ANALYSIS OF THE SECURITIZATION

abhishreshthaa

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CRITICAL ANALYSIS OF THE SECURITIZATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND ENFORCEMENT OF SECURITY INTEREST LAW


 It is a welcome piece of legislation that will have significant positive implications not only for the banking and financial services sector, but for the economy as a whole.


 The formation of the Asset Reconstruction Company which can acquire financial asset of bank/FI for purpose of the realization of the financial assistance. So that bank/FI can concentrate on their core business of lending.


 Changing the norms of NPA so as to meet the same to the international standards in the near future will help to boost the economy as a whole.
 The Law has four parts addressing four separate areas. Firstly, it facilitates securitisation, which is essential for the development of the debt markets in India.



 The growth of the securitization market will enable banks to sell down secured loans originated by them, rather than holding assets to maturity as they have traditionally done, improving their ability to manage their portfolios and optimize the risk-return trade-off.


 It will improve financial intermediation in the economy, as it will facilitate transfer of assets from banks to other intermediaries like insurance companies and mutual funds that have large resources but relatively limited asset origination capabilities.


 Secondly, it provides a framework for the establishment of asset reconstruction companies. This will enable focused and professional management of distressed credit in the financial system, to maximize its economic value and improve recoveries of troubled loans.


 It will also encourage foreign investors specializing in distressed assets to enter the Indian market, providing the system much-needed capital.


 Thirdly, it provides for the establishment of a central registry to register all charges created on assets and all securitization transactions.


 While all these initiatives in themselves are very positive, the most immediate benefits will arise from the provisions relating to enforcement of security interest by secured creditors.


 This new legislation, thus, creates a long-overdue framework for resolving the distressed credit problem in India, by providing legal support to the resolution process, and thereby encourages the flow of capital into this specialized sector.


 By reducing the risk associated with asset-based lending, it encourages availability of credit and reduces the cost of intermediation on an overall basis. It also brings in greater flexibility and efficiency in the financial system by facilitating securitization, which would help in the optimal deployment of resources by the financial sector as a whole.



 It paves the way for a financial system that is able to play a more efficient and effective role in overall economic development.


 The Bill gives secured creditors the power to take over the possession and management of the secured assets of a company without the court's intervention. But similar powers exist under the State Financial Corporation Act, Indian Reconstruction Bank of India Act, Indian Contract Act and the Small Industries Development Bank of India Act (Section 38).


Banks and financial institutions enjoy similar powers under the Indian Contract Act under the various agreements that borrowers sign. But again, the banks and FIs are reluctant to use this power mainly because of the practical problems


 There should have been different rules for non-willful defaulters. Several industries, like steel, are inherently loss-making because of global conditions. The ordinance should differentiate between them.
 
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