The attempt by banks and financial institutions to recover bad debts under the Securitisation Act has hit another airpocket with the division bench of the Madras high court ruling that lenders cannot take possession of the residential property of defaulting borrowers.

While endorsing the decision of the Supreme Court in the Mardia Chemicals case, the Madras high court has gone a step further and held that residential property cannot be attached. The bench handed down this judgment on a clutch of petitions.

In the Mardia Chemicals case, the Supreme Court had in an interim ruling ordered that the secured creditors could take possession of secured assets but could not lease, sell or assign them.

This severely curtailed the rights given to the banks and financial institutions under the Act.

Bankers associated with the recovery process feel the judgment defeats the purpose of the Act and is contrary to all the provisions stated therein.

"The Supreme Court has not yet taken a final decision in the matter. Hence as on date, though the banks and financial institutions are taking possession, their hands are tied when it comes to ultimately disposing of the property and adjusting the proceeds against their dues," said a senior public sector banker.

Moreover, the mere right to take possession without the right of disposal has resulted in secured creditors incurring additional charges on storage, insurance and security of the seized assets.

Further, the owners of the secured assets can file lawsuits if the assets have been damaged or if they have deteriorated.

Public sector banks have managed to recover Rs 440 crore (Rs 4.40 billion) from 7,656 sticky accounts since June 21, 2002 -- when the law was enacted -- and March 31, 2003.

Twenty-seven public sector banks sent notices to 28,866 entities for recovering Rs 10,171 crore (Rs 101.71 billion) under the Act during the period.

Though the State Bank of India sent the maximum number of notices -- 5,858 for the recovery of  Rs 3,502 crore (Rs 35.02 billion) -- it managed to recover only Rs 25 crore (Rs 250 million) from 114 accounts.

Punjab National Bank recovered Rs 31.61 crore (Rs 316.1 million) from 758 bad accounts after sending 2,226 notices to recover Rs 428.70 crore (Rs 4.287 billion).

Oriental Bank of Commerce recovered Rs 30.83 crore (Rs 308.3 million) from 711 sticky accounts. The bank sent recovery notices for 1,866 accounts amounting to Rs 339.61 crore (Rs 3.396 billion).