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Evaluation of Debt Recovery Laws in India

Evaluation of Debt Recovery Laws in India. Looking at a new horizon. June 11-12, 2015, Mumbai. Content. Regulatory Impact Assessment (RIA) Banking Undertaking RIA Way Forward. Section 1. Regulatory Impact Assessment (RIA). Slide 3. Regulatory Impact Assessment (RIA).

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Evaluation of Debt Recovery Laws in India

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  1. Evaluation of Debt Recovery Laws in India Looking at a new horizon June 11-12, 2015, Mumbai

  2. Content • Regulatory Impact Assessment (RIA) • Banking • Undertaking RIA • Way Forward

  3. Section 1 Regulatory Impact Assessment (RIA) Slide 3

  4. Regulatory Impact Assessment (RIA) • RIA is a tool which examines and assesses existing, new or amended policies, regulations and laws • It measures the benefits, costs and risks associated with a regulatory intervention • Uses tools like time value of money, cost-benefit analysis (CBA), etc. • Overall aim is to ensure greatest net public benefit • Not a substitute for decision making, but can inform policy decisions • Periodic review (ex-ante & ex-post) of regulations to facilitate course-correction • Ensures: • Stakeholder buy-in • Clarity and transparency in law making process • Benefits of legislations outweigh the costs • Selection of most optimal alternative • Accountability Slide 4

  5. Process of RIA Slide 5

  6. Need to assess impact of regulations Key for Efficient Regulation – Striking the Right Balance Slide 6

  7. Need for RIA In India • Developing countries suffer with underperforming, high cost, competition distortionary regulations • Impacts on all the stakeholders or implementation bottlenecks not assessed • Government has acknowledged this and initiated repeal of archaic laws, adoption of pre-legislative consultative policy, sector regulators • RIA recommended by Working Group on Business Regulatory Framework (WGBRF), Financial Sector Legislative Reforms Commission (FSLRC), DamodaranCommittee, Tax Administration Reforms Commission (TARC) • Assist the decision makers to choose systematically the most effective and efficientpolicies in foreign jurisdictions. Eg. One-in, two-out policy (UK): Net reduction £836 million in costs to the business between 2010-2013 Slide 7

  8. Section 2 Banking Slide 8

  9. An Overview • Banking sector – lifeline of the economy • Ensures smooth money supply in the system • Depositor and borrower interface • Witnessed weakness in borrower interface in India • Continuous deteriorating asset quality Slide 9

  10. Deteriorating Asset Quality 10.90 6.45 5.87 4.45 4.11 3.42 2.94 Slide 10

  11. Sub-optimal Debt recovery • Inefficient debt recovery framework further deteriorates the situation • Identification of problem:slow and low debt recovery (Amount in Billion) • Who Pays? - Banks/FIs, Government, Regulatory Bodies, General Public, Genuine Tax Payers, etc. Slide 11

  12. Debt Recovery Laws Recovery of Debts Due to Banks and Financial Institutions, 1993 An Act to provide for the establishment of Tribunals for expeditious adjudication and recovery of debts due to banks and financial institutions and for matters connected therewith or incidental thereto. As on 31 March 2014, 66,971 matters amounting to ₹1,415 billion are pending at DRTs. The ratio of amount recovered (to the total amount involved) has reduced from (fiscal 2013) was 14.1 percent to 9.5 percent (fiscal 2014). NEED TO EVALUATE IF OBJECTIVES HAVE BEEN MET OR NOT Slide 12

  13. Debt Recovery Laws (Contd.) Securitisation & Reconstruction of Financial Assets & Enforcement of Security Interest Act, 2002 An Act to regulate securitisation and reconstruction of financial assets and enforcement of security interest and for matters connected therewith or incidental thereto. The ratio of amount recovered (to the total amount involved) has reduced from (fiscal 2013) was 27.1 percent to 25.8 percent (fiscal 2014). In absolute terms, the amount remained unrecovered increased from ₹496 billion to ₹702 billion, during the given period NEED TO EVALUATE IF OBJECTIVES HAVE BEEN MET OR NOT Slide 13

  14. Section 3 Undertaking RIA Slide 14

  15. Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (DRT Act, 1993) Undertaking Regulatory Impact Assessment (RIA) Slide 15

  16. Baseline Scenario DRT Act, 1993 • Absence of mandatory time limits for disposal of matters – 180 days/6 months (recommendatory) • Insufficient number of DRTs (39) and DRATs (5) • Inadequate composition – one person only • Absence of technical members at recovery tribunals (RTs) • Sub-optimal process of filing vacancies at RTs • Inefficient recovery process • Exercise of jurisdictions by other courts/authorities - SatyawatiTondon vs. UOI (SC) • Lack of clarity on powers of RTs Slide 16

  17. Cost-Benefit Analysis (CBA) DRT Act, 1993 • Opportunity cost due to delay in recovery (up to four years) - ₹25,000 cr. • Market cost - low debt recovery has resulted in credit risk premium of around 300 basis points • Opportunity cost of litigation (for fiscal 2014) has been estimated around ₹2,000 cr. • Administrative cost (for fiscal 2016)- ₹102.28 cr. (Approx. 35.38% higher than the revised BE of ₹75.55 cr. for the fiscal 2015) Slide 17

  18. Legislative Alternatives DRT Act, 1993 • Establishment of additional DRTs - ₹63 cr. for setting up 24 additional DRTs in addition to one time infrastructure cost • Appointment of technical members in RTs - ₹6.60 cr. per annum • Constitution of independent advisory body to recommend candidates for appointments – ₹20.40 lakhs per annum • Additional costs for grant of adjournment of increasing rate - ₹15 cr. (costs to litigants) Slide 18

  19. Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act, 2002) Undertaking Regulatory Impact Assessment (RIA) Slide 19

  20. Baseline Scenario SARFAESI Act, 2002 • Absence of time period for Magistrate to take possession of secured asset • No accountability if application is not disposed by RTs within prescribed period – 60 days (recommendatory) • Exercise of jurisdiction by other judicial foras • Taking over management by secured creditor for limited period • Requirement for consent of borrower for sale of movable property Slide 20

  21. Cost-Benefit Analysis (CBA) SARFAESI Act, 2002 • Opportunity cost due to delay in recovery (up to 3.5 years)- ₹10,000 cr. • Market cost - ₹1,00,000 cr. (for setting up of NAMCO) - could retire ₹1,00,000 cr. of public debt or build 10,000 cr. of six-lane expressways • Social cost of the amount of loans written off by commercial banks in last five years - ₹1,61,018 cr. - would have allowed 1.5 million of the children to get a full university degree (RaghuramRajan) Slide 21

  22. Legislative Alternatives SARFAESI Act, 2002 • Specific time period for Magistrate to take possession – Increase in administration and management costs • Statutory provision of additional management fee for the secured creditor, who could stay in control of possession of secured asset, up to recovery of management fee, in addition to debt - Increase in cost to borrower in terms of greater fund outflow and delayed repossession of secured asset Slide 22

  23. Section 4 Way Forward Slide 23

  24. Way forward • Adoption of reforms suggested by the study • Adoption of impact assessment framework in India • Institutionalisation of RIA in India Potential Benefits • Improves ease of doing business in India • Opens the date for foreign investments • Helps in removing regulatory barriers • Reduces costs on stakeholders • Promotes good governance and accountability Slide 24

  25. Thank You Jitin Asudani Assistant Policy Analyst CUTS International Email: jas@cuts.org http://www.cuts-ccier.org/BHC-RIA/ Slide 25

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