Banking Central | Why Kerala revenue recovery law tweak leaves banks worried

Kerala government's recent amendments to the revenue recovery act could impact the credit culture in the state

A recent amendment approved by the state Cabinet to the Kerala Revenue Recovery Act, 1968, allows the government to intervene in the recovery proceedings of banks. This is expected to change the credit culture of a large section of borrowers.

The new provisions can be invoked by borrowers with the permission of local administrative authorities. The amendment to Section 44 of the original Act will allow the defaulter to sell the land that has been attached. Similarly, the insertion of new Section 50 A will allow return of the property to the original title holder if the defaulter pays back the amount with the consent of the district collector.

Third, the insertion of new sections 83A, 83B, 83C and 83D gives special powers of the government to issue stay orders and instalments. To be specific, Section 83B gives the government the power to issue moratorium. Section 83 C allows settlement schemes for the recovery of arrears.

But what necessitated the amendments? The Kerala government cited distress of the borrowers and noted that the defaults were not misdeeds but were consequences of human sufferings. The amendment to the 1968 Act is meant to be sensitive to the needs of the defaulter, noted the state.

This was not the first time. There are precedents of the government staying the recovery proceedings in some cases or allowing the borrower to repay the dues in instalments. After a private bank approached the high court against a stay given in a specific case, the court observed that the existing law does not allow the government such powers. This was the trigger for bringing in the changes.

Credit culture goes for a toss?

The government's intention to help distressed borrowers is a welcome move, but there is a possibility that rogue borrowers may misuse the provisions in the revised law under political clout. This will create hurdles in the business of banks. The notion that the government can intervene in any recovery process may even lure an honest borrower repaying loans regularly into defaults.

A case-in-point is the 2010 Andhra Pradesh microfinance crisis. One of the major reasons that led to the fiasco was calls from politicians not to pay back any loans. This wreaked havoc on the credit culture and soon became one of the biggest crises in the history of microfinance in India. The Andhra disaster may return to haunt Kerala if the legal loophole is misused by borrowers close to the ruling political party.

Let’s be clear. Banks are in the business of lending money and are entirely within their right to recover the loans if the money is not paid back on time. Any delays in such recovery process could impact the asset quality of the lenders.

The changes in the law may only make the lenders credit-shy to avert legal hurdles in the recovery process. While this will affect the business for the banks, it will also cause suffering for fresh borrowers.

Cooperative banks, especially the smaller ones, seem to be most vulnerable since these are influenced heavily by local political leaders and do not have enough financial strength to bear the stress.

The Kerala government must take extreme caution and ensure that the amendments do not create a dent in the credit culture of borrowers and impact the financial strength of banks operating in the state. The banking regulator, Reserve Bank of India (RBI), too must keep an eye on the developments in the state.

Banking Central is a weekly column that keeps a close watch on and connects the dots regarding the sector's most important events for readers.