By Rajeev Dewal
The government appears to be silently working on various measures to fight the menace of black money.
One visible step towards it is rejuvenating, activating and operationalising the Prohibition of Benami Property Transactions Act, 1988, by expanding its scope, making it precise for use, designating the Income Tax Department as the enforcement authority under it and equipping the Income Tax Department with resources. Another step is the passing of the Fugitive Economic Offenders Act, 2018.
The steps above, together with the Prevention of Money Laundering Act, 2002 (PMLA), and the current judicial trend of harmonious interpretation of PMLA with bank recovery legislation (SARFAESI and RDBB) as also the IBC, lead to a potential situation of banks holding property as security suddenly losing such security for it having been attached and confiscated by the enforcement authorities for having been created out of tainted money (proceeds of crime) or being of a fugitive leading to secured credit suddenly becoming unsecured. This is relevant in the Indian scenario since despite the regulatory thrust on the purpose and repayment capacity rather than security, lending in India has remained security-oriented, unlike the West where lending is unsecured and covenant-based. How the enforcement agencies could help banks? Properties held in security by a bank or a financial institution without the knowledge of or not being involved in any act of connivance where such properties having been created out of proceeds of crime should be excluded from attachment and confiscation.
The enforcement agencies need to recognise that banks, which have lent against security of property as secured creditors, are the victims of the situation (unless there is connivance on the banks’ part). They should allow the banks to receive the proceeds of such attached or confiscated property to recover their dues.
In case of a sale by the enforcement authorities of confiscated property held in security by a bank, the bank should get priority over government dues.
There is an increasing need to be cautious and one must ensure that the person in whose name the property stands is indeed the real owner and not a benamidar, doesn’t belong to a fugitive and not bought with crime money. It is easier to ascertain the above and hold documentary evidence of it when the property is taken as security and the disposal of proceeds of such loan is made directly to the seller. It would be in the interest of banks to do the disposal of proceeds of a loan for purchase of property directly to the seller of the property. In case of loans against property where the risk of such loss of security is higher, banks should be careful and assess repayment capability from the business earnings rather from the sale of the property.
In general, reliance on security in lending has to go down.
(The author is a banking lawyer & founder of Dewal & Company)
Source: Economic Times