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RECOVERY OF DEBTS

Limitation Period for Recovery of Debts

Sec. 18 of the Limitation Act, 1963 states that an acknowledgement of debt should be obtained before the expiry of 3 years from the date when money was payable

Debt Recovery Tribunals

In 1991, Narasimham Committee reiterated the need for setting up of Special Recovery Tribunals for recovery of debts of banks and FIs

On 6th Jan. 1992, a committee under the chairmanship of Shri V.G. Hegde , then Principal Legal Advisor, RBI was set up

Debt Recovery Tribunals

The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 was passed to provide for establishment of Tribunals which came into force w.e.f. 24th June 1993

Tribunals established in Kolkata, Delhi, Jaipur, Bangalore, Ahmedabad, Chennai, Guwahati, Patna, Jabalpur and Mumbai

Debt Recovery Tribunals

A tribunal shall consist of one person i.e. Presiding Officer (rank of District Judge) appointed by the Central Government

An Appellate Tribunal established at Mumbai consisting of one person i.e.

Chairman (rank of High Court Judge) appointed by the Central Govt.

Debt Recovery Tribunals

DRT to deal with debts exceeding Rs. 10 Lacs

No court or other authority shall have jurisdiction or power except Supreme Court and High Court

Issue of summons within 30 days

Debt Recovery Tribunals

Filing of written statement only once before first hearing only

Disposal of application within 108 days and issue of Recovery Certificate

Debt Recovery TribunalsThe Recover Officer takes following steps:

1. Attachment and sale of movable and immovable property

2. Arrest of the defendant and his detention in prison

3. Appointing a receiver for the mgmt. of movable & immovable properties

SARFAESI Act

The Securitization and Reconstruction of Financial Assets and Enforcement of Security Act (SARFAESI) Act, 2002was enacted which enabled banks to realise their dues without intervention of courts

SARFAESI Act

Under the SARFAESI act a secured creditor can enforce the security interest created in his favor without the INTERVENTION of the Court or Tribunal

The act deals with how the notice to be given by the secured creditor asking for repayment of the out standings

SARFAESI Act

The secured creditor bank to give a notice asking the debtor to clear the liability in full within 60 days from the date of notice

The above is applicable to such debtors who have defaulted and classified as NPA

There is no bar for the creditor to seek the other legal remedies such as resorting to filing of suit in a competent court

SARFAESI Act

For taking possession and then sale of immovable property, the secured creditor is required to serve a possession notice on the borrower and by affixing the possession notice on the outer door or at the conspicuous place at the property

The authorised officer is required to publish the possession notice in two leading newspapers, one of which should be in vernacular language

SARFAESI Act

When the secured creditor is required to take possession or control of the secured asset or to sell such secured asset, he can take the help of the Chief Metropolitan Magistrate or District Magistrate.

For seeking their help a request in writing is required.

To approach the authority within whose jurisdiction the secured asset or documents related to it are situated.

Securitisation

Securitisation is the process of conversion of existing assets or future cash flows into marketable securities

In other words, securitisation deals with the conversion of assets which are not marketable into marketable ones

Securitisation

Asset-backed securitisation:- The conversion of existing assets

into marketable securities

Future-flows securitisation: - The conversion of future cash flows

into marketable securities

Securitisation

Some of the assets that can be securitised are loans like car loans, housing loans, et cetera and future cash flows like ticket sales, credit card payments, car rentals or any other form of future receivables

Securitisation

Section 5 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, mandates that only banks and financial institutions can securitise their financial assets

Securitisation

A Securitisation Company or Reconstruction Company, has to obtain a certificate of registration issued by the RBI under Section 3 of the Act

It can undertake both securitisation and asset reconstruction activities

Securitisation Process The loan assets are transferred by the

originator (the person who holds the assets i.e. Bank) to a special purpose vehicle (SPV)

The SPV is a separate entity formed exclusively for the facilitation of the securitisation process and providing funds to the originator

The assets being transferred to the SPV need to be homogenous in terms of the underlying asset, maturity and risk profile

Securitisation Process

The SPV will act as an intermediary which divides the assets of the originator into marketable securities

These securities issued by the SPV to the investors and are known as pass-through-certificates (PTCs)

The cash flows received from the obligors are passed onto the investors (investors who have invested in the PTCs) on a pro rata basis once the service fees has been deducted

Securitisation Process

In India only qualified institutional buyers (QIBs)i.e. Mutual funds, FIs, scheduled commercial banks, insurance companies, provident funds, pension funds, SIDCs, etc who posses the expertise and the financial muscle to invest in securities market are allowed to invest in PTCs

Securitisation Process In order to facilitate a wide distribution

of securitised instruments, evaluation of their quality is of utmost importance

The rating agency rates the securitised instruments on the basis of asset quality, and not on the basis of rating of the originator

High rated securitised instruments can offer low risk and higher yields to investors

Securitisation

Securitisation also helps banks to sell off their bad loans (NPAs) to asset reconstruction companies (ARCs)

ARCs are typically debt aggregators and are engaged in acquiring bad loans from the banks at a discounted price, thereby helping banks to focus on core activities

Securitisation

Asset Reconstruction Company of India Limited (ARCIL) was the first (till date remains the only ARC) to commence business in India

Corporate Debt Restructuring (CDR)

The objective of the framework is toensure timely and transparent mechanism for restructuring the corporate debts of viable entities facing problems, outside the purview of BIFR, DRT and other legal proceedings, for the benefit of all concerned

Corporate Debt Restructuring (CDR)

CDR is a non-statutory mechanism which is a voluntary system based on Debtor-Creditor Agreement (DCA) and Inter-Creditor Agreement (ICA)

CDR Structure

CDR system in the country will have a three tier structure:

• CDR Standing Forum and its Core Group

• CDR Empowered Group• CDR Cell

CDR Standing Forum

The CDR Standing Forum would be the representative general body of all financial institutions and banks participating in CDR system

CDR Standing Forum will be a self-empowered body, which will lay down policies and guidelines, and monitor the progress of corporate debt restructuring

CDR Standing Forum

The CDR Standing Forum shall comprise of Chairman & Managing Director, Industrial Development Bank of India Ltd; Chairman, State Bank of India; Managing Director & CEO, ICICI Bank Limited; Chairman, Indian Banks‘ Association as well as Chairmen and Managing Directors of all banks and financial institutions participating as permanent members

CDR Standing Forum It would review and monitor the progress

of corporate debt restructuring system The Forum would also lay down the

policies and guidelines including those relating to the critical parameters for restructuring (for example, maximum period for a unit to become viable under a restructuring package, minimum level of promoters’ sacrifice etc.) to be followed by the CDR Empowered Group and CDR Cell for debt restructuring

CDR Scheme

The CDR mechanism will cover only multiple banking accounts / syndication / consortium accounts of corporate borrowers with outstanding fund-based and non-fund based exposure of Rs.10 crore and above by banks and institutions

The Category 1 CDR system will be applicable only to accounts classified as 'standard' and 'sub-standard'

CDR Scheme

Reference to CDR System could betriggered by: (i) any or more of the creditor who have

minimum 20% share in either working capital or term finance, or

(ii) by the concerned corporate, if supported by a bank or financial institution having stake as in (i) above

CDR Scheme

The acceptable viability benchmark levels are as per the following illustrative parameters, which may be applied on a case-by-case basis, based on the merits of each case:

• Return on Capital Employed (ROCE),• Debt Service Coverage Ratio (DSCR),• Gap between the Internal Rate of Return

(IRR) and the Cost of Fund (CoF),• Extent of sacrifice

GOOD LUCK TO YOU