The Sarfaesi Act aimed at strengthening the banks and lending institutions has triggered a large number of disputes that are clogging up the Indian court system say Neerav Merchant and Melvyn Fernandes at Majmudar & Partners
The collapse of Lehman Brothers in 2008 rocked the banking system to its core. It showed that the exit of a significant player in the banking sector can have a disastrous effect on the economy of a nation.
In India, the banking industry has been progressively complying with international prudential norms and accounting practices. However, the country’s banking industry has some catching up to do in the area of management of non-performing assets (NPAs) – an unhealthy build up of which can trigger chaos.
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, (Sarfaesi Act) was put in place to ensure that Indian banks have a system in place to check the mounting levels of NPAs. However, the Sarfaesi Act is often misused and many industry players argue that its provisions are draconian in nature. The Sarfaesi Act has created many instances where borrowers have been pressurized to settle at terms that may not be to their advantage, but which benefit the lenders.
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Neerav Merchant is a partner in the disputes practice of Majmudar & Partners where Melvyn Fernandes is a senior associate.