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It is very clear that the Banks should follow RBI guidelines on Asset-Classification
before classifying any loan account as Non-performing Asset (NPA). There were
judgments saying that it is mandatory for the Banks to follow RBI guidelines while
classifying an account as Non-Performing Asset (NPA) and any deviation in this
regard can vitiate the proceedings initiated under SARFAESI Act, 2002. While RBI
guidelines are detailed when it comes to Asset Classification and related issues; the
Bank officials or the Banks may have to make a subjective assessment of certain
issues. It is understood from the reading of RBI guidelines on Asset-Classification
that genuine borrowers facing temporary difficulties may be treated separately and
based on reasonable assurance of recovery. Guideline 4.2.4 of RBI guideline deals
with the issue of accounts with temporary deficiencies and narration of few of
the temporary deficiencies in the said guideline appear to be inclusive in nature
allowing the Bank to make certain subjective assessments on case-to-case basis.
Obviously, no creditor and especially secured creditor want to harass a genuine
borrower having a good track-record with the Bank for a considerable time. However,
with constant emphasis on the issue of reduction of NPAs, it seems that the Banks
are very strict while getting the accounts classified as NPAs. The most important
thing about the issue of recovery by the Bank is that they are allowed to proceed
against the borrower for default in any of the facilities availed by him when a
borrower avails multiple credit facilities. Banks are asked to initiate recovery
proceedings Borrower-Wise and not Facility-Wise and it is very clear in the RBI
guideline 4.2.7. Again, Banks are not supposed to lay complete focus on the value of
the security available with the Bank as such while initiating the recovery proceedings
and it is very clear in RBI guideline 4.2.3. The extract of the said RBI guidelines are
as follows:
4.2.7 Asset Classification to be borrower-wise and not facility-wise:
i) It is difficult to envisage a situation when only one facility to a borrower/one
investment in any of the securities issued by the borrower becomes a problem
credit/investment and not others. Therefore, all the facilities granted by a bank to a
borrower and investment in all the securities issued by the borrower will have to be
treated as NPA/NPI and not the particular facility/investment or part thereof which
has become irregular.
4.2.3 Availability of security / net worth of borrower/ guarantor:
The availability of security or net worth of borrower/ guarantor should not be taken
into account for the purpose of treating an advance as NPA or otherwise, except to
the extent provided in Para 4.2.9, as income recognition is based on record of
recovery.
Again, dealing with the issue of temporary deficiencies in adhering to the terms of
the loan agreement, RBI guideline 4.2.4 says as follows:
4.2.4 Accounts with temporary deficiencies:
approaches the Tribunal under section 17 of the Act challenging the proceedings
initiated by the Bank under SARFAESI Act, 2002. If the Bank proceeds with the
proceedings even during the pendency of the Appeal under section 17, then, it
becomes further more complicated to the borrower and it is very often heard that the
borrower is asked to file another appeal literally instead of looking into all
developments in the pending Appeal itself by way of entertaining affidavits or
petitions in the pending Appeal. Filing an Appeal against the order of the DRT to the
DRAT under section 18 is another big process and many normally get discouraged to
do this in-view of pre-deposit condition. In each and every step, the borrower is
discouraged and made to run from pillar to post even in cases with some merit and it
is the view of many of the professionals or the borrowers facing SARFAESI
proceedings. There is no reason as to why Appeals cant be speeded-up, additional
Tribunals cant be set-up. If Appeals are speeded-up and if sufficient Tribunals and
Appellate Tribunals are constituted, then, at-least genuine borrowers seeking remedy
may feel protected and at-present, every case of so-called default is treated in a
same way.
The SARFAESI Act, 2002 (The Securitisation and Reconstruction of Financial Assets
& Enforcement of Security Interest Act, 2002) seems to be proceeding on the basis
that the Banks or the Bank officials do not commit any mistakes. It is quite possible
to ensure speedy recovery through special legislations like SARFAESI Act, 2002 and
also giving confidence to the borrower that he will be heard fairly especially when the
borrower has got a very good track-record and long standing relation with the Bank
along with having valuable and marketable security lying with the Bank. It is quite
possible. Now, it seems that there is an amendment or the provision allowing the
Authorized Officers to bid for the property when there were no bidders initially and
the reason given for this step is that it will allow the Banks to clean-up their balancesheets. But, this kind of provisions can harm the borrowers and already it has
become extremely difficult for the borrowers to establish or state his case and
coordinating with the Banks. If there is too much pressure from the Banks when the
businesses are not doing well for the reasons beyond their control, then, small
business may be suffering irreparable loss if the Bank doesnt understand their
concerns reasonably and sympathetically. Normally, at-times, taking note of industry
specific problems, the Finance Ministry may come-up with some kind of directions to
the Bank to be lenient or understandable while insisting on the speedy recovery inrespect of some specific industries and Banks also are asked at-times to post-phone
the recovery process also.
Instead of discouraging the borrower to get any remedy or forum to advocate his
problems, the legal frame-work governing recovery of secured loans can still be very
fair, few more Tribunals and Appellate Tribunals can be constituted and well-drafted
powers are to be conferred on the Tribunals to even give directions to the Bank when
needed and in-favour of the borrower. For example, if the loan to be recovered is
only 10 lakh and the security lying with the Bank is worth 50 lakh admittedly, and if
the borrower seeks for payment of outstanding loan amount with interest and
charges seeking regularization, then, DRT should be able to give direction to the
Bank to accept the proposal. Delays in adjudication can certainly be curtailed and
technicalities can be ignored while entertaining pleas from the Borrower.
Admittedly, on the issues of reduction of interest, acceptance of OTS etc., Banks will
have their own internal systems and DRT may have little role in this regard.
With many more stringent provisions like allowing the Banks to file Caveats before
Tribunals under SARFAESI Act, 2002, allowing the Banks to bid for the properties;
discretion of the Banks or the Bank officials has grown like anything and the
borrower increasingly feels that he can not state his case and get remedy.
RBI keeps updating or modifies the guidelines governing Asset Classification, but,
borrowers feel that it has become so difficult for them to establish or advocate their
case even when they are not clearly willful defaulters and even when a valuable and
marketable security is lying with the Bank.
Whether it is a Public Sector Bank or Private Sector Bank, borrowers should have a
forum providing speedy, effective and efficacious remedy.
Note: the views expressed are my personal, my own understanding and I can be
wrong in my views.
Posted by V.D.RAO at 8.3.13 8 comments:
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2/25/13
SARFAESI Act & sorrows of Borrower?
There is every need for the Government to enable/assist the Banks in reducing their
NPAs (Non-performing Assets) and it is beyond doubt that the Banks are now well
assisted/equipped through the legal frame-work in recovering their dues. The
provisions of SARFAESI Act, 2002 (The Securitisation and Reconstruction of
Financial Assets & Enforcement of Security Interest Act, 2002), judicial
pronouncements from time to time and amendments to the SARFAESI Act, 2002
enable the Banks to recover their dues speedily. While there should be emphasis on
the need and urgency of the Banks in reducing their NPAs, the rights of the borrower
can never be ignored. It is to be commended that the judiciary has maintained a
great balance between the rights of the Banks on the one hand and rights of the
borrowers on the other hand while interpreting the provisions of SARFAESI Act,
2002. The Act talks of a right of appeal available to the borrower/guarantor/aggrieved
person against the possession notice issued by the Bank under section 13 (4) of the
Act. Time limit is prescribed to prefer an appeal. If the appeal provision is interpreted
in stricto senso, then, the borrower has to confine himself to the issue of demand
notice issued by the Bank under section 13 (2), the issue of classification of an
Account as NPA based on RBI guidelines, the issue of objections raised by the
Borrower, the reply given by the Bank if any etc. issues and nothing more than that.
If the provisions are seen strictly, then, the Bank may not even be questioned when it
fixes the reserve price and sells the property for a very low price affecting the
borrower and also the Bank at times. Addressing these concerns, the judiciary has
maintained that all actions initiated by the Bank under the provisions of SARFAESI
Act, 2002 can be challenged by the borrower in an Appeal under section 17 of
SARFAESI Act, 2002. Technically, if the borrower is silent in questioning the
possession notice issued by the Bank under section 13 (4) of the Act and chooses to
question the Sale Notice, then, the borrower has to confine himself to the procedure
followed by the Bank after the issuance of notice under section 13 (4) and the issues
pertaining to Sale of Secured Asset. When the borrower questions the sale notice
and did not question the notice under section 13 (4) within the prescribed period, the
borrower has to explain as to why he has failed to question the notice under section
13 (4) within the prescribed period. In the absence of satisfactory explanation as to
why the borrower has failed to question the possession notice under section 13 (4),
his position to raise all kinds of objections to the Banks demand becomes untenable.
However, the system has become liberal and courts have also liberally interpreted
the provisions dealing with the right of appeal provided to the borrower and the
borrower can question every action initiated by the Bank under the provisions of
SARFAESI Act, 2002. The borrower or any person aggrieved can approach the Civil
Court in a very limited situation where actually there is fraud or serious dispute with
regard to the title of the secured asset/property mortgaged. Though there can be no
bar on the jurisdiction of High Courts under Article 226 in dealing with the grievances
of the borrower against the Bank when the Bank initiates action, the High Courts do
desist in being alternative to the remedy available before the DRT normally. As such,
there is enough support to the Banks through legal-framework in recovering their
dues from the borrowers. It is true that in the absence of a special legislation like
SARFAESI Act, 2002, it would have been very difficult for the Banks in recovering
their dues and reducing their NPAs. From the borrowers point of view, the borrowers
allege that they do not have an effective remedy against the illegal action being
initiated by the Bank using the provisions of SARFAESI Act, 2002. The Courts have
held that the DRT can look into all allegations while entertaining an appeal under
section 17 of the Act and it includes the issue of disputes pertaining to the actual
debt. Then, it is also settled that the DRT can order re-possession of the secured
asset when it is found that the Bank has illegally taken the possession of the
secured asset. It is very important to look into various stages and issues when the
borrower prefers an appeal under section 17 of the SARFAESI Act, 2002 and those
are as follows:
1.
When the borrower prefers an Appeal under section 17 against the Bank, the
DRT can grant ex-parte stay of proceedings against the Bank if there is sufficient
ground to that affect from the averments in the Grounds of Appeal and also the
documents produced. If there is a caveat, then, the procedure differs. Normally, the
DRT orders notice to the Bank irrespective of the fact as to whether it grants stay or
not in-favour of the borrower. The DRT can also ask the borrower to make some
deposit while granting stay and it is also reasonable as the borrower has to make the
payments towards installments to the Bank in any case and there can be some time
lapse between the demand notice issued by the Bank under section 13 (2) and the
appeal.
2.
The Bank files its reply pursuant to the notice ordered by the DRT and they
normally justify their action and say that the action initiated by the Bank is legal and
the Appeal is liable to be dismissed. The Bank also can ask for vacating the interim
order and can pray for allowing the Bank to continue with the further proceedings
like Sale.
3.
If there is no interim order against the Bank while the Appeal is pending and
the Bank is allowed to proceed with the sale proceedings, the issue gets
complicated. The borrower should be allowed to raise any point and additional
grounds by way of additional affidavit in the pending Appeal and there is nothing
wrong in it and technicalities are to be ignored. For example, the borrower might
have chosen to challenge the possession notice issued by the Bank under section
13 (4) and during the pendency of Appeal, if the Bank initiates the Sale Proceedings,
the borrower should be allowed to question the Sale Proceedings in the same
Appeal instead of bringing technicalities and asking the borrower to challenge the
Sale proceedings separately.
4.
Obviously, during the pendency of SARFAESI Appeal, if the Bank proceeds
with the sale of Secured Asset, it is likely that the property may not fetch the actual
market value as the bidder discounts all the possible risks associated with the
bidding. If the Bank is able to raise the money and can get the entire debt recovered
through the sale consideration, then, the Bank is safe and appeal under section 17
literally becomes meaningless though it is usual to see an order where DRT says
that sale confirmation is subject to the final disposal of Appeal. Or DRT can allow
the Bank to proceed with the sale of Secured Asset and can say that the sale
confirmation is to be stayed until further orders. Instead of doing this, the DRT can
dispose of the SARFAESI Appeal itself as it can ascertain the facts so fast based on
the averments in the SARFAESI Appeal, the documents filed and the reply presented
by the Bank. Once the SARFAESI Appeal is finally disposed off then, it is not easy
to prefer an appeal against the final order of DRT as the borrower will have to make
pre-deposit with the DRAT which can vary from 50% to 75% depending upon the
discretion of the DRAT. Now, with the provision enabling the Banks/secured creditors
to bid for the property when the sale is post-phoned for want of bidders, it has
become much easy for the Banks to deal with the secured asset and claim
recovery.
5.
The proceedings before DRT can not be compared to the proceedings
before Civil Court and adjudication process before the DRT is simple and can be
fast. However, it is also true that DRT requires time to look into the facts and read the
documents apart from hearing the oral submissions from the Bank. Additional DRTs
and DRATs can be constituted if required rather allowing the borrower to suffer and
feel that the remedy before the DRT and DRAT is not effective.
6.
Again, the DRT can either allow the Appeal filed by the borrower under
section 17 or dismiss the same finally. If the DRT allows the Appeal filed by the
borrower under section 17, then, it can order re-possession of the secured asset if
the physical possession of the secured asset is already taken. The Appeal can be
allowed or dismissed either with costs or without costs. More than this, I dont think
that the DRT can do anything else or can give any direction to the Bank. For
example, the borrower may be entitled for getting his loan restructured at the given
point of time pursuant to some notification from the ministry of finance or RBI and the
Bank must have ignored it. Even then, the DRT can not direct the Bank to restructure
the loan of the borrower while disposing off the appeal. This is where the borrower
feels remediless at times. If the Bank is to be asked to do something as per law,
where can the borrower go?. The borrower can give a representation to the Bank
officials, can write to the superior authorities and may approach the High Court under
Article 226 of Constitution of India seeking direction. However, even the High Court
may direct the Banks to consider the representation and with all the might and
luxury, the Bank can make the borrower to run from pillar to post. This happens in
many cases though the factor of habitual litigants can not be ignored.
7.
Very rarely, the Appeal filed by the borrower gets allowed and even then, the
Bank will again be initiating the proceedings correcting the lacunae. For example,
during the pendency of Appeal under section 17, the borrower may say that he is
willing to regularize his account and abide by the loan terms and the market value of
the secured asset can be intact. In such cases, the Bank is in no way gets effected
by regularizing the loan as it collects the interest and also the legal expenses for
initiating the proceedings. However, the DRT can not give such a direction to the
Bank though it can orally ask the Banks to consider the proposal of the borrower.
Now with the recent amendments, the Secured Creditor is enabled with the right of
filing Caveat and it presents many difficulties to the borrower and it becomes now
literally impossible to get an ex-parte stay order against the Bank. And also, it has
become very easy for the Banks to sell the secured asset as there is no need of
following separate procedure of Sale if the Sale is postponed for want of bidders
etc.
It is quite possible to ensure a system or practice under the provisions of SARFAESI
Act, 2002 which is fair and also effective. If the secured asset is valuable, then,
there can not be any worry to the Bank at all as it can recover the dues with interest
and expenses. If the secured asset is not valuable in comparison to the dues
recoverable, then, the officials of the Bank are to be blamed as to how they have
sanctioned the loan in the first place.
Emphasis is always laid as to how to enable the Banks to speed-up their recovery,
but, little emphasis is laid as to how the borrower feels remediless in some cases.
Even while providing the best possible legal-framework enabling the Banks to
recover their dues, the concerns of the borrower can certainly be addressed and it is
very much possible. From the borrowers point of view, the following issues need to
be considered.
a.
The Appeal mechanism under the provisions of SARFAESI Act, 2002 can be liberal
and the borrower should be allowed to question every action initiated by the Bank
under SARFAESI Act, 2002 without raising any technicalities like condonation of
delay etc.
b.
c.
There should be time-limit for the Banks in filing their reply in an appeal under
section 17 of the Act and in the absence of filing the reply within the specific period,
the proceedings of the Bank under SARFAESI Act against the borrower should
automatically be stayed.
d.
Though there is a time-limit for disposing the Appeals under section 17 in the Act,
the disposal normally takes time. If work-load in the DRTs and DRATs is the main
cause for the delay, then, additional DRTs and DRATs can be constituted and so that,
Appeals under section 17 and under section 18 of the Act can be disposed of as
quickly as possible.
e.
The scope of powers of the presiding officer of DRT under section 17 should be
expanded further and it should include giving suitable directions to the Bank from
time to time keeping the need of recovery of dues in mind.
With the system aimed at speedy recovery and balanced heavily towards the Bank,
genuine borrowers who are not willful or habitual defaulters also get affected. The
borrowers feel remediless now and even if the remedy is provided, most of the
borrowers feel that the remedy provided is ineffective.
While it is important to improve the financial health of the Banks/Financial
Institutions, there is no justification for a completely one-sided draconian legal
system where the borrower is harassed like anything. Bank officials exercise great
discretion and the Bank officials must be extremely happy with the legal provisions
now governing the recovery of secured loans under SARFAESI Act, 2002. It has
become totally one-sided affair now and ordinary citizens & small businesses may
feel it better to approach the private money leaders for their financial needs rather
approaching Banks and Financial Institutions in this country.
I expect constitutional courts to entertain certain important issues under SARFAESI
Act, 2002 in public interest rather supporting every view of the government.
It is known that while some loan transactions with the Bank like Housing Loan,
Educational Loan etc. are very simple, some commercial loan transactions are very
complex in nature. The Bank may provide various loan facilities to the Borrower and
most of these commercial loans are complex to understand and these loans infact
involve many complexities. When a Businessmen or a Corporate gets various loan
facilities and if there is a default or allegation of default with regard to a particular
loan facility, the Bank proceeds against the borrower and claims for the settlement of
entire outstanding debt in respect of all facilities. The Banks use the provisions of
Securitisation and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002 (SARFAESI Act) which appear to be draconian in some cases
while the Act is justified from another angle. Irrespective of the long standing relation
of creditor and borrower, in some cases, the Bank may be unreasonable towards a
borrower and may insist for recovery of the entire outstanding dues even if the
borrower commits a default in respect of only one facility among many other facilities
extended to the same borrower. The Bank may say that they will proceed borrowerwise in classifying any Account as Non-performing Asset and proceed with the
recovery process under the provisions of SARFAESI Act, 2002. Banks or the officers
concerned do exercise some discretion in this regard while the Bank or the officers
are left with no discretion in respect of few other cases. The Bank has to follow the
RBI guidelines and the RBI circulars having binding nature from to time. It is known
that the Banks should follow the guidelines of Asset Classification prescribed by the
Reserve Bank of India in classifying any loan account as Non-performing Asset.
The guidelines never intended to unnecessarily and unreasonably harass the
borrowers. The guidelines refers to the significance of looking at risk factor, the
value of security, track record of the borrower and even getting the loan Account
updated though Bank usually follows their internal guidelines.
In some cases, the borrowers do not want to litigate the issues with the Bank and
may try their level best to get the default rectified and may try to get the account
settled finally under One-time Settlement Scheme. The Bank or the officers
concerned in most of the cases maintain written or oral communication with the
borrowers when there is default. The borrowers, in-turn, explains their difficulties in
view of their long standing relationship with the Bank and may seek some relaxation
and may seek indulgence of the Bank to rectify the default in repayment. This
communication or negotiation happens before classifying any loan Account as Nonperforming Asset and even after the classification of account as NPA and before
initiating the proceedings under the provisions of SARFAESI Act, 2002. In some
cases, the borrowers negotiate with the Bank for rectifying the default or for a final
settlement even after the issuance of demand notice by the Bank under section 13
(2) of the Act. This is the reason as to why there is delay on the part of the Bank in
proceeding with the recovery under the provisions of SARFAESI Act, 2002 even after
the issuance of demand notice under section 13 (2). When a borrower intends to
avoid litigation, he may listen or act upon the oral understanding with the officials.
Sometimes, the understanding for rectification of default or settlement of loan can
be in writing also. While the rectification of default is oral in most of the cases, the
final settlement of the account is in writing normally.
Settlement of Default of Debt/Regularisation:
It is frequently alleged now-a-days by the borrowers that the Bank or the officers of
the Bank agrees for the settlement for rectification of default, receives the money
from the borrower and later-on, insists for the full settlement of the outstanding due.
Inspite of updating the loan account, the Bank may choose to proceed under the
provisions of SARFAESI Act, 2002 and may say that they are acting on the basis of
classification and they never agreed for regularizing the loan account. This happens
even after the demand notice issued under section 13 (2). Even after the demand
notice, the borrower can negotiate with the Bank and the Bank may receive some
substantial amount of money in-between and even then, suddenly may choose to
proceed with the issuance of notice under section 13 (4). These are the usual
allegations from the borrowers against the Bank when it comes to regularization of
loan accounts. The allegation in some cases is that the Banks goes back from their
promise and in some cases, the Bank is not co-operating for regularization as even
the RBI guidelines refer to the regularization if other factors like the track-record,
risk-factor, value of security etc. are justified. Another thing is that the intention
behind giving notice to the borrower under section 13 (2) of the Act is to invite
objections if any. Law mandates the Bank to give a reasoned reply to the objections
raised by the borrower under section 13 (3A). But, what happens is that the Banks
agree for some kind of settlement either orally or in writing even after the issuance of
notice under section 13 (2). Later on, after a gap of some one year and when the
borrower makes the substantial payment, the Bank acts upon the demand notice and
issues a possession notice under section 13 (4) of the Act. This is infact incorrect. If
something notable has taken place with regard to the recovery of loan after the
issuance of notice under section 13 (2) and if the Bank is silent in acting on section
13 (2) for a considerable time in view of the payments made by the borrower, then, it
is incumbent upon the Bank to issue the demand notice afresh taking note of
subsequent developments and this fresh demand notice under section 13 (2) of
SARFAESI Act can give an opportunity to the borrower to include his objections
afresh without taking a direct recourse to an appeal to Debt Recovery Tribunal (DRT)
or without having to approach the High Court seeking intervention at times. But, this
is not happening. In most of the cases, unless the Debt Recovery Tribunal sets the
SARFAESI proceedings aside, the Banks do not issue demand notice twice under
section 13 (2) and instead acts upon the demand notice issued earlier irrespective of
time gap or lapse. These are the usual problems being faced by the borrowers in
getting his or their account regularized or updated. The borrowers are infact left with
no remedy in these cases as the scope of powers of DRT under section 17 of the Act
does not include the power to give direction to the Banks to agree for regularization.
These kinds of cases mostly come to High Court and the High Courts usually issues
suitable directions noting the interests of the Bank and the rights and plight of the
borrower.
Settlement of Debt/One-time Settlements:
The second issue is with regard to final settlement of debts. In many cases, Banks
are going back from their promise of one-time settlement. The Banks agree for final
settlement of account with the borrower. The Banks may ask the borrower to give an
offer letter in a format and with some averments and then, the Banks will agree for
settlement. When the substantial amount is paid, the Banks may say and are saying
in most of the cases that the RBI guidelines do not allow them to get the account
settled under One-time Settlement. Again, the Banks may say that the borrower has
not disclosed all the facts with the Bank while coming forward with the One-time
Settlement Proposal. Once the settlement proposal is agreed, the Banks will be very
silent till the substantial amount is deposited with the Bank and finally, they can say
that they do not have right to go for settlement or can blame the borrower that he
has not disclosed the whole facts. These things do happen regularly now-a-days.
The DRT normally do not look into these issues and the DRT may at best, look at the
procedural irregularities if any and even the disputes pertaining to outstanding are
not entertained as such though the DRT can look into those issues. The DRT
normally goes with the stand taken by the Bank unless the Bank is apparently wrong
in their approach. Public Sector Banks should concentrate on the recovery of money
and at the same time, can not harass the borrowers who are willing to get their
accounts regularized or willing to get their account finally settled. Even, the RBI
guidelines hint at this. When there is security lying with the Bank and when original
documents are with the Bank, the Banks pressurize the borrowers with all kinds of
things and using the provisions of SARFAESI Act, 2002 to their advantage. The DRT
in these cases proves to be ineffective and the borrower is not entitled to approach
the Civil Court in these cases in view of the bar under section 34 of SARFAESI Act,
2002. Though there is a scope for the Civil Court to entertain even the SARFAESI
related matters in some cases in a limited sense pursuant to the Mardia Chemicals
case, it is very difficult to persuade the Civil Court with regard to its jurisdiction in
SARFAEI matters and this can be attributed to the lack of expertise on the part of the
Civil Courts with the Securitisation Law.