Sunday, February 7, 2016

Supreme Court Favour Tenant Affects Banks

Banks’ NPA pains just got worse
--The Indian Express by Indu Bhan

The apex court, in the matter of Vishal N Kalsaira vs Bank of India & Ors, has ruled that tenants cannot be arbitrarily evicted by using the provisions of the Sarfaesi Act as that would amount to stultifying the statutory rights of protection given to the tenant. This ruling given by learned apex court will further add to the pain of banks.

A non-obstante clause (Section 35 of the Act) cannot be used to bulldoze the statutory rights vested on the tenants under the Rent Control Act, the court observed, while holding that the securitisation law will not override various rent control laws enacted by state governments as it will leave tenants to the mercy of landlords.

“There is an interest of the bank in recovering the NPAs on the one hand, and protecting the right of the blameless tenant on the other. The Rent Control Act being a social welfare legislation must be construed as such. A landlord cannot be permitted to do indirectly what he has been barred from doing under the Rent Control Act, more so when the two legislations, that is the Sarfaesi Act and the Rent Control Act, operate in completely different field,” the judgment stated.

The Sarfaesi Act empowers a secured creditor to take possession of the mortgaged property if the borrower fails to pay up after 60 days of the notice for default of loan repayment being served.

Rejecting the contention of the banks that the Sarfaesi Act overrides provisions of the Rent Control Act, the court said that if it were to be accepted, it would render the entire scheme of all rent control laws as “useless and nugatory since tenants would be left in the fear that the landlord may use the tenanted premises as a security interest while taking a loan from a bank and subsequently default on it.”

The top court also directed that enhanced rent by way of a conditional interim order shall be continued to be paid to the respective banks, which is to be adjusted towards debts of the debtors/landlords.

Legal experts, however, feel that the judgment is flawed on many counts as it does not take into consideration the larger public interest. Barring lenders from proceeding under securitisation laws to evict the tenants residing in the tenanted premises which have been offered as collateral securities for loans is going to frustrate loan recovery. When the Sarfaesi Act came into force, the NPA burden stood at R1.1 lakh crore and has increased to R2.67 lakh crore at the end of March 2015 in case of PSU banks.

“With this judgment, the Sarfaesi Act would become unworkable. It is easy for the borrowers to put up bogus tenants, by producing back-dated rent receipts, thereby frustrating the entire intent and purpose of framing the Act.

In case the rights of unregistered/oral tenants were considered necessary to be protected, it should have been subject to certain guiding principles/conditions, so as to make the Sarfaesi Act workable, viz. that a unregistered or oral tenancy would be accepted as valid, only where there are overwhelming documents in possession of such lessees like electricity bills, water bills, voter ID and passport to prove his possession,” Kapur says.

According to another Supreme Court lawyer R Chandrachud, the court has “overlooked the aspect that Sarfaesi Act has a public element involved”, as at the end of the day, the loans come from public money. “It misses the larger point that the landlord by merely leasing its premises does not lose other rights as he continues to be the owner of the property and still retains the right to sell and give the property as a collateral towards loan,” he says.

Rs 1.14 lakh crore of bad debts: The great government bank write-off

That is the amount of bad loans waived in last three financial years, more than the write-off in the previous nine

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