The Hindu Business Line : SC lends a hand to banks

THE SUPREME COURT upholding the constitutional validity of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act 2002 is only a partial victory for the banking industry. For years, a plethora of legislation has sheltered borrowers from any hostile action by lenders. These laws stemmed from the high degree of public sensitivity to job losses that the enforcement of rights by a banker might precipitate, and also from the recognition that a resource-starved economy such as India cannot afford to let even one day pass without active exploitation of physical resources invested in a business. Unfair as this may have seemed from a banker's perspective, it did not matter much to the banking industry as its assets were largely performing barring the most outright case of mismanagement or promoter misappropriation. Also, the economy was regulated against domestic competition and sheltered from external competition.

But liberalisation rewrote the rules of the game and the policy of indulgence towards borrowers threatened the very survival of the financial sector with all its implications for public welfare. The Securitisation Act was a logical response to protect the financial sector. By upholding it, the Supreme Court has ensured that the balance which until the passage of the new law had been loaded against banks and other financial institutions is now tilted in their favour, if only slightly. But if the banking industry had hoped for an end to prolonged and often frivolous litigation by borrowers solely to frustrate a bank's efforts to enforce its financial claims, then the latest verdict clearly puts paid to it. For the Supreme Court has ruled as unconstitutional the stipulation in the Act which required borrowers to deposit 75 per cent of the dues claimed by the bank before they can move the Debt Recovery Tribunal (DRT) in appeal against the recovery action. In effect, the borrower can run through the whole gamut of legal filibustering tactics before the issue is disposed of in the highest legal forum of the land. Given the enormous time lag involved in that process, the borrower can stall the enforcement of mortgage interest that a lender possesses which was the aim of the new law in the first place.

On the face of it, this requirement in law may seem an onerous condition. What cannot, however, be denied is there are enough instances of borrowers using the DRT mechanism to lodge counter claims alleging failure on the part of lenders to fulfil their contractual obligations just to tie up the impending recovery action in legal knots. Of course, borrowers have suffered occasionally from delayed response by lenders that may render a project unviable. A via media has to be found to distinguish between proactive actions by a borrower who has suffered breach of contractual commitments by a lender and those that are purely an after-thought when faced with an impending recovery action. The new government that assumes office must quickly address this in the interest of stability of the financial sector.

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