The government plans to tweak laws to facilitate seizure of assets from defaulting borrowers to help banks reduce non-performing assets, which are on the rise after the recent economic downturn.The finance ministry is expected to move a proposal before the cabinet suggesting changes in the Securitisation and Reconstruction Of Financial Assets and Enforcement of Security Interest (SARFAESI) Act.

“It is a step to ensure that the recovery process is not time-consuming,” a finance ministry official said while assuring that the changes will not lead to harassment for borrowers.

Rating agency CRISIL expects gross NPAs of Indian banking system to swell to around 5% of the advances in March 2011. Currently, banks need permission of the relevant Chief Metropolitan Magistrate or the district magistrate for seizing an asset. The new rule will require the district administration to carry out due diligence and take a decision within 120 days of the request.

The proposed changes are in response to concerns expressed by the Indian Banking Association over the rising NPAs and the regulatory hurdles that delay the process of recovery.The current law came into force in 2002 and was widely seen as empowering the lender, but has not really helped because of operational issues. “There is no time frame under which the concerned authority has to take a decision. This leads to the whole process being delayed by several months,” the finance ministry official said, requesting anonymity.

Asset Reconstruction Companies (ARCs), specialised institutions that deal in distressed assets, feel changes in the rules will incentives the banks to sell bad loans. RBI has given permission to 13 ARCs. “Easy recovery norms will further facilitate the business,” said a senior official with Asset Reconstruction Company of India (ARCIL) who asked not to be named. The company acquired bad loans worth about of Rs 12,000 crore in the financial year 2009-10.

The new rules will also give banks at least 15 days to reply to the objections raised by the borrower. “The borrowers generally raise a list of objections. It is impossible for the banks to reply within a week, which is the current time frame. This severely impacts if the case goes to the debt recovery tribunal,” the official said. Banks have also requested for a reduction in the 60 days time they have to provide to the borrower to settle dues before they can send a recovery notice.

“Already, if a borrower is lagging on his payments we keep sending reminders. An extended period of 60 days further delays the whole process,” said an IBA official, requesting anonymity. CRISIL sees a deterioration in asset quality of Indian banks over the medium term on account of the slowdown and the seasoning of loan portfolio after a period of rapid credit growth between 2002-03 and 2007-08.

The net NPAs of India’s banks stand at 0.99% of their net advances, but gross amount is much higher, indicating that banks have been able to set aside funds for covering losses but recovery remains low.

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