The Cabinet on Thursday cleared two amendment Bills paving the way for banks to recover loans from errant borrowers. The move would also help the financial institutions to reduce their non-performing assets and release funds for home, retail or corporate credit needs.

The Bills to amend the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act and Recovery of Debts due to Banks and Financial Institutions (RDBF) Act were listed in the Budget for 2011-12 as one of the financial sector reforms that the government would carry out this fiscal.

The Sarfaesi Act, 2002, allows banks and financial institutions to auction properties of borrowers if they fail to repay their loans. It also envisaged to securitise and reconstruct the financial assets through two special purpose vehicles — Securitisation Company (SCO) and Reconstruction Company (RCO). The RDBF Act, 1993 envisaged summary procedure for ascertainment of dues.

Although the two acts helped banks bring down bad debts, there were certain procedural issues faced by banks. These amendments proposed to simplify these procedures.

For instance, if a borrower had objection to a foreclosure, then the bank had to respond within seven days. If the banks did not respond within seven days, borrowers could go to court and get a stay order. The time limit, now, has been extended to 15 days.

There were also certain powers of chief metropolitan magistrates and district magistrates relating to issuing orders on recovery, but they were not non-delegable. These powers were sought to be delegated to the additional metropolitan magistrate and additional district magistrate as well.

“The proposed amendments would enable banks to improve their operational efficiency, deploy more funds for credit disbursement to retail investors, home loan borrowers, without fearing for recovery, thus bringing about equity,” said Information and Broadcasting Minister Ambika Soni.

According to RBI data, net NPAs of scheduled banks (excluding regional rural banks) declined to 1.1 per cent of advances in 2009-10, from 7.6 per cent in 1998-99.(Business Standard)