evaluation of debt recovery laws in india looking at a new horizon june 11-12, 2015, mumbai

Evaluation of Debt Recovery Laws in India

Looking at a new horizon

June 11-12,

2015, Mumbai

Union Budget 2014 Slide 2

Content

• Regulatory Impact Assessment (RIA)

• Banking

• Undertaking RIA

• Way Forward

February 2015Microchip Technology (India) Private LimitedSlide 3PwC

Section

1Regulatory Impact

Assessment (RIA)

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

Slide 4


Process of RIA

Slide 5

Problem

definition

• 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 RIA)

Evaluating the

baseline

• This involves identification of issues, understanding the costs and benefits of the as-is/ prevailing scenario, by stakeholder interaction, in-depth literature review and analysis of relevant provisions in select legislations (in case of ex-post RIA).De

veloping alternatives

• 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 alternatives are estimatedC

omparing and

selection

• 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 having the potential to result in greatest net benefit.


Need to assess impact of regulations

Key for Efficient Regulation – Striking the Right Balance

1. Independence2. Transparency3. Predictability & Stability4. Cost-effectiveness

1. Accountability2. Commercial sensitivity3. Adaptability 4. Detail - Oriented

Slide 6


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), 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

Slide 7


Section

2Banking

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

Slide 9


Mar'11 Mar'12 Mar'13 Mar'14 Mar'150

2

4

6

8

10

12

Restrctured Assets to Gross Advances (%)Gross NPAs to Gross Advances (%)

% o

f S

tru

ctu

red

Ass

ets

3.49

2.36

4.69

5.81

Deteriorating Asset Quality

2.943.42

4.11

5.87

4.45

6.45

10.90

Slide 10


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

Modes of Recovery

2013 2014

No. of cases referred

Amount involved

Amount recovered

No. of cases referred

Amount involved

Amount recovered

DRTs 13,408 310 44 28,258 553 53SARFAESI Act 1,90,537 681 185 1,94,707 946 244Lok Adalats 8,40,691 66 4 16,36,957 232 14

Total 10,44,636 1,057 233 18,59,922 1,731 311


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


Debt Recovery Laws (Contd.)

Securitisation & Reconstruction of Financial Assets & Enforcement of Security Interest

Act, 2002An 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


Section

3Undertaking RIA

Slide 14


Recovery of Debts Due to

Banks and Financial

Institutions Act, 1993

(DRT Act, 1993)

Undertaking Regulatory Impact Assessment (RIA)

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

Slide 16


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


Legislative Alternatives

• 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)

DRT Act, 1993

Slide 18


Securitisation and

Reconstruction of Financial Assets and

Enforcement of Security Interest

Act, 2002 (SARFAESI Act,

2002)

Undertaking Regulatory Impact Assessment (RIA)

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

Slide 20


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 (Raghuram Rajan)

Slide 21


Legislative Alternatives

• 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

SARFAESI Act, 2002

Slide 22


Section

4Way Forward

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

Slide 24


Thank You

Jitin AsudaniAssistant Policy AnalystCUTS InternationalEmail: [email protected]://www.cuts-ccier.org/BHC-RIA/

Slide 25

http://www.cuts-ccier.org/BHC-RIA/

evaluation of debt recovery laws in india looking at a new horizon june 11-12, 2015, mumbai

Documents

banking slide

right balance slide

low debt recovery

impact of regulations

regulatory bodies

regulatory intervention

financial institutions

sector regulators ria