"Even if we can get back 75 per cent of the dues, we would be happy. " Kalpana Morparia, executive director, ICICI

"We are collating details of all defaulters. Notices will soon be on their way." Janaki Ballabh, chairman, SBI

It was a rare burst of candour. Last Tuesday Finance Minister Jaswant Singh-in a debate triggered by 10 questions plus supplementaries on bad loans and non-performing assets in the banking system-declared in chaste Hindi that "the Rs 83,000 crore worth of non-performing assets (NPAs) is a loot. This can't continue". It is a sentiment that isn't new. Perhaps the expression is. What has changed is that the Government is now armed with an ordinance promulgated on June 21 and which has been introduced in the Lok Sabha as the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Bill, 2002.

There is much jubilation. And nobody is wasting time either. A flurry of notices is being sent to chronic defaulters by institutions and banks like ICICI, State Bank of India (SBI) and IDBI. The message is clear: pay up or we take over your assets-sell them in bits and pieces or all together to your rival and recover our dues. Your land, your machinery, anything that has some value. We are coming to get it.

Economy

CHANGING LAWS Sick Industries Companies Act, 1985: In the process of being scrapped. Provisions do not allow security to be enforced if the company is under the purview of BIFR. Deemed pro-borrower. Recovery of Debt Due to Banks and Financial Institutions Act, 1993: To co-exist with the new law. Security enforcement through tribunal appointed recovery agent. No set time limit for recovery. Balanced between borrower and lender. The Securitisation Ordinance, 2002: Security can be enforced anytime after the asset becomes an NPA by the lender after a 60-day notice. Considered pro-lender.

The confidence stems from the empowerment afforded by the ordinance. As Kalpana Morparia, executive director of ICICI, puts it, "The existing legal regime was creditor-unfriendly and debtor-friendly." A defaulter could simply declare heavy losses and seek protection with the Board for Industrial and Financial Reconstruction invoking the provisions of the Sick Industries Companies Act. Even when dragged to the debt recovery tribunals, the defaulter could use delaying tactics and thwart creditors. The new law allows no such leeway to the borrower. Indeed, many see it as being "pro-lender".

But the Securitisation Bill itself may not be able to ensure recovery of dues. It has been the experience of bankers that by the time the companies reach the NPA stage, their net worth has already whittled, their productive assets rendered non-profitable and, in many cases, assets have been stripped leaving behind a skeleton of unpaid dues to suppliers and employees.

However, P. Krishnamurthy, vice-chairman, JM Morgan Stanley, is optimistic. "Some of these companies do have assets," he says. Besides, most banks and institutions want to resolve the problem of NPAs quickly. "Even if we can recover 75 per cent of the dues, we would be happy. We are already seeing some defaulters wanting to come to the negotiating table," asserts Morparia. Many seem to agree with her. ICICI Bank has sent notices to seek recovery of dues worth Rs 1,000 crore. The SBI too is losing little time. Chairman Janaki Ballabh reveals, "We are collating details of all defaulters. Notices will be on their way soon."

The lenders are exploring two options. In cases where the company is unviable, they are trying to exit by selling off the assets. But if the physical assets of the defaulters are operational, the lenders plan to go in for financial restructuring and bear a "one-time pain"-that is the promoters would write down equity and the lenders can take a cut in their expectations.

Besides, the law allows for a creation of an asset reconstruction company (ARC) that will be jointly owned by lending institutions, both from the private and public sector. The arcs will subscribe to the debt portfolio and restructure or sell them to quality buyers. Proceeds will then be repatriated to lenders.

However it is not a smooth path as yet. The law requires the consent of three-fourths of the creditors before an NPA is parked into an arc or put up for auction. Thus, as Berjis Desai, senior partner at law firm Udwadia, Udeshi and Berjis, says, "The ordinance leaves enough scope for defaulters to create legal obstacles."

The law, for instance, is activated only when a loan account is declared an NPA, that is when dues are not paid for over 180 days. This will exclude a large number of loans that may not qualify as an NPA, but on which the borrowers default intermittently. Besides the notice period (180 days plus 60 days) allows a wilful defaulter enough time for asset stripping. The notice period could also be used for motivated litigation or for suppliers to step in. This could further delay the recovery process.

Not surprisingly, rating agency Crisil feels that the Securitisation Bill would at best enhance recovery by 5 to 10 per cent of the Rs 1,25,000 crore in distressed accounts. However, says R. Ravimohan, managing director, Crisil: "The bill will accelerate settlements and increase recovery." Every recovery will be a double bonanza for the lenders. Not only will they get cash in, but will also bring down the levels of NPAs from their balance sheet.

Whatever its drawbacks, the Securitisation Bill gives lenders a better shot at recovery, even if it is only a part of what is due to them. More importantly, the fact that there is now a mechanism that allows lenders to park the NPAs elsewhere and appear healthier probably explains the cheer on Mint Street.