Ten days ago, a bench of the Jammu and Kashmir High Court ruled in a case that the SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act) cannot be enforced in that State. This Act, passed in 2002, empowered banks and financial institutions to recover the money they had lent to borrowers without going through an elaborate court process.

When the Act was passed, bankers projected it as the panacea for all their problems. The impression given was that borrowers would quiver and quake at the very prospect of a banker coming to them armed with a SARFAESI notice.

A little over a decade hence, reality has been different. Bankers will concede that they have probably succeeded only one in four times when they used the Act.

So, was it really useful?

The answer is yes despite the statistics not standing the test of effectiveness.

For bankers, the process of getting the money back is never easy or straightforward — and they need to press different buttons (bilateral negotiation, debt recovery tribunal, lok adalats, one-time settlements, etc) for this purpose.

SARFAESI was one more useful tool — particularly useful to have in the banker’s armoury while trying to bring recalcitrant borrowers back to the negotiating table. More often than not, bankers used it for its deterrent effect.

The threat of seizure of assets (whether plant and machinery or premises or stock) and the possibility that it could be auctioned off pretty soon if the bank chose to follow the procedure, was usually enough to bring many borrowers (except the hardened ones) to the bank and complete a settlement.

The High Court judgment on the issue of the applicability of the Act in the State is therefore a setback for banks.

It will most probably have a negative impact on further credit growth in the State, which has not been much to begin with. Bank deposits in J&K have doubled to ₹22,504 crore while loans have likewise risen to ₹10,863 crore over the past five years. But this is a meagre amount when seen in the context of the ₹66.50 lakh crore lent by banks across the country.

The importance of bank credit to spur economic growth and development is well understood.

It is especially critical for a backward State such as J&K, with its history of a troubled political and business climate.

Recovery chances The judgment will unfortunately weaken whatever little confidence banks had in lending to borrowers in that State.

Knowing now that the chances of recovery are slim, they will very likely play it safe and begin to curtail lending activities there.

While passing its orders, the High Court bench had, of course, left it open to the State Government to pass a law similar to SARFAESI. In the current political climate in the State, that does not seem a realistic possibility.

Both the Centre and the State Government must wake up to the danger of a drastic drop in credit in J&K in the coming year.

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