The amendment to the debt recovery legislation will, among others, allow multi-state co-operative banks to assign their bad loans to asset reconstruction companies (ARCs), proving a win-win for banks as well as the companies.
Currently, these co-operative banks are not allowed to sell bad loans to ARCs. “This (amendment to the debt recovery legislation) will open the opportunity for ARCs to tap the sector which has so far not been targeted for debt recovery,” P. Rudran, MD and CEO of Arcil, country's largest asset reconstruction company said.
The Enforcement of Security Interest and Recovery of Debt Laws (Amendment) Bill, 2011 was passed in the Lok Sabha on Monday. Rising non-performing loans has prompted the Finance Ministry to look at alternative ways to help banks mitigate the bad loans problem. The amendments if passed by Rajya Sabha will be notified by the Reserve Bank of India. ARCs buy bad loans from banks and financial institutions at a discounted rate and recover the dues from the borrower.
Immovable property
The amendments also allow banks to acquire immovable properties from the borrower so that they can sell them at a later date.
Sometimes there are no buyers for a property or there is cartelisation from bidders, who deliberately quote a lower price thus undervaluing it. “The amendment will ensure that banks do not get into the situation of distress sale and get the right pricing for the assets on sale,” Rudran said. The amendment states that banks will be heard in Debt Recovery Tribunals (DRTs) before granting any stay on recovery of loans from borrowers. This will ensure that the law is not misused by borrowers to delay the settlements and payment of dues.
Also, the amendment allows ARCs to convert a part of the debt into equity. This could be a win-win situation for the borrower as well as the ARC. The borrower stands to gain because his outstanding liability decreases to the extent of equity conversion and the ARC can exit the company when it has made good of the liability. Further, the ARC will also get some amount of management control in the borrowing company so as to aid in the turnaround of the stressed company.