Dec 11, 2012, 04.25 PM | Source: CNBC-TV18

SARFAESI act to empower financial institutions: Experts

SL Bansal, CMD of Oriental Bank of Commerce is of the opinion that the new amendments will strengthen the financial institutions and give them more power to deal with NPAs, he added.

As the government is gearing up to strengthen the bank's ability to recover bad loans and improve their non-performing asset recovery mechanism, The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) act is likely to be amended. The act deals with rules governing loan securitization and is expected to be a major booster for financial institutions.

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P Rudran, MD & CEO of ARCIL believes this will make debt reconstruction easier and will therefore, reduce the burden of the concerned company to a certain extent. Hence, the new rules will be useful for the financial institutions as well as the borrowers, feels Rudran.

The act also includes a clause that allows banks and financial institutions to accept movable as well as immovable property to settle the claims. Rudran is of the view that it is a very positive step as it will prevent cartelisation and help the borrower realise the true value of his assets.
SL Bansal, CMD of Oriental Bank of Commerce is of the opinion that so far the banks were at the mercy of the borrower as there was a provision for classifying accounts as non-performing assets. However, the new amendments will strengthen the financial institutions and give them more power to deal with such accounts, he added.

Morevoer, the enabling clause for conversion of debt into equity will make the banks as well as the asset reconstruction companies more comfortable, clarified Bansal. Overall, it is a welcome step from the government and will go a long way in improving the health of the banking industry, he stated.

Here is the edited transcript of the interview on CNBC-TV18.

Q: One of the important things you told me was that you can now convert part of your debt into equity and that was not allowed earlier, this amendment allows you to convert debt into equity. Now does this mean that you will be able to take over more assets from the banks or you will be able to turn them around faster?

Rudran: More than taking over more assets from the banks, reconstruction will become much easier because when debt is more there is a lot of burden on the borrower which can be reduced to a certain extent if we can do a structuring of the debt component. It will in turn reduce the financial burden of the company for some time.

And if I am sure that the unit is going to make good profit later, potential viabilities can be established. In that case, I will reduce the loan amount and the financial burden of the company will come down. Later when the company is doing well, I will be able to take part in the share also because the share value will go up. So like a PE investment I will not be making any loss, in fact my profit earnings can be improved by this method.

Q: I wanted to focus on one clause which says that banking and financial institutions can accept immovable as well as movable property to settle their claims. Can you take us through the rationale behind that and how positive a development it is?

Rudran: The rationale is many times you will find when we go for sale or bids have to be submitted, people come and see the property but they actually don’t submit their bid due to some kind of cartelization taking place. Sometimes the promoter himself will drive it in such a manner that nobody will purchase his property.

This will act as a deterrent for such activities, preventing cartelization because the bidders would very well know that if they are not going to bid for it the lenders themselves can at least take over the assets at the reserve price because there is a certain reserve price. And many people will not bid for it or they will always bid less than the reserve price.

This will act as a deterrent for such activities and this will help in a big way because the value of the asset will be realized and the borrower also will be benefitted because his liability can be brought down.

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