Debt recovery needs right set-up

After passage of the landmark Goods and Services Tax (GST) Bill in Parliament and pressing a fast track button on the follow-up action, restoring the health of public sector banks should rightly be the next key priority of the government. Thankfully, the Finance Ministry appears to be quite serious about the job. Even though the man who initiated the process of cleaning up the mess , RBI Governor Raghuram Rajan has just a few weeks left in office, the glide path set by him for the banks is irreversible. After all, given the size of the non-performing assets (NPAs) estimated to be a huge US $133 billion, it is a question of sheer survival of the government banks whose shares have taken a severe beating in stock markets as they go on posting NPAs, high level of provisioning and low credit growth.

Passage of the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill passed by Parliament in the monsoon session would align the existing debt recovery frame-work with the newly enacted Insolvency and Bankruptcy Code. As the banks get busy cleaning up their balance sheets, their principal job of fresh lending and borrowing should not be halted, though the functioning has been affected significantly, both by the adverse discourse against the defaulters as well as the ability of the public sector lenders to extend fresh loans in a bold manner. As the economic circle takes a turn for the better, the recovery of bad debts would pick up provided well-concerted efforts are further mounted in a pragmatic way, without treating all the defaulters as ‘wilful.’ One such way for the banks would be to take a hair cut, or simply book some losses and sell these toxic assets to professionally run Asset Reconstruction Companies (ARCs). This way, the banks can start afresh after cleaning up their balance sheets while ARCs can go about their business of recovery of debts. The entire process has to be legally tenable. It is in this context that the new recovery of debt laws bill has been passed, bringing in simultaneous amendments in four critical enabling laws.

These are Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 (Sarfaesi Act), the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, the Indian Stamp Act, 1988, and the Indian Depositories Act, 1996. Things like centralisation of registry, time limit for clearing of possession of assets by secured creditors etc, would smoothen the debt recovery process at the level of implementation. Hopefully, the new legal framework would restore health of the financial sector.