Securitizing Autonomy

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A new law empowering banks to dispose off mortgaged assets of a defaulter to realize its money clash with state subject laws in J&K. The state government has decided to ask New Delhi to amend the law so that it does not devour the fig leaf of autonomy, reports R S Gull

SURFESIBanks are like shops where they sell financial products. Deposits are bank’s liabilities and advance their assets and they manage their incomes in the variation between the interest they pay to their depositors and they charge on their lending. Like shops they also run the risk of accounting getting bad. But what makes them different is that they provide loans against collateral mortgaging which they can even sell to recover the money, if situation demands so.

Impaired assets are called non-performing assets (NPA) and this is a huge problem with the banks. Every year, all banks set aside a part of their earnings which they use for provisioning to keep their balance sheets clean. But invariably most of the loans are recovered to the tune of basic amount without interest. Usually a loan account gets bad if it does not get the required payments in for 90 days.

For a long time, J&K has been dubbed as a state where most of the loans get bad. This was used as propaganda, the other being that J&K lacks capacity to absorb credit, by vested interests as a tool to manage the flight of capital from J&K to outside states. In the last few years the ground realities have proved it otherwise.

Right now, all banks have cumulative advances of Rs 16353.40 crore, which is over 48 percent of the deposits they are holding across J&K. Of this, Rs 716 crore are NPAs as on September 2009 which means that the entire banking sector has 4.37 percent NPAs. It varies from bank to bank and waxes and wanes with different quarters. The NPA ratio is not above the national average even though the recession and the allied issues should have surged the impaired assets in J&K.

Managing NPA is a challenge for all banks. In J&K where J&K Bank is the sector leader and has close ties with the government, it is managing its impaired assets better. But that may not be true with other banks.

It was this motivation that led to the passage of the Recovery of Debts Due To Banks and Financial Institutions Act, 1993. The law was aimed at providing for expeditious adjudication and recovery of debts due to banks and financial institutions. After experimenting it with, the banks wanted more teeth and more powers. Finally the central government brought in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 popularly known as securitization law. The act was enforced across India including J&K.

Unlike all earlier laws, the securitization act empowers the banks and financial institutions to move on its own against a borrower whose assets are secured, and who has made some kind of default in repayment of the same. Banks can sell it off to recover its loans. Banks were happy with the law as it would help them recover a fortune, around Rs 65000 crore.

In case of J&K, however, it triggered a problem. Apart from sub-section (2) of section (1) the law applies to whole of India, law’s section 35 provides that its provisions shall have effect, notwithstanding anything inconsistent therewith contained in any other law in force or any instrument having effect by virtue of any such law. Besides, sub-section (1) of section 13 lays down that notwithstanding anything contained in section 69 or section 69A of the Transfer of Property Act, 1882 any security interest created in favour of any secured creditor may be enforced, without the intervention of the Court or Tribunal, by such creditor in accordance with the provisions of the said Act. Accordingly, J&K’s Transfer of Property Act was subjected to its provisions even though Lok Sabha lacks this authority.

The new law mandating secured creditor to take possession of securing assets of the borrower including the right to transfer by way of lease, assignment or sale for realizing the secured asset could hit hard the state, especially its TPA that is perhaps the only fig-leaf of its autonomy. Transfer of property, according to the constitutional arrangement between the state and the centre, falls within the legislative competence of the state legislature. Under Article 256(2) of the Constitution of India, if the central government requires land, it will have to be acquired or requisitioned by the state at the expenses of the Union and can not be done by the centre directly. Various state laws prevent transfer any immovable property to persons who are not permanent residents of the state.

“I had raised the issue with the government there and then because this law was going against many other state laws,” said Altaf A Naik, the then advocate general. “Since it will involve the seizure and sale of the property by non-state subjects, it would hit the fundamentals of the state subject law.” Interestingly, however, section 140 of the TPA was amended many times to make exemptions from the operation of the laws prohibiting transfer of immovable property to persons not permanent residents of the J&K state. Apart from J&K bank, the exemptions have been given to LIC, Industrial bank of India, and all the banks falling in the second schedule of the RBI act. In all these cases, however, the exemption is subject to the express condition that in any suit passed on such mortgage the mortgaged property shall be sold only to a permanent resident of J&K.

“I had even suggested that the state government can have a separate law on the same pattern but somehow it did not take place,” he said.

And the problem did hit. When a bank initiated action against some of the defaulters in Jammu, they straightaway went to the court. They had only one plea that the central law violates the Article 370 of the Constitution of India as well as section 5 of the Constitution of Jammu and Kashmir and is ultra-virus to various other laws of J&K. The case, according to informed sources, is nearing the final arguments.

Successive state governments were in know of it, informed sources tell Kashmir Life.

“At one point of time, the High Court sought the response of the state government,” said a senior official in the state law ministry. Even the central government was also informed that it needs to take a stand of this. “We advised the government (initially Mufti Mohammad Sayeed and then to Ghulam Nabi Azad) that the law is against the interests of the state and there are two options to counter it.”

One option, the law ministry officials suggested was to go to the court and submit that the central law is against the fundamentals of the state constitution. The other option was to approach the central government – finance and law ministries – and request them to get the law amended so that it does not violate various laws of the state constitution. No decision was taken. In recent days as the arguments over the case were almost concluded, heat was felt in the civil secretariat as well. Same advice was given to the government and finally it took a decision.

Last cabinet presided over by the Chief Minster Omar Abdullah took a decision that instead of taking a stand in the court of law, it is better to approach the central government to suitably amend the law so that it is suited to J&K. Informed sources said now a formal letter will go from the office of the chief secretary to the finance and the law secretaries of India requesting amendment in the securitization act so that it is in harmony with the constitutional scheme in vogue.

At one point of time, sources tell Kashmir Life, there was a thinking that any institution within the state should get a legal authority to set up a subsidiary that will takeover the mortgaged assets of a nationalized bank and dispose it off at its own level locally and pay the proceeds to the bank. This will not only help create a new institution and a new expertise in a new field but will also protect the interest of the state.

But the officials in the law ministry say that once the central government agrees to the request, this situation may not be required at all. “The central government will issue a notification empowering state to manage the implementation of the law,” one officer said. “The state government will make necessary amendments in all relevant laws including TPA so that the restrictions are imposed on sale or leasing the property to persons who are not state subjects.”

However, the problems might remain. A businessman in hospitality sector asks in a case scenario involving a hotel that a bank takes-over and the Grand Palace Hotel wishes to buy it, will it be in conformity with the state laws?

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