Supreme Court upholds existing definition of non-performing assets-By Sreeeja Sen- LiveMint-29.01.2015
A bench dismissed several petitions challenging the constitutionality of Section 2(1)(o) of the Sarfaesi Act New Delhi: The Supreme Court on Wednesday upheld the definition of bad loans as amended in 2004 under the securitization Act, handing a victory to creditor banks and a setback to borrowers who had challenged the definition.
A bench comprising justices J. Chelameswar and S.A. Bobde dismissed several petitions challenging the validity of Section 2(1)(o) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act, 2002.
They also directed the borrower companies that had challenged the definition of non-performing loans (NPAs) amended in 2004 under the Act to pay 1% of their outstanding amounts as costs to the creditor banks and other non-banking financial institutions.
The Sarfaesi Act enabled borrowers to seize and sell the assets of defaulting borrowers to recover their loans among other measures.
The amended definition was challenged by borrowers because by the amendment it was possible that different sets of guidelines made by different bodies could be followed by different creditors depending upon who is the administering or regulating authority of creditors while determining what was an NPA.
The order comes at a time when banks’ profitability has been under pressure from a rising tide of bad loans after two years of sub-5% economic growth, delayed project approvals that stalled investments and crimped corporate cash flows, making it difficult for borrowers to pay back debts.
“Recovery of money from a debto
r by resorting to the filing of a suit takes painfully long time in this country, for various reasons,” the apex court observed in its judgement.
“Huge amounts of money are lent by various banks and other financial institutions. Speedy recovery of the monies due to such institutions is an important element determining the efficiency not only of such institutions, but also becomes an important factor for the financial health of the country”.
Bankers, while finding the ruling a positive one, spoke of loan recovery in a similar strain.
“The recovery process is very lengthy. What we really want is that the defaulting companies should be given less loopholes to exploit so that we can quickly enforce the proceedings,” said Ranjan Dhawan, executive director of Bank of Baroda.
He said the judgement acts as a morale booster, but did not want to comment on the nitty-gritties of the judgment because he hadn’t seen the order yet.
In its 52-page ruling, the apex court analysed decisions from two high courts that had opposing views in relation to the definition of NPAs.
Last year, the Gujarat high court and Madras high court had given contradictory decisions regarding the validity of the amendments to the Section 2(1)(o) of the Sarfaesi Act.
The Gujarat high court had on 24 April found the amendment to this provision gave banking and non-banking financial institutions arbitrary powers to declare what could be termed an NPA.
It struck down the amendment and restored it to its original form. However, the Madras high court, in a decision dated 18 May, upheld its validity
The apex court held that “Parliament is only stipulating that the expression ‘NPA’ must be understood by all the creditors in the same sense in which such expression is understood by the expert body i.e., the RBI or other regulators which are in turn subject to the supervision of the RBI”.
It also stated that “all the creditors do not form a uniform/homogenous class” as “there is nothing uniform about these creditors or their activities”.
It noted that it would be “impracticable” to define NPAs in a way which would be applicable to “the millions of cases of loan transactions of various categories of loans and advances, lent or made by different categories of creditors for all time to come”.
The petition challenging the definition was initiated by companies including Hyderabad-based publisher Deccan Chronicle Holdings Ltd.
T. Venkattram Reddy, chairman of Deccan Chronicle Holdings, could not be contacted after office hours. His office said he had left for the day
Court dismisses petition challenging SARFAESI Act-Business Standard-23.05.15
Petitioners include Deccan Chronicle Holdings & Marg Ltd
The Madras high court has dismissed the writ petitions filed by various companies and individuals, including Deccan Chronicle Holdings and Marg Ltd, questioning the constitutionality of Section 2(1)(o) of the SARFAESI Act and the guidelines issued by the Reserve Bank of India (RBI) on the classification of assets as non-performing assets (NPAs).
The petitioners, who are debtors to various banks, sought the HC to declare the provisions of the Section as arbitrary, unconstitutional and opposed to public policy, null and void and the same being ultra vires the Constitution of India. They argued that issuing directions or guidelines relating to asset classification is essential legislative function and therefore it cannot be delegated.
They argued the guidelines issued by the RBI cannot be used for defining a “non performing asset” under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI). There has to be a separate legislation, as provided under Section 38 of the Act. They also argued the circular under challenge, which defines NPA, is very vague.
However, in a Common Order issued on May 8, 2014, on more than 50 writ petitions, the court said in all the cases, the petitioners have borrowed money from the respective respondent banks and had not repaid the amounts borrowed.
“In the light of the discussion made we do not find any merit in these writ petitions. Accordingly, the writ petitions are dismissed. However, there is no order as to costs,” said the bench. It also refused to use its power of Judicial review, stating, “While dealing with a legislation pertaining to a specialised field, that too, a one like economy, the court should adopt a “dignified reluctance”.”
As per the guidelines issued by the Supreme Court of India, when an asset is treated as a NPA by the respective banks, a rigorous recovery machinery is put into action. It is this provision, which adopts the directions or guidelines relating to asset classification issued by the RBI was put to challenge before the court as unconstitutional, said the order issued by the division bench comprising of Justice N Paul Vasantha kumar and Justice M M Sundresh.
The bench added the court should be aware of the fact that the Legislature is dealing with complex problems and the economic mechanism is highly sensitive “and therefore we should constantly remind ourselves of our own limit.” “We do not like to take the role of a higher authority to review a decision made by an expert body on the materials placed before it. The said attempt is to be avoided, as neither the counsels nor the court can claim a better expertise. Such an attempt would be akin to a search by a visually impaired person to find a black cat during night time in a dark room when the cat itself is not there,” added the court.
