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The Securitization Act has been enacted mainly for tackling the rising danger of non-performing assets by securitization of assets by sale to ARC, which is to issue of security receipts to the investor and for enforcement of security interest by banks and financial institutions.
In the beginning, many were pleased to find that the securitization process as a class has come to stay in the Indian legal system and the difficulty of the non-performing assets of banks and financial institution would stand determined since the banks and financial institutions would be able to enforce its security interest without interference of the courts. The quantum of non performing assets has been rising by leaps and bounds and has been playing havoc on the Indian financial system since as at the end of the year 2001 the total amount of outstanding NPAs stood at Rs.83, 500/- crores. After enactment of the Securitization Act, 2002 the willful defaulters cannot now hide behind long-winded judicial procedure but at the same time the bank also cannot recover dues arising out of underwriting commitments obligations and equity finance by way of share subscriptions, so also the shares acquired by exercise of choice for conversion of loan into equity.
The Securitization Act, 2002 does not also guarantee or undertaking full recovery of the whole outstanding over dues fully. In the result the financial health of the banks will not develop because, in absence of adequate assets not in excess of 20 percent of NPAs would be recovered by resorting to the provisions of the Securitization Act, 2002. The IT Tribunal ruling in case of Vishvapriya Financial Service and Securities Ltd would jolt growth of asset securitization in auto finance and housing finance sector. The company was utilizing funds obtained from the investors for deployment in predetermined income security and had assured fixed rate of return. The contention of the company that it was only agent for the investors and has evolved only a pay-through structure was not received by the tribunal, which held that the company was responsible for the withholding taxes on the payments made to the investors.