Govt mulls law to give banks more muscle

The finance ministry is considering a new 'wilful defaulter' legislation that will empower banks to induct new members on the boards of defaulting borrower companies and attach even those assets that had not been pledged.

At a time when the asset quality of state-owned banks is deteriorating, the Reserve Bank of India is also planning harsher penalties for wealthy promoters of wilful defaulters.

A committee headed by former law secretary VK Bhasin, with some finance ministry officials as members, has prepared draft of the Bill on 'wilful defaulters'.

"Bank will be able to induct a new management if a company is unable to pay.

"The name-and-shame policy might be adopted for wilful defaulters. Assets on which security was not deposited could also be seized.

For recovery of assets, banks should be able to look at other bank accounts as well. Defaulters often divert funds to other banks," said an official privy to the draft who did not wish to be named.

Besides this new Bill, the finance ministry is revisiting recovery laws to make those more effective.

Amendments have been proposed to the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Sarfaesi Act), "to remove lacunae in these laws.

The proposed Bill, as well as amendments to the existing Acts, are likely to give banks the power to reconstitute the boards of defaulting companies.

"If you are trying to run a company with the same set of people you suspect of mismanagement, how much faith can you repose in them? If an independent set of people with the responsibility to run a company report to the bank, they would probably be more professional and fair.

"This will particularly help in case of promoter-run companies," said K V Karthik, senior director, Deloitte.

BAD-LOAN MANAGEMENT

LEGAL RECOURSE: New law being considered to deal with wilful defaulters; changes to be made to the two existing recovery laws

POWER TO BANKS: To induct new management on the boards of defaulting companies; to seize assets not put up as collateral

INSTILLING FEAR: The name-and-shame policy might be adopted; regular review of large-sized NPAs and wilful defaulters

PROBLEM FOR PROMOTERS: Banks want RBI to allow them to recover dues from wealthy promoters of defaulting companies

NPA CHECK: NPAs of public-sector banks rose to 4.72% (Rs 2,16,739 crore) as at the end of March 2014, compared with 3.8% in March 2013

TOP DEFAULTERS: According to the All India Bank Employees' Association, top 50 defaulters account for NPAs of Rs 40,528 crore (Rs 405.28 billion)