On November 28, 2002, ICICI bank, in one of those small-step-for-itself-but-giant-one-for-the-industry kind of moves, took over a unit of Mardia Chemicals in Ahmedabad's industrial suburb Vatwa. This came approximately 48 hours after the Indian Parliament passed the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Bill, 2002 (a mouthful, yes, but its heart is in the right place). In one fell swoop, the Act sought to alter the balance of power between lenders and borrowers in favour of the former. "Watch our NPAs (Non Performing Assets) come down now," boasted bankers across the country, a reference to the bad loans of Rs 110,000 crore in the books of banks and financial institutions.

A year later, much of that euphoria has evaporated, leaving in its place cautious optimism that the Supreme Court will rule in favour of the banks when it delivers its final judgement on a clutch of petitions challenging the validity of the Act. Mardia Chemicals-the amount it owes ICICI Bank and 10 other banks is in the region of Rs 1,400 crore-was, not surprisingly, first off the block, and it did not even wait for the ordinance, originally passed on June 21, 2002, to become an Act; it challenged the legislation in October. The court's decision could go either way: in an interim order in October. It stated that "secured creditors" could possess assets, but proscribed them from selling them.

Expectedly, there hasn't been too much activity since then. According to figures collated by the Reserve Bank of India, by December 31, 2002, 27 banks had issued 15,316 attachment notices to defaulters, and actually attached properties valued at Rs 79.85 crore. Three months later, on March 31, 2003, the corresponding figures for 27 banks and financial institutions were 19,000 attachment notices and recoveries worth Rs 120 crore. "The amount recovered (from defaulters) is not along expected lines," admits S.S. Kohli, Chairman of Punjab National Bank. "The entire infrastructure-securitisation and reconstruction companies, and the central registry need to be in place for a quicker resolution." Infrastructure of the kind Kohli refers to will help banks and financial institutions securitise the assets they have attached or sell them. Today, courtesy the interim order of the Supreme Court, they cannot do this. "Until the last mile is cleared, there is little we can do in terms of disposing the property," rues Subrata Mukherji, Executive Director, ICICI Bank.

The Recovery Process

Those companies that have already seized assets have hired independent 'recovery agents' (as the law mandates they do) to protect and preserve them. ICICI Bank, for instance, has appointed Industrial Technical Consultancy of Tamil Nadu (ITCOT), to do this; IFCI, Himachal Pradesh Consultancy Organisation. And Bank of India has decided to wait until the Supreme Court gives lenders permission to sell seized property before it embarks on its 'attachment' drive.

Meanwhile, the mere fact that the Act allows lenders to seize property has made converts out of some defaulters. ICICI Bank has recovered Rs 400 crore, PNB, Rs 34 crore, and Indian Bank, Rs 14 crore. "The enactment has brought a sense of urgency among borrowers to negotiate with the bank and settle their dues," says Krishnamurthy Kota, General Manager, Indian Bank.

Most bankers are counting on this trend continuing. "We are not rushing into seizing assets because we want to give time to defaulters to come forward with proposals on how they can restructure and repay their debt," says V.P. Singh, Chairman, IFCI.

The Stumbling Block

THE IMPORTANCE OF BEING RASIKLAL MARDIA Mardia Chemicals has challenged the provisions of the Securitisation Act in the Supreme Court. The judgement could well decide the fate of the banking sector's Rs 110,000 crore NPAs.

Rasiklal Mardia: I'll see you in court! Rasiklal Mardia, the chairman and managing director of Mardia chemicals didn't even wait for the Securitisation Bill to become an act; he challenged its validity while it was still an ordinance. Others followed, and the Supreme Court delivered an interim order that said that while lenders could issue notices and seize assets, they could not sell or transfer them so as to incur a third party liability. That's slowed down the pace of seizures; after all, no FI or bank wants to bear the cost of preserving the seized assets only to have the court decide against them. Meanwhile, the man who started it all is convinced that the Securitisation legislation will not stand close scrutiny. "The Securitisation Act spells the death knell for the Indian industry-the real borrowers-and ultimately for the lenders too, since they won't have anyone left to lend to. It is a draconian law," he says. If the court thinks so too, Indian banks might as well write off the NPAs on their books.

One reason for the reluctance of banks and financial institutions to take the hard approach could be the Act itself. For instance, it allows 'secured creditors' to seize the assets of defaulters, but bars them from taking over the management of the business. And Reserve Bank of India has, in a guideline dated April 23, 2003, stated that banks cannot take over the management of the business of defaulters unless specific guidelines are issued. "This is a major roadblock," laments Punjab National Bank's Kohli. "Sometimes, a company's errant management conducts activities detrimental to the interest of creditors, or even its own employees." Adds IFCI's Singh, "Unless management control is transferred, no buyer will come forward because he fears hostile resistance from existing promoters."

The Act is also more defaulter-friendly than creditor-friendly. Attached assets sold by creditors come with all encumbrances of the defaulter. "Ideally, the transfer should be free of encumbrances," points out IDBI Chairman P.P. Vora. Even the two-month notice period it stipulates could encourage defaulters to strip assets. "By the time the two months are over, there is every likelihood of there being nothing left for the creditor to salvage," says a Delhi-based financial consultant.

There are other issues that creditors need to address as well. How do they deal with defaulters whose cases are being heard by Debt Recovery Tribunals? What happens in multiple-lender accounts? What benchmarks of valuation do they follow for the seized assets? The Securitisation... Act could help clean up the country's financial system but only after the Supreme Court issues its final judgement concerning its validity, and other regulators clarify on variables like management control. Still, as one senior banker points out, "All of us including the regulator and the legislator are in learning mode; it is only a matter of time before things fall in place." One would hope so.