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
Union Budget 2014
Slide 2
Section
1
Regulatory Impact
Assessment (RIA)
Microchip Technology (India) Private Limited
PwC
February 2015
Slide 3
Slide 3
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
Union Budget 2014
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4 4
Process of RIA
• The first and the most critical step in any RIA is defining the problem.
Problem definition sets out the objective and scope of RIA exercise,
stakeholders involved and applicable legislations (in case of ex-post
Problem
RIA)
definition
• This involves identification of issues, understanding the costs and
benefits of the as-is/ prevailing scenario, by stakeholder interaction, indepth literature review and analysis of relevant provisions in select
Evaluating
legislations (in case of ex-post RIA).
the baseline
• Multiple alternatives intending to achieve desired change in the
baseline scenario are developed. Alternatives could be no-regulation,
co-regulation, direct regulation etc. Costs and benefits of the
Developing
alternatives
alternatives are estimated
• The alternatives are compared inter-se and with the baseline scenario
using various tools, such as the cost-benefit analysis, cost-effective
analysis, multi-criteria analysis etc, for selection of the alternative
Comparing
and selection
having the potential to result in greatest net benefit.
Union Budget 2014
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Need to assess impact of regulations
Key for Efficient Regulation – Striking the Right Balance
Union Budget 2014
1. Independence
1. Accountability
2. Transparency
2. Commercial sensitivity
3. Predictability & Stability
3. Adaptability
4. Cost-effectiveness
4. Detail - Oriented
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6 6
Need for RIA In India
•
Developing countries suffer with underperforming,
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),
Damodaran Committee, Tax Administration Reforms Commission (TARC)
•
Assist the decision makers to choose systematically the most effective and
efficient policies in foreign jurisdictions. Eg. One-in, two-out policy (UK): Net
reduction £836 million in costs to the business between 2010-2013
Union Budget 2014
high
cost,
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Section
2
Banking
Microchip Technology (India) Private Limited
PwC
February 2015
Slide 8
Slide 8
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
Union Budget 2014
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Deteriorating Asset Quality
12
10.90
% of Structured Assets
10
Restrctured Assets to Gross
Advances (%)
Gross NPAs to Gross
Advances (%)
8
6
6.45
5.87
5.81
4.69
4
3.49
4.45
2
4.11
2.36
2.94
3.42
0
Mar'11
Union Budget 2014
Mar'12
Mar'13
Mar'14
Mar'15
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Sub-optimal Debt recovery
• Inefficient debt recovery framework further deteriorates the situation
• Identification of problem: slow and low debt recovery
Modes of
Recovery No. of cases
referred
2013
Amount
involved
Amount
recovered
No. of cases
referred
2014 (Amount in Billion)
Amount
Amount
involved recovered
DRTs
SARFAESI
Act
13,408
310
44
28,258
553
53
1,90,537
681
185
1,94,707
946
244
Lok Adalats
8,40,691
66
4
16,36,957
232
14
Total
10,44,636
1,057
233
18,59,922
1,731
311
• Who Pays? - Banks/FIs, Government, Regulatory Bodies, General
Public, Genuine Tax Payers, etc.
Union Budget 2014
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Slide 11
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
Union Budget 2014
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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
Union Budget 2014
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Section
3
Undertaking RIA
Microchip Technology (India) Private Limited
PwC
February 2015
Slide 14
Slide 14
Recovery of Debts
Due to Banks and
Financial
Institutions Act,
1993
(DRT Act, 1993)
Undertaking Regulatory Impact Assessment (RIA)
Microchip Technology (India) Private Limited
PwC
February 2015
Slide 15
Slide 15
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 Satyawati Tondon vs. UOI (SC)
• Lack of clarity on powers of RTs
Union Budget 2014
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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)
Union Budget 2014
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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)
Union Budget 2014
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Slide 18
Securitisation and
Reconstruction of
Financial Assets
and Enforcement of
Security Interest
Act, 2002
(SARFAESI Act,
2002)
Undertaking Regulatory Impact Assessment (RIA)
Microchip Technology (India) Private Limited
PwC
February 2015
Slide 19
Slide 19
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
Union Budget 2014
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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 sixlane 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
(Raghuram Rajan)
Union Budget 2014
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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
Union Budget 2014
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Slide 22
Section
4
Way Forward
Microchip Technology (India) Private Limited
PwC
February 2015
Slide 23
Slide 23
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
Union Budget 2014
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Thank You
Jitin Asudani
Assistant Policy Analyst
CUTS International
Email: jas@cuts.org
http://www.cuts-ccier.org/BHC-RIA/
Union Budget 2014
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