It
has become very easy in most of the cases for the Bank now to recover their
dues under ‘The Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 (SARFAESI Act)”. Under the Act, the
Bank classifies the loan account as ‘NPA’ as per the RBI guidelines, gives a
demand notice under section 13 (2) of the Act asking the borrower/s to pay the
entire outstanding, deal with the objections if any from the borrower/s under
section 13 (3A), will take the symbolic possession of the property under
section 13 (4), proceeds with taking the physical possession of the property
with the police assistance etc. under section 14 if there is resistance in
taking physical possession of the property and then, proceeds with auctioning
the property in accordance with the provisions of SARFAESI Act, 2002 and
connected rules. Unless the Bank is at fault at the time of sanctioning the
loan and unless the Bank commits procedural irregularity, in most of the cases,
Bank succeeds with its efforts to recover the dues under SARFAESI Act, 2002.
There are several critical and complex issues under SARFAESI Act, 2002. There
were many judgments of Courts interpreting the provisions of SARFAESI Act, 2002
and guiding the Banks in acting under the provisions of SARFAESI Act, 2002. Despite providing a right to the borrower/s or
aggrieved to approach Debt Recovery Tribunal under section 17 of the Act
challenging the action initiated by the Bank under SARFAESI Act, 2002, many do
feel that the remedy provided to the borrower/s under section 17 and also
appeal provision to file an appeal to DRAT is not effective. There is still a
big question mark at the effectiveness of the procedure being followed by the
DRT and the powers of DRT. Powers of DRT are well settled now with the
judgments of Supreme Court and these powers now extend to the extent of
ordering re-possession and a power to look into the disputes pertaining to
calculation of ‘outstanding’. While some seek for examination and
cross-examination of Bank officers in a proceeding before DRT, it also to be
considered that if that practice is usually followed, then, DRT can become
another Civil Court
It
is settled now that the RBI guidelines governing the ‘classification of
accounts’ and related treatment are mandatory.
Few basic things in the RBI guidelines related to NPA’s and its
treatment as per the updated guidelines issued in RBI/2012/13/64 dated 2.7.2012
are as follows:
Identification of NPA’s:
“2.1.2 With a view to moving towards
international best practices and to ensure greater transparency, '90 days' overdue” norms
for identification of NPAs have been made applicable from the year ended March
31, 2004. As such, with effect from March 31, 2004, a non-performing asset
shall be a loan or an advance where:
(i) Interest and / or
installment of principal remain overdue for a period of more than 90 days in
respect of a Term Loan.
(ii) The account remains 'Out of order’ for a period of more than 90 days, in
respect of an Overdraft / Cash Credit (OD/CC).
(iii) The bill remains overdue for
a period of more than 90 days in the case of bills purchased and discounted.
(iv) In the case of direct
agricultural advances as listed in Annex 1, the overdue norm specified at para
2.1.5 would be applicable. In respect of agricultural loans, other than those
specified in Annex 1, identification of NPAs would be done on the same basis as
non-agricultural advances.
(v) Any amount to be received
remains overdue for a period of more than 90 days in respect of other accounts.”
Treatment of NPA’s & record of
recovery:
“2.2.1.(i) The treatment of an asset as NPA should
be based on the record of recovery. Banks should not treat an advance as NPA
merely due to existence of some deficiencies which are of temporary in nature
such as non-availability of adequate drawing power, balance outstanding
exceeding the limit, non-submission of stock statements and the non-renewal of
the limits on the due date, etc. Where there is a threat of loss, or the
recoverability of the advances is in doubt, the asset should be treated as NPA.”
Few basic considerations for
classification of Assets:
“3.3.1. (i) Broadly
speaking, classification of assets into above categories should be done taking
into account the degree of well defined credit weaknesses and extent of
dependence on collateral security for realisation of dues.
(ii) In respect of accounts where
there are potential threats to recovery on account of erosion in the value of
security and existence of other factors such as, frauds committed by borrowers,
it will not be prudent for the banks to classify them first as sub-standard and
then as doubtful after expiry of 12 months from the date the account has become
NPA. Such accounts should be straight away classified as doubtful asset or loss
asset, as appropriate, irrespective of the period for which it has remained as
NPA.”
Important issues underlined in the RBI
guidelines:
1. RBI guidelines specifics as to the
parameters to be applied with regard to classification of accounts and its
treatment.
2. If the record of recovery is good and
if the risk of loss is less due to the value of security, then, the Bank should
be cautious in classifying the account as ‘NPA’.
Apart
from these guidelines, RBI issues guidelines through circulars to the Banks
from time to time taking stock of many issues. Certain circulars or guidelines
can be industry specific.
Consideration of
‘value of asset’:
Obviously,
there can not be any risk of loss to the Bank if the value of security provided
by the borrower/s is much more than the outstanding. If there are no serious
complaints against a particular borrower and if he commits default and
expresses his willingness to update the account and if the value of the
security is intact and much more than the outstanding, then, Banks can
certainly accommodate the requests from such borrowers. It is very frequently
complained that the Bank is not accommodative to the borrowers even when the
value of security is more and the Bank mechanically follows the RBI guidelines
with regard to classification of account as ‘NPA’. There can not be any justification as to why
the Banks can not be accommodative to the temporary problems of the borrowers
in remitting the dues as agreed where the value of security is much more than
the outstanding. Banks show more
eagerness in disposing the asset than providing an opportunity to the borrower
to regularize or to update his or her account.
Ascertainment
and establishing the ‘value of asset’ can also be very difficult for the
borrower. Apart from the valuation
report submitted by the borrower or obtained by the Bank while sanctioning the
loan, it would be very difficult to establish the current market-value of the
property while the Bank knows as to how to get the valuation reports and fix
‘reserve price’ and dispose of the property. When the value of security provided by the
borrower/s is much more than the outstanding due, then, definitely, Bank can go
slow and accommodate the request of the borrower seeking time to update and
regularize as ultimately Bank can realize the entire outstanding with interest,
penal interest and also legal expenses. But, when the Bank proceeds with its action
under SARFAESI Act, 2002 and if the borrower challenges the action under section
17, can the DRT consider the ‘value of asset’ or ‘realisable value of asset’
for granting some relief to the borrower or the appellant is another important
issue. According to me, DRT can certainly consider the ‘value of asset’ also
apart from other considerations while granting or rejecting the relief sought
by the borrower. It has become a practice in Debt Recovery Tribunals as many
say that the Tribunals mandate the borrowers to make some deposit in order to
get relief and there is a statutory provision of depositing 50% of the
outstanding with the DRAT if the borrower chooses to prefer an appeal against
the order of DRT. This procedure and practice makes it very clear that the
object is to allow the Banks to recover their dues. Consideration of ‘value of asset’ is more
important for the borrowers as ultimately borrower suffers if the asset is sold
in an ‘auction’ for a meager price. It is a known fact that there can be clear
gap between the prevalent market-price of an asset and the price for which the
property is sold in a ‘public auction’ conducted by the Bank under the
provisions of SARFAESI Act, 2002. It is certainly the risk and responsibility
of the borrowers to establish the price of property and to establish the
difference between outstanding due and the market value of the property. It is
infact difficult thing to do for the borrowers in many cases.
Courts
now have made it very clear that even the ‘Auction Sale’ under the provisions
of SARFAESI Act, 2002 can be a subject matter of an appeal under section 17 and
the DRT or the High Court under Article 226 can set-aside the sale in
appropriate cases. But, frequently getting the ‘Auction Sales’ set-aside under
SARFAESI Act, 2002 is not a good trend and it can affect the credibility of the
Bank auctions under the provisions of SARFAESI Act, 2002 and the bidders
consider lot of risk factors while bidding for a property and it can result in
a situation where the bidders are careful and careful in locking their deposits
with the Bank. Very delicate balance is to be done on these issues while
interfering with the ‘Auction Sales’ though it is also the responsibility of
the bidders to do their own assessment of the issue by getting fullest possible
information from the Banks and doing their own enquiries as the Bank sells the
property with ‘as and where condition’.
How the DRT considers the value of asset while deciding the relief
sought by the borrowers under section 17 and how the DRT or the Court looks
into the objections with regard to valuation of the property is a matter for
detail and no ‘hard and fast rule’ can be laid in this regard. However, keeping
the interests of the borrowers and the public interest in consideration, the
Act and rules provide detailed procedure to be followed in conducting ‘auctions’
and the procedure is summed-up by Madras
High Court in a recent judgment of A. Varalakshmi Vs. The Chief Manager Punjab National Bank
reported in CDJ 2012 MHC 3240 and the relevant portion of the
judgment is as follows:
“18.
Once the possession of the secured asset has been taken by virtue of the
provisions of the SARFAESI Act, in terms of sub-rule (5) of Rule 8 of the
Rules, the authorised officer shall obtain valuation of the property from an
approved valuer and in consultation with the secured creditor, fix the reserve
price of the property and may sell the whole or any part of the immovable
secured asset by any of the following four methods viz., (a) by obtaining
quotations from the persons dealing with similar secured assets or otherwise
interested in buying the such assets; or (b) by inviting tenders from the
public; (c) by holding public auction; or (d) by private treaty. Sub-rule (5)
of Rule 8 refers to effecting of sale of immovable property as contemplated in
sub-rule (1) of Rule 9 of the Rules. Sub-rule (1) of Rule 9 provides that no
sale of immovable property under these rules shall take place before the expiry
of thirty days from the date on which the public notice of sale is published in
newspapers as referred to in the proviso to sub-rule (6) or notice of sale has
been served to the borrower. Rule 9(1) refers to the proviso to sub-rule (6) of
Rule 8, where it states that if the sale of such secured asset is being
effected by either inviting tenders from the public or by holding public auction,
the secured creditor shall cause a public notice in two leading newspapers; one
in vernacular language having sufficient circulation in the locality by setting
out the terms of sale, which shall include (a) the description of the immovable
property to be sold, including the details of the encumbrances known to the
secured creditor; (b) the secured debt for recovery of which the property is to
be sold; (c) reserve price, below which the property may not be sold; (d) time
and place of public auction or the time after which sale by any other mode
shall be completed; (e) depositing earnest money as may be stipulated by the
secured creditor; (f) any other thing which the authorised officer considers it
material for a purchaser to know in order to judge the nature and value of the
property.
19.
A combined reading of the above provisions would show that in the event the
authorised officer intends to sell the secured asset by inviting tenders from
the public in terms of sub-rule (5)(b) of Rule 8 or by holding public auction
in terms of sub-rule (5)(c) of Rule 8, he shall cause a public notice in two
leading newspapers one in vernacular language having sufficient circulation in
the locality by setting out the terms of sale as indicated earlier in terms of
the proviso to sub-rule (6) of Rule 8. This provision is intended for the
purpose that when the sale is to be effected by inviting tenders from the
public by holding public auction, the public must be made aware of the
description of the immovable property, the details of the encumbrances, the
secured debt for recovery of which the property is to be sold, reserve price,
time and place of public auction, deposit of earnest money and other conditions
which the authorised officer considers it material for a purchaser to know in
order to judge the nature and value of the secured asset. The said proviso to
sub-rule (6) of Rule 8 is mandatory in the event the authorised officer intends
to sell the secured asset by inviting tenders from the public by holding public
auction. One more condition for such sale is that in terms of Rule 9(1), no
sale of immovable property shall take place before the expiry of thirty days
from the date on which the public notice of sale is published in newspapers by
virtue of the proviso to sub-rule (6) or notice of sale is served to the
borrower. To this extent, there is no dispute.
20.
However, in the event the authorised officer intends to sell the secured asset
by the above two methods by fixing the reserve price and if he fails to obtain
a price higher than the reserve price, he shall effect the sale at such price
which is consented by the borrower in terms of the second proviso to Rule 9(2)
of the Rules. The authorised officer has two options. In the event the
authorised officer fails to obtain a price higher than the reserve price and in
the event the consent of the borrower is obtained, he can sell the secured
asset at such price for which the borrower has consented by following the
procedure enumerated in sub-rule (5)(b) and (c) as well as sub-rule (6) of Rule
8. The consequential question would be in the event the consent of the borrower
could not be obtained, namely, when the borrower refuses to give consent, what
would be the procedure to be adopted by the authorised officer? In the event no
consent could be obtained, he cannot resort to sell the property either by
obtaining quotations or by private treaty and has no other option except to
resort to sale by public tenders or public auction. In this context, a
reference also can be made to the first proviso to Rule 9(2) of the Rules
providing that no sale under the rule shall be confirmed, if the amount offered
by sale price is less than the reserve price, specified under sub-rule (5) of
Rule 9. Only for that reason, the second proviso requiring the consent of the
borrower has been made. This issue will be considered in point no.(3). As far
as the first question is concerned, in the event the authorised officer fails
to obtain a price higher than the reserve price, he cannot sell the secured
asset for a lesser price than the reserve price without the consent of the
borrower. The said issue came up for consideration before a Division Bench of
this Court in K.Raamaselvamand others v. Indian Overseas Bank, Aminjikarai
Branch and another, AIR 2010 Madras 93, where the Division Bench held as
follows:-
"12....It
is crystal clear from the present stand taken by the borrower that there is no
consent for confirmation of such sale. As a matter of fact, the Authorised
Officer has never bothered to find out from the borrower whether he was willing
that the sale should be confirmed, despite the fact that the Authorised Officer
had failed to obtain a price higher than the reserve price.
14.
We do not think that in view of the clear language in the second proviso, such
a contention can ever be countenanced. In fact, the first and second provisos
contemplate the situation that if the bid amount is less than the reserve
price, such a position is covered by the first proviso and if the bid amount is
more than the reserve price, the situation is contemplated in the main
provision. However, if the Authorized Officer fails to obtain the price higher
than the reserve price, with the consent of the borrower, the sale may be
confirmed only after the borrower and the secured creditor give their consent.
By no stretch of imagination, it could be construed that even if the Authorised
Officer fails to obtain price higher than the reserve price, he may, confirm
the sale without obtaining any consent from the borrower or from the secured
creditor."
What
if the borrower fails to give consent?
21.
Point No.(3): This question relates to a situation when the borrower refuses to
give consent to the authorised officer to sell the secured asset for less than
the reserve price and the authorised officer decides to sell the secured asset
by private treaty. The power of the authorised officer to sell the secured
asset by private treaty is beyond dispute, as it is one of the methods
contemplated for sale of immovable property in terms of Rule 8(5) of the Rules.
However, in the event the authorised officer decides to sell the secured asset
by private treaty, such sale should be strictly in conformity with Rule 8(8) of
the Rules. The said sub-rule states that “sale by any methods other than public
auction or public tender, shall be on such terms as may be settled between the
parties in writing”. When this rule mentions the sale by any methods other than
public auction or public tender, it conveys two things, namely, in the event
the sale is made through public auction or public tender in terms of Rule
8(5)(b) and (c), the provisions of sub-rules (6) and (7) of Rule 8 would be
attracted. In the case of any other sale, the provisions of Rule 8(5)(a) &
(d) would alone be attracted. As a consequence, a sale by private treaty must
be on such terms as between the parties in writing. The word “parties” came up
for consideration before a Division Bench of this Court-Madurai Bench in
J.RajivSubramanian and another v. M/s Pandiyas and others, AIR 2012 Madras 12,
where the Division Bench held as follows:-
“33.
The first question for our consideration is as to what are the formalities to
be adopted when invoking private treaty and effecting a sale on that basis. In
this connection, it would be worthwhile to refer to Rule 8(5) of the Security
Interest (Enforcement) Rules, 2000 which reads thus:
"5.
Before effecting the sale of the immovable property referred to in sub-rule (1)
of rule 9, the authorised officer shall obtain valuation of the property from
an approved valuer and in consultation with the secured creditor, fix the
reserve price of the property and may sell the whole or any part of such
immovable secured asset by any of the following methods:
a)
by obtaining quotations from the persons dealing with similar secured assets or
otherwise interested in buying the such assets; or
b)
by inviting tenders from the public;
c)
by holding public auction; or
d)
by private treaty."
As
per the private treaty, other than public auction or public tender, it can be
settled between the parties invoking as per Rule 8(8) of the Security Interest
(Enforcement) Rules, 2002. The sale of properties by private treaty is also
permissible in law. The only condition is that it shall be on such terms as
settled between all the parties in writing. From this, it is clear that the
presence of debtor and his willingness in writing are essential.”
Note: the views expressed are my personal
