Indian Focus: Need to introduce foreclosure norms

Whatever confusion one might have about how to go about acquiring housing loans one of the major areas which always confuses people are the foreclosure norms.

So here goes. As we already know, housing loans are long term loans, repayable over a period of 15 to 20 years. Some Housing Finance Companies (HFCs) lend money for a period of 30 years also. The repayment is in monthly installments (EMI) over this period. So strictly speaking the repayment will be due over a period up to 15 or 20 years as agreed. In case if there is default, the default will be restricted to the period of actual default.

Under Prudential Norms the account will become a non performing asset (NPA) if there is default in recovering six monthly installments. Foreclosure laws will enable the lender to call back the entire dues when default of six monthly installments takes place irrespective of the fact that the amount is due to be repaid over a period of 15 to 20 years.

The various agreements obtained by the lender will have such clauses to recall the entire balance due in case of default as prescribed. Till now one of the major impediments for the growth of a healthy secondary real estate market in India was the absence of foreclosure norms as discussed above. It becomes difficult for HFCs to sell their housing loan portfolio to institutions if they do not have the remedy to foreclose an account.

The normal procedure under code of civil procedure for recovery of bad debts is very long, cumbersome and time consuming. It takes more than 10 years to get a decree in a civil suit for recovery and even after getting the decree it takes further time for enforcement of a decree.

The Government had enacted "Recovery of debts due to banks and financial institutions Act, 1993" to mitigate the difficulties being faced by the banking and financing institutions for recovery of their dues through summary proceedings.

Under the Act the 'Debt Recovery Tribunals' and 'Appellate Tribunals' have been established where recovery suits for over Rs1 million can be filed instead of civil Courts.

The need for a summary procedure was long felt for housing finance institutions not only for expediting the recovery proceedings but also for giving impetus for creation of 'Secondary Mortgage Market'. The parliament passed the National Housing Bank (Amendment) Act, 2000' which received the assent of the President on May 24, 2000 and has come into force from June 16, 2000.

Vide the aforesaid amendment to the National Housing Bank Act, 1987 a new chapter VA -simplifying the foreclosure norms, has been introduced permitting summary proceedings for recovery of dues by appointment of Recovery Officer and creation of Appellate Tribunal on the lines of Debt Recovery Tribunal in case of banks. Further, in the definition of approved institutions, the Govt. has also included scheduled banks besides housing finance companies.

Under these provisions, Officers of approved institutions, with legal background shall be appointed as a Recovery Officers of the Tribunal.

If a borrower defaults in repayment of an assistance given by an approved institution, the institution may resort to foreclosure of the account and apply to the recovery officer for sale of the property pledged mortgaged, hypothecated or assigned to it as security.

The recovery officer may serve a notice of demand on the borrower to pay the specified amount within 90 days and make an interim order to debar the borrower from transferring alienating or otherwise dealing with the property. If the borrower fails to comply with the notice, the recovery officer may take possession of the property and transfer it by a sale, lease, or otherwise.

An application made to the recovery officer shall be dealt with by him as expeditiously as possible and endeavour shall be made to dispose of the application within six months. The Act also provides for establishment of one or more Appellate Tribunals to entertain appeals against any order made by recovery officer.

The recovery officer and the appellate tribunal shall not be bound by the procedure laid down in the Code of Civil Procedure, but shall be guided by the principles of natural justice. The recovery officer will take possession of the property through the Chief Metropolitan Magistrate or the District Magistrate within whose jurisdiction any such property is situated.

The District Magistrate may take or cause to be taken such steps and use, or cause to be used, such force, as may, in his opinion be necessary for purpose of taking possession, and no act of the District Magistrate done in pursuance of this Act shall be called in question in any court or before any authority.

Appeal against the order of the Recovery officer shall not be entertained by the Appellate Tribunal unless such person has deposited within the Appellate Tribunal 75 per cent of the amount due from him as determined by the Recovery Officer. No court or other authority shall have the jurisdiction, powers or authority except the Supreme Court and a High Court exercising jurisdiction under articles 226 and 227 of the Constitution.

The Foreclosure law as explained above can really speed up the recovery. However, there is delay in framing Rules under the Law and appointment of Recovery Officers. For Framing the Rules etc, NHB constituted a Sub-Committee, selecting the members from housing finance companies to give recommendations on:

a) Qualification, experience and other requirement of a Recovery officer.
b) Draft of application form to be made by HFCs to the Recovery officer.
c) Draft notice to be issued by the Recovery Officer to the borrowers and others.
d) Procedure for transfer, safe keeping of property and matters related thereto.
e) Draft form of appeal for the borrower.
f) Norms relating to right of redemption of mortgage, hearing procedure etc.

The Sub-Committee finalised its recommendations on all the points mentioned above and submitted its recommendations to the NHB in Sept. 2000. The NHB accepted all the recommendations. However, it is still pending.

The Government should expedite notifying the Rules and appoint Recovery Officers so that the foreclosure norms will really take effect soon.

R. Dyes is a journalist based in New Delhi.