Cheque bounce and nbfc

The Reserve Bank of India (RBI) on Tuesday extended the guidelines on securitisation of standard assets (loans), which had earlier been issued to banks, to non-banking finance companies (NBFCs) also, stipulating that originating NBFCs can securitise loans only after it had been held by them for a minimum period in their books.

These guidelines were issued to prevent unhealthy practices surrounding securitisation, such as, origination of loans for the sole purpose of securitisation and in order to align the interest of the originator with that of the investors and redistribute credit risk to a wide spectrum of investors.

“It was felt necessary that originators should retain a portion of each securitisation originated and ensure more effective screening of loans. In addition, a minimum period of retention of loans prior to securitisation was considered desirable, to give comfort to the investors regarding the due diligence exercised by the originator,” the RBI said in a notification.

MINIMUM HOLDING PERIOD

While implementing a minimum holding period (MHP), the RBI said that the project implementation risk is not passed on to the investors, and a minimum recovery performance is demonstrated prior to securitisation to ensure better underwriting standards. NBFCs can securitise loans only after a MHP counted from the date of full disbursement of loans for an activity / purpose; acquisition of asset (that is, car, residential house) by the borrower or the date of completion of a project, as the case may be. MHP would be also defined with reference to the number of instalments to be paid prior to securitisation.

Trade receivables with tenor up to 12 months discounted/purchased by NBFCs from their borrowers will be eligible for securitisation.

Further, the RBI said that a minimum retention requirement (MRR) would be applicable to ensure that the originating NBFCs have a continuing stake in the performance of securitised assets so as to ensure that they carry out due diligence of loans to be securitised. In the case of long-term loans, the MRR may also include a vertical tranche of securitised paper in addition to the equity / subordinate tranche, to ensure that the originating NBFCs have stake in the performance of securitised assets for the entire life of the securitisation process.

ACCESS TO DATA

Where the repayment is at more than quarterly intervals, loans can be securitised after repayment of at-least two instalments.

The RBI also stipulated that originating NBFCs should disclose to investors the weighted average holding period of the assets securitised and the level of their MRR in the securitisation. The originating NBFCs should ensure that prospective investors have easily available access to all materially relevant data on the credit quality and performance of the individual underlying exposures, cash flows and collateral supporting a securitisation exposure.

The purchasing NBFCs need to monitor on an on-going basis performance information on the loans purchased and take appropriate action required, if any, said RBI.

This is not the problem of securitisation.

NBFC while granting loans take number of blank cheques. After default they put one case of a small amount for cheque bounce and  persuade the accused to pay and settle the case.

Once this is done a new case is filed or a big case under arbitration act is filed at a distant place.

New develpment for accused of cheque bounce cases . A petition has been filed in SC FOR QUASHING THE CHEQUE BOUNCE LAW- read the news report.

Challenge to cheque-bounce rule
SAMANWAYA RAUTRAY

New Delhi, May 13: A section of the Negotiable Instruments Act that provides for a two-year jail term for a bounced cheque or a fine twice the amount drawn has been challenged in the Supreme Court as violative of the Constitution.

A petition, filed by law student Yeshwanth Shenoy, has claimed that it is the poor who are at the receiving end of Section 138 of the 1881 act rather than the rich.

Arguing the case himself last Tuesday, Shenoy told a three-judge bench that courts should always distinguish between “unwillingness to pay” and “inability to pay” while adjudicating in cheque-bouncing cases.

He contended that the law did not allow a judge, in his discretion, to set the “honest drawer” of a cheque free even in the face of overwhelming evidence of his “inability to pay” as opposed to “unwillingness to pay”.

Assuming that the judge imposes a penalty and the person is still unable to pay, the only consequence is still a jail term of two years, he argued. The section should only be invoked against those unwilling to pay, he contended.

He cited earlier judgments to claim that “to be a poor was no crime” and to “recover debts by putting a person in prison is flagrantly violative of Article 21”.

He claimed the section failed the test of reasonableness necessary for a law to be constitutionally valid. Article 21 states that no person can be deprived of his right to life and liberty except according to procedure established by law.

But in case of Section 138, he argued, the constitutional guarantee of liberty is withdrawn only for the reason that a person is poor. The section offers no protection to an honest cheque drawer hit subsequently by a twist of fate that renders him unable to pay the amount.

Most of the cases that have virtually clogged up the lower courts are cheque-bouncing cases. At last count, the lower courts had over 2 crore cases pending. Of them, some 30 lakh cases were cheque-bouncing cases.

Shenoy, a Mumbai resident who claimed to be a practising advocate, sought release of all those in jail under this provision. The number of prisoners jailed on this count, he said, speaks poorly of “access to justice”.

He claimed that years of practice had shown that the only persons who took advantage of this provision were financial institutions that held personal liberty of debtors to ransom till repayment of a debt.

He claimed he had seen farmers from remote villages being prosecuted by a magistrate having jurisdiction over the headquarters of a financial institution because that institution had decided to deposit the cheque in a bank there. This was despite the transaction and documentation actually taking place in a remote village.

He claimed he had seen illiterate villagers who had issued blank cheques being prosecuted and convicted in the temples of justice where they had no access to justice.

He also claimed to have witnessed many prosecutions of home loan or vehicle loan debtors who failed to honour their commitments because of the death or illness of some family member or because the key income earner lost his job.

“…the financial institutions chose to prosecute these debtors in criminal courts while effectively taking over their secured assets by invoking special laws/contractual agreements,” his petition claimed.

Pendency of such a large number of cases has dented the image of the judiciary at home and abroad, and has led to it being perceived as slow. Related cases such as pleas to quash these complaints or challenges to interim orders add to the courts’ burden.

Shenoy contended that while the section aimed to protect the credibility of commercial transactions, it has ended up persecuting only the “honest” category of citizens.

“There are larger debts taken from public financial institutions by large conglomerates run by powerful politicians and industrialists and their failure in repaying the debts do not end in criminal prosecution even when it brings a large loss to the exchequer and in fact public money,” his petition said.

After hearing him at some length, Justices R.M. Lodha, H.L. Gokhale and Ranjan Gogoi issued notices on his petition.