Vol 3 (2006) - Issue 3

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The Indian Securitisation Act: An Overview

For years, Indian banking and institutional lenders have had a major complaint – they were criticised for their inability to control their burgeoning non-performing
assets (‘NPAs’) (bad debt lump), but when it came to recovery and reducing bad debts, they had little power. When a loan goes into default, it has been operationally difficult for lenders to take control of the collateral, or to utilise recovery procedures designed for a company that goes into bankruptcy. The existing environment of weak creditor rights has been a major cause of NPAs building up in the banking system.
The Civil Courts were found ineffective, hence came the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (‘RDDBFI Act’). The RDDBFI Act envisages a summary procedure for ascertainment of dues, but it fails to execute court orders or decrees in an effective way.
The Government in June 2002 introduced a new law entitled The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘the Act’) that aims to simplify the process of recovery of bad loans from wilful defaulters. The Act provides the first legal framework that recognises securitisation,asset recovery and reconstruction.
This article seeks to examine the scope of the Act, especially in relation to recovery of dues and the various issues and problems arising on its implementation.

1. Salient provisions of the law

– The Act gives a formal statutory framework for transactions relating to securitisation and asset reconstruction in India.
– The Act promotes setting up of asset reconstruction and securitisation companies to take over the NPAs accumulated with banks and public financial institutions. It provides special powers to lenders and securitisation/asset reconstruction companies to enable them to take over the assets of borrowers without first resorting to courts.
– The banks and financial institutions (‘FIs’) have now been given powers to enforce their security without filing suits or cases before the courts and hence they can now realise their loans speedily.