"An important aspect of the continuing reform process is thus to reduce further the high level of NPAs as a means of institutional strengthening. While there is reason to expect that with a combination of policy and institutional development, new NPAs could in future be lower than hitherto, the problem remains of the huge backlog of existing NPAs which impinges severely on banks performance and their profitability. Several approaches are possible. The earlier Committee had suggested the creation of an Assets Reconstruction Fund (ARF) to take these assets off banks books at a discount. Recapitalisation through infusion of capital is another approach and has been used in the case of some banks. In the last six years massive budgetary funds have been used for recapitalisation of public sector banks. This a costly and over time, not a sustainable option. The problem, however, remains and consideration would need to be given to revisiting the concept of an ARF."

The Narasimham Committee, also recommended that the core NPAs of the banks would be transferred to the new entity which, in turn, would issue NPA swap bonds at the realisable value arrived at after due assessment.

The basic elements of this approach consisted the following assumptions:-

1. that the huge NPA burden of the industry is an one time problem, the contribution of past history of regulated banking

2. that future accrual of NPA would be streamlined and remedied through "a combination of policy and institutional development"

3. The ARC must have adequate resources to take over NPAs of commercial banks. In other words it must adequate paid-up capital to carry out a turnover of NPAs to be taken over by it, out of the piled up heap of around Rs.30000 Crores that existed before 2000 A.D.

4. Once the mission is completed, the ARC would be no longer needed and it can be wound up or closed

It was estimated that a minimum of Rs.2000 Crores would be needed to float an ARC that would have the capacity to start the recovery process of NPA by taking over them from commercial banks at a discount based on the realisable value of the assets of the borrowers of these sticky borrowal accounts held by the banks. It was also suggested that the ARC should be constituted as a Private Sector enterprise.

THE Reserve Bank of India in early 2001 has suggested a maximum life-span of seven years for asset reconstruction companies (ARCs) and a minimum Rs 100-crore initial paid-up capital. The suggestion places the authorised capital of ARCs at Rs 500 crore. In a draft scheme prepared as a run-up to the constitution of ARCs, the RBI has proposed that the entities would function as private sector companies with 49 per cent holding subscribed by public sector banks and financial institutions, while the remaining 51 per cent would be offered to the public.

It also suggested that the ARCs, which are to be set up for tackling the problem of non-performing assets (NPAs) in the banking sector, should be restricted to only the past bad debt of the banks. Thus, the companies would not be allowed to nibble at the fresh NPAs added by banks on an ongoing basis after the constitution of the ARC.

The first ARC should deal with the bad debts of the three weak banks - Indian Bank, UCO Bank and United Bank of India. If the experiment proved successful, similar companies could be set up for taking up the bad debts of other banks and FIs as well.

The RBI further suggested that the realisable value of the NPAs should be a fair discounted value arrived at through a consensus between the valuers acting on behalf of the banks and the ARC.

The ARCs should be managed by a board of directors consisting of professionals from various fields such as banking, finance, law, engineering and valuation experts.

Reduction/control of NPA needs a multi-pronged approach. Government of India originally set up during 1994, the Debt Recovery Tribunals in terms of "Recovery of Debts Due to Banks and Financial Institutions Act, 1993". The Government set up 22 DRTs and 5 DARTs. Seven more DRTs were set up after 2000 A.D. The Debt Recovery Tribunal is conferred the jurisdiction to try and entertain an application for recovery of debts of amount of Rs.10 Lacs or more due to banks and financial institutions. The Appellate Tribunal has also been constituted to entertain appeals from orders of the Debt Recovery Tribunal. The jurisdiction of the civil courts has been excluded in relation to matters falling within jurisdiction of the Tribunal except under Articles 226 and 227 of the Constitution of India. However the progress of settlement of disputes under DRTs were slow in the initial years.

To ensure the expeditious adjudication and recovery of dues, remove legal anomalies and strengthen the Recovery Tribunals, Government in the year 2000 A.D. passed The Recovery of Debts Due to Banks and Financial Institutions (Amendment) Act, 2000. The new statute allows the summary attachment of the property of the defaulting borrower at the time of filing the complaint and it also empowers Debt Recovery Tribunals (DRTs) to distribute sale proceeds among secured creditors and issue certificates for the recovery of enhanced or reduced amounts on the basis of the final order of the appellate tribunal.

The main provisions of the Act relate to set-off and counter-claims, appointment of receivers and commissioners by the Tribunal, transfer of cases from one Tribunal to another and appointment of more than one recovery officer in a Tribunal. The other provisions include empowering the Tribunals to issue certificates for recovery of enhanced or reduced amount on the basis of the final order of the Appellate Tribunal, empowering the Chairperson of the Appellate Tribunal to appraise the work of Presiding Officers of Tribunals and discharge the functions of the Chairperson of another Appellate Tribunal. The Act also allows for the transfer of recovery certificates from one Tribunal to another to facilitate recovery, and empowering the Tribunals to distribute the sales proceeds among the secured creditors in accordance with the provisions of Section 529A of the Companies Act.

The issue of NPAs is closely related to the state of legal framework. The legal framework sets standards of behaviour for market participants, details about rights and responsibilities of transacting parties, assures that completed transactions are legally binding and provides regulators with the backing to enforce standards and ensure compliance and adherence to law. The legal procedure for recovery through foreclosure of defaulted loans of banks and Financial institutions is felt too cumbersome and time consuming and there was persistent demand for provision of powers to the banks/FIs for summary take over of securities with the power to sell the same in satisfaction of the dues. To consider all these matters Government in the year 1999 appointed the Andhyarujina Committee under Chairmanship of T R Andhyarujina, senior Supreme Court advocates and former Solicitor General of India. The other members of the Committee were M Damodran, joint secretary for banking at the ministry of finance, A P Agarwal, additional legal advisor at the ministry of law and justice, V K Bhasin, additional legislative counsellor, S H Bhajani, executive director at the ICICI, N L Mitra, director at the Bangalore-based National Law School of India University, Shardul Shroff, solicitor, and N V Deshpande, legal adviser at the Reserve Bank of India.

The Committee submitted four reports. The first is on the debt recovery tribunals. The second is on amendment to Section 28 of the Indian Contract Act 1997. The third is on powers for taking possession and sale of securities without intervention of court to banks and financial institutions. The fourth is a law for securitisation.

In its report on the debt recovery tribunals or DRTs, the committee said even after the recent amendment to the recovery of debts to banks and Financial Institutions Act 1993, or DRT Act, extensive changes are required to confer larger powers on the tribunals for the expeditious disposal of claims of banks and financial institutions. The committee recognised the need for expertise in the personnel of the tribunal in view of complex transactional matters such as project financing, securitisation and new kinds of debt instruments involving high stakes, which will come up in future before these tribunals. It said the government might have to consider changing the set up of the tribunals in future to include members having expertise in such matters. The status and personnel of the tribunal should be upgraded in the meantime.

The committee has also recommended that conflicts of jurisdiction experienced between the working of the winding up court under the Companies Act and the jurisdiction of the BIFR under Sick Industrial Companies Act 1985 should be clarified. The tribunal should be given the authority to allow banks and financial institutions to serve the parties with summons for urgent orders. It further recommended that the central government should be invested with the power to make regulations for a uniform procedure to be adopted by all the tribunals in the country.

The committee has suggested that government may consider conferring the powers of contempt of court on the tribunals for effective implementation of their orders. If the tribunals are to function smoothly, it must be ensured that infrastructure requirements are expeditiously provided to them. For this purpose, the committee recommended that the DRT Act should be amended to cast an obligation on the RBI to constitute an infrastructural fund for the tribunals to ensure and facilitate and administrative and infrastructural requirements of the tribunals.

In its report on the amendment made to Section 28 of the Contract Act in 1997, the committee has stated that the banks and financial institutions have a case to have a special treatment for guarantees in the amended provisions of Section 28, particularly guarantees to government under which claims can be enforced even up to 30 years causing the banks and financial institutions to keep securities and margins for long periods. It recommended a reasonable period to be provided to the bank to enforce their rights under the guarantee after a specified event, which would extinguish or discharge the banks from their liability under a guarantee.

In its report on the powers of taking possession and sale of securities without the intervention of court, the committee has recognised that the right of private sale of movable and immovable property should be conferred to banks and financial institutions for speedy recovery as have been conferred upon land development banks and state finance corporations. For this purpose, a new law may incorporate power of sale without intervention of the court in cases where the mortgagees are banks and financial institutions with proper safeguards. Such a special law would also define a charge by way of hypothecation, floating charge and crystallisation of the floating charge into the rights and obligations of the hypothecator and hypothecatee with power of sale without the intervention of the court to banks and financial institutions. The law should provide for the setting up of a new registry jointly by the banks and financial institutions for registration of mortgages and hypothecation charges in place of the present obsolete and dilatory office of sub-registrar of assurance which are presently keeping records of transfers.

In its report on securitisation, the committee has recognised that it was time to examine the methodology of facilitating the modern concept of securitisation, which contemplates dealings in a new genre of commercial property. The committee has examined the essential ingredients of a securitisation transaction and suggested a draft bill for undertaking such transactions. It said that only with a new law there could be effective securitisation in a present dynamic field in which the development of law must assist the business world in achieving its goals. The Committee by way of Annexure to its Report enclosed a draft of a model Bill titled "Securitisation Bill 2000".

The promulgation of the "The Securitisation And Reconstruction of Financial Assets And Enforcement Of Security Interest Ordinance, 2002" for setting up asset reconstruction companies and for securitisation by these companies of NPAs of banks/FIs taken over by them is by way of implementation of the recommendations of the committee in its third and fourth reports mentioned above. The ordinance legislates on securitisation with particular reference to Asset Reconstruction of financial assets in the nature of NPAs of banks and financial institutions. It provides enforcement of security interest without taking recourse to civil courts.

In the ensuing pages, we will discuss in detail about securitisation in general and in particular as the securitised instruments are provided with reference to the Asset Reconstruction under the Ordinance.