A law that allows banks to take over the mortgaged collaterals in case of willful defaults has taken Kashmir by storm after a division bench of the Supreme Court made it applicable to J&K, a special state having its own constitution. Amid lot of heat and dust, Masood Hussain created a prime to help readers understand a banking norm that, many think, threatens the special status of the state that has acceded to and not integrated with the union of India.

SARFAESI structure (Source Internet)

What is this SARFAESI law?

SARFAESI (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act) law enacted in 2002 by the Lok Sabha allows the financial institution (banks) to recover willful defaults beyond one lakh rupees by disposing off the assets mortgaged by the borrower. Normally, this process, in case of nonperforming assets (bad loans), would take place through courts which could take a long time and costs. Now the banks can do it quickly after issuing a notice without going to courts. Takeover of assets is limited for recovering the principal amount and not the interest which the account might have accrued till the account goes bad. This law replaced Recovery of Debts Due to Banks and Financial Institutions (RDDBFI) Act, 1993.

Is it in conflict with J&K constitution?

Banking is a Central subject that falls in the union list. All the banking operations in the state are regulated by the Reserve Bank of India (RBI). Apparently the law is securing the public money that banks deploy in the market. But for recovery, when the process starts under the law, it hits J&K Transfer of Property Act which is a key state subject. It is there that it is in conflict with the state constitution.

Constitutionally, J&K retains its special status by having a “stiff” state subject law and another law that prevents non-state subjects from owning immovable properties in the state. 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 cannot be done by the centre directly. In case of non-state institutions holding property in the state, J&K legislative assembly amends the Transfer of Property Act (TPA) for specific purposes – the last instance was in case of Baglihar power project.

SARFAESI Act’s sub-section (2) of section (1) applies it to whole of India with no exclusions. Its 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. Its sub-section (1) of section 13 lays down that notwithstanding anything contained in section 69 or section 69A of the TPA, 1882 any security interest created in favour of any secured creditor (bank) 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 TPA was subjected to its provisions even though Lok Sabha lacks this authority.

The law mandates banks 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. It can hit hard TPA.  Transfer of property, according to the constitutional arrangement between the state and the centre, falls within the legislative competence of J&K legislature.

What was the response of the state?

After the issues with the particular law were detected, the state level bankers committee (SLBC) the main banking association that tackles issues collectively and intermediates with the government spent many years in creating a draft for a similar law to be enacted by the state. Once the draft law was submitted to the government, it dawned that state’s assembly lacks authority to legislate on a subject that does not fall under its competence. But a section within the state government believes that state government can still legislate and come up with a localized copy. Their argument is that J&K state having its own constitution and controls the residuary powers have the right to enact the same law after taking it through the state legislature. No law, whether or not it falls in the state list, can be directly applied to J&K, they believe. They say the state government, at the time of enactment of SARFAESI act by the centre, should have insisted for exclusion so that it could have later been ratified by the state assembly. This can now be done.

At the same time, however, the then Chairman of J&K Bank, who was also the economic adviser of the state, suggested a way-out. He said that state government having adequate legislative authority can create an organization as a subsidiary to any state institution linked with the subject. The Asset Reconstruction Corporation (ARC) will be a state subject. It will be taking over the impaired assets of the non-local financial institution at a cost and disposing it off. With this corporation, the system of helping banks recover their funds will become easy and will not hurt the state’s special position.

The ARC idea is still shuttling between various desks of the government as no final decision was taken so far. Initially it was being suggested that any bank or a financial institution can create a subsidiary but central government process does not permit that. Now the idea is to create a new company that central government should accept as an ARC.

Was there any follow up?

The government opened formal talks with the central government on this issue. A delegation comprising Law secretary, advocate general and finance secretary talked in detail with the relevant quarters in central government, a few years back. On state’s request the central government agreed to amend the law and its rules to suit the state government because certain processes were in confrontation with the state’s special laws, especially the property laws.

Was it ever implemented in J&K?

J&K bank being the state subject has no problems in using the law. Incidentally, it is the major player in credit management of the state holding more than 60 percent of the overall credit in the state. The non-local banks did invoke SARFAESI in certain case but the borrowers took the case to the court. In a series of judgments, the High Court invoked state’s special status to deny banks using the law to recover their funds. On July 16, 2015 the High Court ruled that SARFAESI cannot be enforced in J&K and the state government was at liberty to enact law similar to that of the SARFAESI Act. In fact, the state government maintained as early as September 9, 2015 that it was keen to bring in the legislation for enacting a separate SARFAESI Act in the State and in view of the recent clear and explicit order of the High Court.

It was this High Court judgment that was taken to Supreme Court by the State Bank of India where a division bench upheld SARFAESI implementation in the state that was the main reason for the mass criticism of state’s capacity to defend its special status.

What the judgment said?

Division bench of the Supreme Court comprising Justices Kurian Joseph and Rohinton Nariman snubbed the High Court and insisted that J&K lacks sovereignty, sovereign powers and “has no vestige of sovereignty outside the Constitution of India”. It said J&K residents are citizens of India and there is no dual citizenship. The judgment also upheld Lok Sabha’s right to legislate on banking operations in J&K without seeking a concurrence of the state legislature. The judgment made the law applicable to the state. It said J&K’s TPA could be harmonized with the SARFAESI and if it is impossible, the latter will go ahead. It invoked the SARFAESI rules suggesting that properties sold under the law will go to state subjects only.

Is state government going for an appeal?

Right now, it seems unlikely. Law Minister Abdul Haq Khan said on record that the judgment has been immensely good because it upheld Article 370 as a permanent provision in Indian Constitution thus impacting a larger debate over its temporary status.

Senior officials in the government said that after talks with centre, the act remained unchanged as the law under Section 13; clause 4 maintains that the impaired asset can be acquired by “any person”. However, rules were amended. Under clause 5 of Rule 8, no state subject has a right to acquire an impaired asset that a bank sells. They say they were frustrated whether the courts in case of litigations will decide on basis of the law or the rules and the judgment has invoked rules to address that which is satisfactory. Besides, the law was changed to give the rights of SARFAESI tribunal to district and sessions court with High Court as appellant authority.

Instead of going for an appeal, the state government is considering harmozing the TPA by introducing suitable amendments that will make SARFAESI law’s property disposal a state affair. They say the ARC can still be created as the state government is constitutionally within its rights to create such a company which can even make good money. Having a brand new state law is also a way-out and the draft law is currently being discussed at the level of some legal experts.

A man shows new Rs 2000 currency after exchanging old Rs 500 and 1000 denominations at srinagar on Thursday 11 November 2016

How huge are the defaults in J&K?

Against Rs 91049 crore in the bank vaults in J&K, the banks have deployed only Rs 43373 crore in the state. Of this J&K bank alone has a lion’s share of 60.86% as on September 2016. Interestingly, there are 11 public sector banks operating in the state that enjoy a share of less than one percent in the overall banking loan book in the state. By September 2016, banks have put Rs 2769.9 crore as gross NPA which is 7.08 percent of the overall credit in the state. It includes a default of Rs 50.01 crore under various schemes by the central and state governments. Interestingly, J&K Bank alone has a share of Rs 1059.72 crore in the overall NPA in the state. Public sector banks cumulatively have only Rs 864 crore as default of which Rs 187.32 crore is of State Bank of India, Rs 173.73 crore belongs to Punjab National Bank and Rs 112.89 crore is of Ellaquai Dehati Bank.

Why is the civil society concerned?

They say that the objective is to weaken the special status. The centre, they say, starts with something innocuous as was the case in state subject. Initially it was termed to be a small piece of legislation for women and then the interested groups used the judiciary to build on it to the extent that now nobody knows how many people used this to regain citizenship and property rights.

(Note: The copy was slightly modified after it went in print edition last week.)


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