A senate panel has formally blocked the approval of a bill that would have given widespread powers to banks to sell off mortgaged properties.
The Financial Institutions (Recovery of Finances Amendment) Bill 2016 was blocked after it was found to be in violation of a Supreme Court (SC) order and could also infringe a constitutional right of borrowers.
Despite desperate efforts by State Bank of Pakistan (SBP) Governor Ashraf Mahmood Wathra and Secretary Finance Dr Waqar Masood to get it passed, the bill could not sail through the Senate Standing Committee on Finance and Revenue. The SBP governor repeatedly expressed his lack of confidence in the country’s judiciary and said the banks did not get justice from courts.
The committee, however, approved another bill – Financial Institutions (Secured Transactions) Bill 2016, which would facilitate small borrowers to get loans from banks by pledging their movable assets including ‘ideas’, copyrights, patents and goodwill.
The push to pass this law to facilitate small and medium-sized borrowers came from the Netherland’s Queen Maxima, who visited Pakistan in February this year to promote greater financial inclusion.
The components of the bill
The ‘Financial Institutions Recovery of Finances Bill’ gives sweeping powers to commercial banks in handling mortgaged properties.
The government has proposed that the banks can sell the mortgaged property without involving courts. The banks will have all rights on rent and profit from the mortgaged property after serving default notice to the borrower. The banks have also been given a right to purchase the mortgaged property by paying 10% higher than the highest bid price.
The National Assembly Standing Committee on Finance already passed the bill in April this year. The Senate panel would take a final decision on it by June 21.
The committee on Wednesday decided to further review a SC’s judgment, in which it struck down a law that had given sweeping powers to the banks.
The government has proposed “where a mortgager fails to pay the amount as demanded within the period, the financial institution may, without the intervention of any court, sell the mortgaged property by public auction”.
PML-N Senator Kamil Ali Agha, however, said the proposed amendment infringes the constitutional right to go to court and seek justice.
However, the SBP governor had a different point of view.
“In this country, there is no check on loan defaulters who freely roam around and the banks do not get justice from courts,” said Wathra.
The standing committee made a counter proposal, suggesting that the banks may auction the property “subject to the court’s approval”. The SBP did not agree.
“In its December 2013 judgment in which it declared clause 15 of Finance Institution Recovery Ordinance ultra-vires, the SC did not accept the concept of non-judicial intervention,” said Mohsin Kamal, the legal consultant to the standing committee.
“The apex court ruled that there was no mechanism under which borrowers could be involved in the foreclosure process,” he said, adding that the apex court also raised objections over parallel court proceedings and the lack of reserve price mechanism.
“The 2013 judgement led to a drastic reduction in house financing, which is not more than half percentage points of total banking sector lending,” responded Wathra. “The proposed law would facilitate the housing sector lending.”
Secured Transactions Bill
The standing committee approved the secured transaction bill, which will help small and medium-sized borrowers get loans from banks by pledging movable assets.
During her visit to Pakistan, Queen Maxima said that Pakistan could increase its lending to SME sector from 7% to 15% by using movable assets as collaterals in credit and for that to happen, there was a need to have registry and legislation to facilitate this in parliament.
The government has defined movable assets that include receivables, rights under letter of credits, rights under trust receipts, securities, right to funds credited in a deposit account, title documents and negotiable instruments.
Among other movable assets are intellectual property including patents, trademarks, copyrights, trade-names, goodwill, royalties, stock in trade, inventory, interest in partnership and other form of entity, ornaments, jewellery, stones, goods in transit, agriculture produce, leaves, grass (including growing grass), petroleum and minerals, motor vehicles and property attached to immovable property.
