Passage of quicker debt recovery bill credit positive: Moody's

New Delhi: Passage of the Bill to fast track debt recovery, together with the bankruptcy law passed earlier, will lead to structural improvements and is credit positive for Indian banks, Moody's Investors Service said on Monday.

The Lok Sabha last week passed the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016, empowering banks to take possession of collateral in the case of loan default, except for farm land.

The bill seeks to amend four laws -- the Sarfaesi Act, the DRT Act, the Indian Stamp Act and the Depositories Act.

The changes in the Sarfaesi Act allow secured creditors to take over a collateral against which a loan had been provided, upon default in repayment. It also provides that the process will have to be completed within 30 days by the district magistrate.

The bill aims to "expedite the recovery and resolution of bad debts and is credit positive for Indian banks", Moody's said.

Together with India's new bankruptcy law, which took effect earlier this year, these changes will lead to structural improvements in how banks deal with problem assets.

The bill will now go to the Rajya Sabha for its approval.

Weakness in current processes for bad debt resolution has been a key structural credit challenge for Indian banks, it said.

There are currently about 70,000 cases pending in debts recovery tribunals (DRTs), and these cases have been pending for many years owing to various adjournments and prolonged hearings.

Among the credit-positive amendments in the bill are changes aimed at promoting asset reconstruction companies as viable channels for banks to offload their nonperforming assets and prioritize debt due to secured creditors over all other debts and claims, including debt due to the government, Moody's said.

There are also measures that seek to improve the function of DRTs.

Currently, asset reconstruction companies cannot take large nonperforming assets because of a lack of capital.

"To promote asset reconstruction companies as viable channels for banks to offload their nonperforming assets, the bill seeks to promote investments in asset reconstruction companies by removing the current 49 per cent ownership cap on sponsors, and allowing non-institutional investors to invest in security receipts that they issue," Moody's said.