CUTS INTERNATIONAL FACILITATING ADOPTION OF IMPACT ASSESSMENT FRAMEWORK IN INDIA First Focused Group Discussion (FGD) on Impact Assessment of Debt Recovery Laws in India December 23, 2014, Mumbai Executive Summary The main objective of debt recovery laws is to expedite the recovery process, which can be ensured by fixing accountability and ensuring transparency. Accountability can be ensured by laying down stringent provisions in the law in black and white, and incentivising the officials for strict enforcement of the same. Also, there should be provisions to penalise the officials if they fail to discharge these duties. Multiplicity of debt recovery forums and forum shopping by parties to their advantage is a huge problem in debt recovery. Therefore, there must be judicial accountability in the system to prevent this system. Further, some DRTs and DRATs are performing efficiently under the same system while others are not. Individual personalities could have driven institutional performances, but adequate mechanisms need to be put in place to improve institutional performance as a whole. Similarly, the same system works well in case of small borrowers, but in case of big borrowers, it fails to perform efficiently. This inequitable treatment needs to be fixed to make the recovery mechanism more effective, especially in case of large borrowers. A comprehensive review of insolvency and bankruptcy regime is needed. The proposed Bankruptcy Code is an important step as it will encompass various existing bankruptcy, insolvency and debt recovery related legislations. Introduction Consumer Unity & Trust Society (CUTS) is implementing a project entitled Facilitating adoption of Impact Assessment (IA) Framework in India with support from the British High Commission (BHC). The project will comprise of two cycles in total span of two years. Based on the study and research to be undertaken in both cycles, a detailed research report along with a customised IA toolkit will be 1 P a g e
prepared. Each cycle will be followed by the advocacy and capacity building programmes for the central government and regulatory agencies. The activities under the project include stakeholder interactions in form of direct interviews, focused group discussions (FGD) with industry representatives and one stakeholder forum. In this background, the focused group discussion with industry representatives was organised in Mumbai on December 23, 2014. The FGD was attended by G.Gopalkrishna (Director, CAFRAL), M.P. Baliga (Program Director, CAFRAL), Rajendra M. Ganatra (MD & CEO, India SME Asset Reconstruction Company Limited), Sanjay Kumar Khemani (Independent Director, Arcil Premier ARC), Sucheta Dalal (Managing Editor, Money Life Magazine), Sandeep Singh (Senior Director & Head, Structured Finance, India Ratings), Sundar Rajan (GM, Stressed Asset Management, SBI), S.D. Kelkar (GM, Law, SBI), Surendra U. Kanstiya (Company Secretary, Surendra Kanstiya & Associates), Prof. Sunder Ram Korivi (Dean, School for Securities Education & School for Securities Information & Research, National Institute of Securities Market) and Saugata Bhattacharya (Senior Vice President, Axis Bank). Opening Remarks Udai S Mehta, Director, CUTS, welcomed the participants for the FGD on Impact Assessment of Debt Recovery Laws in India. Giving a brief introduction about CUTS and its programmatic areas, he mentioned that the objective of this meeting is to have a focused discussion on the issue of the debt recovery in India, problems faced, and possible legislative alternatives to improve the situation. He further pointed out that CUTS has done an intensive work on regulatory reforms and has also worked with the Working Group on Business Regulatory Framework (WGBRF) of the Planning Commission of India, as a knowledge partner. One of the recommendations of WGBRF was impact assessment of proposed and existing legislations, and this project aims to facilitate adoption of IA in India. He also mentioned that the Prime Minister of India is of view that the cost of doing business in India is very high. Keeping this in mind, CUTS has taken the initiative of facilitating adoption of IA framework in India. In this regard, the motive of this event is to sensitise the industry representatives, sector experts, market participants, and academia about the progress made so far in the project, including issues identified, key findings, and also seek comments / suggestions from stakeholders. Presentation on IA of Debt Recovery Laws in India Amol Kulkarni, Senior Policy Analyst, CUTS, started his presentation on IA of debt recovery laws in India by stating that there is a need for regulatory and policy reforms in India. IA uses tools like costbenefit (C/B) analysis, time value of money, etc. Number of committees including FSLRC and Damodaran committee has also suggested the C/B analysis of regulations. 2 P a g e
On participatory approach (which is an important aspect of IA exercise), Kulkarni pointed out that both RBI and SEBI have already started putting their draft regulations in the public domain. He then highlighted the benefits of doing the IA exercise to various concerned stakeholders. As regards the CUTS initiative on facilitating adoption of IA framework in India, he mentioned that the project is merely confined to IA of primary legislations on debt recovery in India. It does not cover providing solution to the NPA problem as a whole, reviewing RBI guidelines in this regard or analysing due diligence exercise undertaken by bank officials while finalising the credit proposal. Further, it is pertinent to note that much focus is given on IA of secondary regulations in India, but not much work has been done in relation to primary legislations. Therefore, CUTS has taken the initiative to undertake a case study on IA of primary legislation(s) in relation to debt recovery in India. He then highlighted the methodology adopted by the project team in addition to various challenges (like limited data availability, limited awareness about IA, regulatory capture, etc.) faced in the process. In relation to the problem of debt recovery, he narrated the recent quote of the RBI Governor on low recovery i.e., merely 13 percent of the amount was recovered from cases decided in 2013-14 by the debt recovery tribunals (DRTs). There are number of factors like long pendency of cases, vacant positions, long & multiple adjournments, interim injunctions by courts and DRTs, inadequate number of DRTs, inapt composition, etc. which lead to low and delayed recovery. Eventually, he concluded his presentation with linking the factors that lead to low recovery with legislative provisions / absence of provisions in the SARFAESI Act and RDBFI Act, and pointing out issues for discussion for the FGD. Roundtable Discussion This session was in the form of a round table discussion on issues identified, initial findings in the CUTS project in relation to the debt recovery, as highlighted in the presentation. 1. G. Gopalkrishna The roundtable discussion was started by Mr. G. Gopalkrishna by commenting on the long and multiple adjournments. He mentioned that irrespective of whether adjournments are prayed by bank or the borrowers, it is important to have DRT s view point on the same as well, as it is the institution which grants adjournments. Further, there is no cost imposed in case of non-appearance by lawyers from either side. The law should be amended to this effect to ensure levy of high cost in case of adjournment because of non-appearance / non-preparation of lawyers. At last, he mentioned that despite the high courts and other lower courts have no jurisdiction to interfere in the DRT proceedings, still their frequent interference is delaying the process of debt recovery. 2. Sucheta Dalal 3 P a g e
Sucheta Dalal pointed out that it seems that how DRTs would perform vis-à-vis the Civil Courts was not thought through, when the DRT Act was passed. This is one of the issues which could be investigated. In addition, performance of DRTs as compared with other forums like consumer forums could also be analysed. She further mentioned that the system works well in case of small borrowers, from whom recovery is prompt, but when it is a matter of big sharks, the same system fails to perform efficiently. This inequitable treatment must be investigated and suggestions must be made to fix the same. She further mentioned that there is an absence of judicial accountability in the system, and while fines could be imposed if the parties to the proceedings (lenders and borrowers) do not perform efficiently, how would the sub-optimal performance of judiciary and government be reined in. She further noted that the faulty and corrupt system entails in undue delay in recovering the money from defaulter borrowers. In relation to data for the purpose of study, she advised the project team to file an application under the Right to Information Act, 2005 with the concerned authorities. 3. Sanjay Kumar Khemani Sanjay Khemani mentioned that some DRTs / DRATs, and other forums, are performing efficiently under the same system while others are not. In this regard, he gave the example of the Income Tax Appellate Tribunals (ITATs) and Customs, Excise and Service Tax Appellate Tribunal (CESTAT), where the pendency is miniscule. He further agreed with the view of Ms. Dalal that the same system works better in case of small borrowers. In this regard, he pointed out that the return on equity (ROE) in case of debt amount up to INR 1 crore is respectable, but as soon as the debt amount goes above INR 1 crore the ROE starts declining. It is because small borrowers have to mortgage additional securities for availing the credit facilities. He echoed the need for accountability in the system. 4. Sunder Rajan Sundar Rajan endorsed the view of Mr. Khemani in relation to some DRTs / DRATs are performing better as compared to others. In this regard, he gave the example of Mumbai DRAT which is performing remarkably well under the same system. He mentioned that since the time new Chairman has assumed office in Mumbai DRAT, recovery rate has gone up and the decisions of the DRAT are also not challenged. Consequently, he emphasised on the role of individual personalities which result in better institutional performance. He further mentioned that there should be greater transparency and accountability. The issue of accountability and transparency was also supported by Saugata Bhattacharya and Sucheta Dalal. Accountability could be ensured by writing the same in the law and then incentivising for strict enforcement of the law, through e-governance. 5. Rajendra M. Ganatra Rajendra Ganatra highlighted that the Sick Industrial Companies (Special Provisions) Act, 1985 was equipped with adequate provisions, but section 22(1) of the said Act resulted in delaying the matters. Similarly, the RDBFI Act was introduced in the year 1993 with loads of expectations, but eventually failed to accomplish the desired results. To prevent such situations, we have to avoid making 4 P a g e
legislations that are always designed to fail. Therefore, the proposed Bankruptcy Code will be an important step as it will encompass various existing bankruptcy, insolvency and debt recovery related legislations. Similar bankruptcy laws are doing well in some foreign jurisdictions like UK, Sweden, Germany, etc. He further stressed on incentivising the officials in discharging their responsibilities. The incentivisation should be designed in a part-payment format and linked to absence of appeal and debt recovery by the lender. He also felt that maximum fee to file an OA could be increase and stakeholders would be happy to pay the same if the recovery is made certain. He added that if officials fail to discharge their responsibilities, penal provisions should also be there to penalise them. He also noted that the present system is inequitable to small borrowers, which must be avoided. Mr. Ganatra also emphasised that multiplicity of forums and forum shopping by parties is a huge problem in debt recovery and it must be prohibited, to implement which judicial accountability will be must. He highlighted the benefits of e-governance and added that it could be an important tool to ensure transparency and accountability. He mentioned that it would be important to disincentivise parties from taking multiple adjournments by imposition of hefty costs. As regards Asset Reconstruction Companies (ARCs) compared to the Asset Management Companies (AMCs) across the world, Mr. Ganatra mentioned that the latter is set up as a special purpose vehicle (SPV) and the same gets wound up on completion of the desired objective, but same is not the case in India. 6. S.D. Kelkar S.D. Kelkar highlighted that the RDBFI Act was amended in the year 2012 to deal with the issue of multiple adjournments. As per the said amendments, once the hearing of OA is commenced, it shall be continued from day to day until the hearing is concluded. Also, the amendment states that DRT shall not grant any adjournment more than 3 times to a party and if there are 3 or more parties, the total number of such adjournments shall not exceed six. The aforesaid amendment was made in line with the Code of Civil Procedure. However, compliance with this provision is lacking. He further suggested that the PO should be strict on the bank when adjournments are sought by bank. He mentioned that as per the provisions of the SARFAESI Act, if the DRT is unable to dispose of the appeal within the stipulated time period, any party to the appeal may make an application to the DRAT for directing the DRT to dispose of the appeal at the earliest. Pursuant to which DRAT may make an order for expeditious disposal of the pending application by the DRT. Implementation and enforcement of these provisions is the key, and accountability must be fixed to ensure the same. 7. Sandeep Singh Sandeep Singh mentioned that in rating a bank / financial institution, credit rating agencies evaluates the business and financial risks of the business. The agencies assess the quality of credit appraisal process and lending norms, riskiness of the loan mix and recovery processes adopted by the financial institutions. Large opportunity cost is involved in the amount which the banks / financial institutions 5 P a g e
are not able to recover. Therefore, he also agreed with the view point of Mr. Ganatra as regards incentivising the officials to recover the amount stuck with the borrowers. He suggested that during the interaction with regulators and government, a case must be made that the benefits of incentivising officials and strengthening institutions to ensure recovery would surpass the costs involved such incentivisation and institutional strengthening. 8. Sunder Ram Korivi Sunder Korivi agreed with the need to ensure transparency and accountability in the system. He mentioned the issue of multiple legislations and pointed out there various state level legislations (Relief Acts) are present which override the central laws. This needs to be fixed. He further mentioned the need to improve infrastructure of DRTs. He suggested that the recommendations of the study could be shared with T.K. Vishwanathan committee, set up by the government to review corporate bankruptcy framework. Conclusion Udai Singh Mehta, concluded the event by stating that fixing accountability and ensuring transparency is extremely crucial to ensure speedy recovery. He also mentioned that while individual personalities have driven institutional performance, adequate mechanisms need to be put in place to improve institutional performance. ******* 6 P a g e