Non-performing assets disaster can vitiate banking system

Reserve Bank of India (RBI) Governor Raghuram Rajan has come down heavily on the bankers for deterioration in loan recovery position and terrible slippage in the Non Performing Assets (NPAs).

An account becomes NPA when a borrower, who has availed a loan from a bank or a Housing Finance Company (HFC), has not paid the dues for more than 90 days. Bankers have been instructed by the governor to clean up the balance sheets by March 2017 by taking proactive steps for early recognition of the stressed assets (akin to cancer) and to take aggressive steps for recovery.

The gross NPAs of all the scheduled commercial banks was at 5.1 per cent of the total advances in September 2015. The ratio of the stressed assets including the Strategic Debt Reconstruction was at 11.3 per cent. In money terms, the impact is Rs 7 lakh crore which is ruining the health of the banks and progress of the economy.

The stress is pronounced in the mining, infrastructure, iron, steel, builders and housing finance sectors. The Financial Institutions (FIs) are also sitting on a time bomb of huge over dues in the category 60-89 days which is just a whisker away from becoming NPAs. When exploded, the NPA disaster can vitiate the banking system.

Taking the stern message of Rajan seriously, bankers have taken the aggressive route of SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act actions on the NPA cases.

The weapon of SARFAESI empowers  authorised officers appointed by the banks to take physical possession of the immovable properties – houses, commercial buildings, educational institutions, industrial units and hospitals whose loan accounts have turned into NPAs. Banks are going hammer and tongs to acquire the immovable assets, bring them up for auction, recovering the full dues to post impressive performance by March 2016.

There are specified prerequisites for initiating SARFAESI actions. The loan accounts will have to be classified as NPAs (unpaid dues above 90 days), asset funded has to be an immovable property, cannot be an agricultural land, minimum loan has to be above Rs 1,00,000 and the total over dues, at the time of initiation of the SARFAESI action, to be above 20 per cent of the loan outstanding etc.

Banks will then issue Demand Notice  by way of registered post to such defaulters advising that the entire loan including overdues is  payable within 60 days from the date of notice. Unserved notice warrants mandatory publication of the notice in two newspapers – English and vernacular. Assuming that the defaulter does not respond, banks will take the symbolic possession of the property by pasting the Possession Notice on the property, followed by its publication in two newspapers.

Soon after, the banks will submit an application with the district magistrate seeking vacant possession of the mortgaged property. The magistrate, after ensuring that the banks have followed the due process, will direct the revenue authorities to take vacant possession of the property and hand over the same to the banks/ HFCs after conducting proper panchnama of inventory of the movable assets.

Deft handling
This stage witnesses lot of drama, emotional outbursts, histrionics, interference from local politicians, etc. to prevent the authorities from taking possession of the property, which requires sensible and deft handling.

The stage is now set for the auction of the acquired asset with the publication of sale cum auction notice with a 30-day time for the defaulter to close the loan account, failing which the acquired property will be auctioned. The successful bidder gets the valid legal title to the property with the authorised officer executing the sale certificate which will be the title deed to the asset.

The borrowers, even as defaulters, can exercise their legitimate rights to protect their interests. Notices from banks should not be ignored. Borrowers should not abscond, switch off their cell phones and should not become incommunicado.

Borrowers should visit the bank, check the statement of account, discuss their problems, reschedule  the loans by refixing the installments to lesser amounts with a longer loan tenure and go for one time settlements (OTS) so that the SARFAESI actions can be short circuited and the asset saved from auction.

Since no courts have jurisdiction to deal with SARFAESI actions, the aggrieved parties (including tenants) can approach only the Debt Recovery Tribunal (DRT/DRAT) for redressal of grievances and to get a stay. The Supreme Court judgment of January 2016 has held that the provisions of the SARFAESI Act cannot override the provisions of the Rent Control Act, wherever applicable. It is, hence, safe and desirable for owners to get the rent agreements registered from their tenants.

There are interested parties, real estate agents, investors and asset recovery companies who concentrate keenly on buying the SARFAESI auction properties. The attraction is a guarantee of the legality of the property titles, good assets, houses/ apartments in central locations and, most importantly, the auction prices of the SARFAESI properties will be 20-30 per cent less than the market prices.

However, the transactions will not always be hunky-dory as the principle of ‘buyers beware (caveat emptor)’ operates.

The bidders should thoroughly be satisfied with the title of the property, obtain a legal search report of the property, check on the property tax paid particulars, obtain latest encumbrance certificate to know whether there are any other claimants.

For apartments, it is prudent to visit the project, inspect the flat, check for society dues, quality of maintenance of the flat, as the ultimate desire of the bidder should be to buy a good property and not a headache.

(The writer is a Bengaluru-based banker)