  • RBI will be empowered to impose penalties for non-compliance with its directives, and regulate the fees charged by these companies to banks at the time of acquiring such assets.
  • The bill will pave the way for the sponsor of an ARC to hold up to 100% stake.
  • It will also enable non-institutional investors to invest in security receipts issued by ARCs and mandate a timeline for possession of secured assets.
  • To be sure, RBI already regulates these entities, but the bill expands the regulator’s powers. It also increases the penalty amount that can be levied by RBI to Rs.1 crore from Rs.5 lakh.
  • The bill proposes to widen the scope of the registry that will house the central database of all loans against properties given by all lenders.
  • It also proposes to bring hire purchase and financial lease under the ambit of the SARFAESI Act, and enable secured creditors to take over a company and restore its business on acquisition of controlling interest in the borrower company.
  • As part of the overhaul of DRTs, the bill proposes to speed up the process of recovery and move towards online DRTs. To this effect, it proposes electronic filing of recovery applications, documents and written statements. DRTs will be the backbone of the bankruptcy code and deal with all insolvency proceedings involving individuals. The debtor will have to deposit 50% of the amount of debt due before filing an appeal at a DRT.
  • It also seeks to make the process time-bound. A district magistrate has to clear an application by the creditor to take over possession of the collateral within 60 days.
  • At present, more than 70,000 disputes are pending before DRTs as they battle the deluge of cases with insufficient staff.
  • DRTs and DRATs (debt recovery appellate tribunals) became like any other courts, thus, defeating the purpose of their setting up. They will now function like electronic courts.

The amendment bill was introduced in May and referred to a joint Parliament committee, which submitted its report last month. The government accepted all the recommendations of the committee.

Indian banks have been under stress, with many of them reporting losses and surges in NPAs for the last two quarters after the Reserve Bank of India (RBI) pushed lenders to classify visibly stressed assets as NPAs after an asset quality review in 2015-16.

The stressed assets of state-run banks as of 31 March made up 14.5% of total advances and, according to a recent RBI report, this may increase. The gross NPA ratio of state-run banks may rise to 10.1% by March 2017 from 9.6% in March 2016, RBI’s financial stability report said, warning that under a severe stress scenario, it may rise to 11% by March 2017.

Numbers from most banks that reported their first quarter results so far mirror this trend. All of them have reported a sharp increase in gross NPAs and are unsure if their bad loan portfolios have peaked.


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