Banking regulations did not allow for trading in debt. This is the Gujarat High court judgement.
Banks cannot trade transfer or purchase a pool of non performing asset or bad debt.Thus securitisation loses its meaning. Debt cannot be transferred without the borrower being party of the transaction.The court has researched in depth and found out that under section 6 trading in debt is not within the purview of banking company. The impact is wholesome . The banks cannot ,hereafter simply shed their debt box as dry leaves fall from the tree. They have to carry the bag with them.
Is a loan item of the borrower an asset of a bank or debt of a bank?This has to be studied carefully. From a layman’s point of view the loan of a borrower is a debt not an asset. But the bank’s term the faltering companies as Non performing asset. The situation is little peculiar . How can the banks address a loan as an asset?. So far we have blindly followed the bank’s regulations, The judgement of the Gujarat High court is an eye opener. This will have a retrospective effect too.
Selling a debt to Asset Reconstruction Company will also have a similar reference . The ARCIL is a company formemed by different banks, Its regulations and rules ,as found in their Memorandum ,will also definitely reflect the distinctions as found in Bank’s strictures.
The Supreme court can set aside the judgement, but the ruling of the Gujarat High court is an evolution of a thorough analysis of the laws and formulas that govern the financial institutions.
If the judgement is upheld by the Supreme Court of India, then the entire scenario of Non performing Assets under the DRT, under Securitisation (SARFESI ACT) wil produce a remarkable challenge to the banks autocratic behaviour. It will a stimulate the depressed industrial dogma , and rejuvenate the dishevelled manufacturing premium .
Times change. Rules get modified. Profiles undergo moderation. Perceptions get altered. But true Judgements provide a certainity and a memorable requisite and a required respite.