Co-creditors stall process of NPA recovery

As the 60-day notice period comes to an end, a recurring theme at the stock-taking meetings by banks and financial institutions is the conflict of interest among the lenders. Another common issue is the sudden reluctance of potential buyers. With the ordinance now before the courts in cases involving Mardia Chemicals, Givo and Modern Syntex, buyers are also holding their horses for now. Interestingly, a senior financial institution executive has remarked that there is even serious rethinking now about the desirability of taking over running units, given their attendant problems.

Financial institutions normally have larger amounts of outstandings due to them in any consortium lending. In a number of cases, they have issued notices to defaulters hoping that the other creditors involved will give their consent for further action. However, some smart borrowers, who owe banks much smaller amounts than they do to financial institutions, have rushed to square up their bank outstandings. Thus, non-performing assets in such cases have turned to standard assets. Some defaulters have been bringing pressure to bear on bankers to refrain from giving their consent. This has made it difficult for financial institutions to take the next step – seizure of assets.

Under section 13 (9) of the ordinance, in case of financing of an asset by more than one secured creditors or joint financing, “no secured creditor shall be entitled to exercise any or all of the rights conferred on him under or pursuant to sub-section (4) unless exercise of such right is agreed upon by the by the secured creditors not representing not less than three-fourth in value of the amount outstanding… and such action shall be binding on all the secured creditors”. Sub-section (4) authorises creditors to take possession of the secured assets or their management or even put them under an appointed manager.

Banks, on their part, have argued that in view of the uncertainty over how the ordinance will fare in the courts, it will be foolhardy to take the chance of even their standard assets getting stuck by giving their consent for seizure, a senior banker has averred.