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It is time of retribution for those who have defaulted on bank loans. The Central Government, faced with rising bad loans at leading banks, has decided to tackle loan defaults with an iron hand. It has put defaulters, especially wilful ones, on notice by amending an existing debt recovery law, to allow asset reconstruction companies (ARCs) a greater role in the day-to-day operations of the sick company. The amendment will give wide-ranging powers such as a right to being heard at the debt recovery tribunal to acquiring immovable assets of the sick company.

Move to Reduce Lenders’ Toxic Assets

The bill called the Enforcement of Security Interest and Recovery of Debt Laws (Amendment) Bill, 2011, allows an ARC to transform a part of the debt of the defaulting company into equity, to help recover the losses. This will actually allow an ARC to actually participate in the revamping of the business of the defaulting firm.

Once the rule is notified by the Reserve Bank of India, ARCs will become eligible to either have a say in management or gain management control of the company, thus making revival of the debt-stricken company an easier task. The ARC can choose to exit the company at a later stage with the equity price on the higher side, as compensation for the losses suffered on debt-concessions.

ARCs feel that the managements of defaulting companies are not willing to change their way of running the business, either out of ignorance or for any other reason. Restructuring the toxic debt into equity will allow ARCs to rejig the company’s business in a more effective manner.

Converting debt into equity is particularly useful because reducing the debt by converting it into equity will reduce the burden of interest payments.

Companies Beware Of Defaults, Recovery Law Amended

Change Makes it Mandatory for Tribunal to Hear Both Parties in Dispute

Under the present debt recovery tribunal (DRT) regulations, it was possible for a borrower opposed to debt restructuring, to file a caveat before the DRT and thus delay the revival process. The amendment makes it necessary that both the lender and the borrower are heard at the DRT before the borrower can file a caveat and obtain a stay on restructuring.

Allowing banks and financial institutions a hearing ensures that litigation will not be a tool for dishonest borrowers to delay the settlements and repayment of dues.

Banks get 15 Days to Respond to Objections, can Acquire Immovable Properties

Under the amendment, the financial institution, or any other lender, is given 15 days to respond to the objections raised to the debt restructuring by the defaulter. This is a reasonable timeframe in which the bank can evaluate the arguments against restructuring.

This amendment also allows banks to acquire immovable properties towards settlement of pending dues, which clears the way for banks to buy back the property if it does not sell at an auction. Earlier, such properties were required to be shown as non-current asset in the lender’s books for nearly seven years. Now that such a property can be acquired means they can become part of the fixed assets of the concerned bank or the financial institution.

According to a report from credit rating agency ICRA, gross non-performing assets (NPAs) of lenders in India is expected to exceed 2 lakh crore and touch 3.6-3.8 percent of gross advances as of 31 March 2013, up from 2.8 percent at the end of 31 March 2012.

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