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About
nine months ago, the banking industry received with high hopes the
announcement of the reconstruction and securitisation ordinance,
which became an Act subsequently. The provisions of this piece of
legislation seemed just the measures needed to tackle the sticky
issue of non-performing loans (NPLs), estimated by the industry
to be in the region of Rs 100,000 crore. It was a well-thought-out
framework that the regulators needed to fine-tune to the prevailing
realities of the Indian environment.
What was the design? As one understood it,
the framework was created to take care of two major issues associated
with non-performing loans. Firstly, there was a need for large funds
to flow into the system to originate the transfer of assets to asset
reconstruction companies (ARCs) or asset management companies. Secondly,
there was a need for experienced business and asset managers to
recover or enhance the value of the assets. Unlike the models tried
out in other countries that were dependent upon huge funds from
multilateral agencies or from their respective governments, this
model was aimed at using the liquidity available in the banking
and financial system. The mobilisation is to be carried out by the
asset reconstruction companies by floating security receipt or from
its own funds.
In addition, the framework seemed to have some other interesting
objects. It aimed to provide a level playing field for the lenders.
Chapter III of the Act gave adequate powers to the lenders to seize
and dispose the assets of defaulting borrowers that were charged
to the bank by way of security or assets forming part of the collateral.
The law also did not get down to making a distinction
between wilful defaulters and others, which would have opened a
Pandora's box of interpretations. It empowered the regulator to
frame rules in regard to such seizure as well as disposal, thus
bringing transparency to the system.
This framework envisaged minimum intervention
from the government and the legal system. To that extent, the principle
of natural justice was given due consideration, by filtering out
the myriad obstacles created in the asset recovery process.
The framework also envisaged the formation
of intermediaries for the process of asset reconstruction. Professional
asset managers, valuers, and advisors were to assist the process
of recovery. The intermediary's role was to create a market for
assets that were unproductive or sub-optimally productive because
of lack of investment. Different approaches were considered for
reconstruction such as change of management, sale or lease of the
defaulters' businesses, separating the good businesses from the
bad ones, rescheduling loan repayments, and the recovery of assets
through seizure and disposal.
So far so good, but the progress actually attained
on ground would make the most acute optimist despair. Murphy's law
seems to have taken over. Every possible thing that could have gone
wrong with the execution of the framework has actually gone wrong.
Perhaps the details that were left to the regulators to fill in
proved to be far too many and the rest of the system, including
the government, got hopelessly caught up in this confounded maze
of details.
The first asset reconstruction company is yet
to be operational. The rules regarding securitisation and the formation
of the registry for such securitisation is still awaited. Several
provisions of Chapter III of the Act, which empower the lender to
take possession of assets and subsequently dispose them, need to
be clarified. The constitutional validity of the Act itself may
undergo a test. Also, clarity in regard to the applicability of
the provisions of the Act in cases that were earlier before the
legal system has been proved to be sadly lacking.
The fundamental objectives behind the asset
recovery legislation still remain largely unrealised. And there
is still some way to go before we can create the conducive environment
required for the speedy asset recovery and disposal so essential
to revitalising our financial system.
Ashvin Parekh is the
Executive Director of Deloitte Touche & Tohmatsu. The views
expressed by the author are his own and not necessarily of his view
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