The Hindu Business Line : Exorcising borrower belligerence

FINALLY, Mardia Chemicals has to accept defeat. After a protracted delay, the Supreme Court upheld the constitutional validity of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act, 2002. The embargo on banks not to dispose of the assets acquired has been lifted.

Already, newspapers are full of advertisements by banks seeking buyers for assets up for grabs. Asset reconstruction companies (ARCs), the special purpose vehicles that implement the provisions of the Act, are busy with the business of scrutinising these assets. A lot of debate has been going on about the Act ever since its introduction and no final view has emerged.

On hindsight, the SARFAESI Act appears to have been a partial success. With the recent Supreme Court nod to dispose acquired assets, the Act will be a threat to any borrower henceforth. If one looks at legacy, all that the banks had as recovery mechanism was to file cases before the Debts Recovery Tribunal (DRT) — a process that would get so entangled in webs and take ages.

For companies that met the criteria to be termed a sick company, the erstwhile Board for Industrial and Financial Rehabilitation (BIFR) and its appellate arm, the Appellate Authority for Industrial and Financial Rehabilitation (AAIFR) provided a safe parking place to be away from angry creditors.

The corporate debt restructuring (CDR) scheme was for those corporates which wanted a forum to delay paying their creditors apart from depriving them of some interest and principal payments too.

It appeared to be a travesty of justice that during this time, certain foreign banks were using strong-arm tactics to recover retail loans — which are by nature unsecured. In this situation, the enactment of the SARFAESI Act came as a breadth of fresh air to bankers used to the dingy confines of a DRT room.

Even after the Supreme Court decision, the critics are still having a field day. Most people were disappointed when the Supreme Court termed as unconstitutional the move to ask a borrower to cough up 75 per cent of the dues before he claims his right to file an appeal against an order made under the SARFAESI Act.

The apex court could not have been more right in its decision. If a person is willing to pay Rs 75 lakh out of the Rs 1 crore that he owes to a bank just because the bank is threatening to acquire his property and he desires appellate remedy, he would not mind bidding goodbye to the bank for a compromise amount of Rs 80 lakh.

The history of compromise settlements shows that banks generally take anything that comes their way. Also, if the borrower has failed to convince his bankers with whom he would have had a rapport till his account misbehaved, he would find it doubly difficult to convince a totally new appellate authority and would, hence, prefer a compromise with his bankers.

Trade unions have now joined the fray. Their retort is that employees' statutory dues are not protected under SARFAESI as the erstwhile BIFR was doing. At the outset, both the pieces of legislation are poles apart in terms of intent — the BIFR being more of a carrot to companies to mend their ways and get on to the beaten path while SARFAESI is more of a stick to recalcitrant borrowers. What they have failed to comprehend is that banks would resort to an attachment and sale only for borrowers and accounts that have no oxygen left.

It is only if another company resuscitates the company by bringing in the moolah that, any hopes would be left for the borrower. In such a state, the last thing that would come to the mind of the borrower would be to credit 12 per cent of salary to the accounts of all his employees month on month after soliciting an equal contribution from them.

PF authorities have the unilateral power to milk the bank account of the borrower dry till statutory obligations are met. If the company is in a position wherein it can meet employees' statutory dues, there is no reason why it would rob a bank of its interest and vice versa. The entire threat-factor created by the Act would be lost if it includes clauses to take care of employees' terminal benefits and the like. There is also a murmur of protest that the business of the bank is banking and not looking after offices and factories. It is probably here that the intent of SARFAESI has not been understood. The primary intent of SARFAESI is to give a shock treatment to a company that is not paying up. A reasonable time limit of two months has been fixed under the Act for borrowers to respond after the first death-knell has been sounded.

If the borrower cannot work out a solution in two months with the banker, he might as well give up a portion of his assets. Even if the bank actually takes over the asset, they are not going to hold on to it for eternity and post their manager as the CEO of the unit. They would seek the assistance of the ARC to find a person to take over the factory and run it or sell off the assets on an `as is where is' basis.

The ultimate intent is to ensure that the account of the borrower is credited with the sum realised from these efforts and the balance is forgotten. In many cases, after getting a notice under SARFAESI, many a borrower has been psychologically shaken and has paid up some/all his dues to the bank from sources hitherto known but not tapped.

The SARFAESI Act is a step in the right direction for the banking industry. A few rough edges need to be ironed out which would happen over a period of time. It would be erroneous to misjudge the intent of this Act even before the first results of it are in the process of happening.