Govt weighs amending law to allow ships to be mortgaged while raising loan

“Currently, ships cannot be mortgaged (with the lenders) because the SARFAESI Act don’t have a provision,” R Lakshmanan, Joint Secretary, Ministry of Ports, Shipping and Waterways said while addressing the ‘Global Ports and Shipping Summit’ in Mumbai on Thursday 26 Sep. The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI Act) allows banks and financial institutions to auction the secured asset when the borrower fails to repay the unpaid dues.

“This is an issue we have taken up with the Department of Financial Services and we are actively working with them to address this (through an) amendment in the act which will enable ships to be mortgaged,” Lakshmanan said. This is one of the areas that the Ministry is working on to create a “better eco system for ship ownership” in the country, he added.

Local fleet owners have cited issues related to mortgage as one of the main reasons why banks are not comfortable in funding ship purchases.

“Indian banks ask for all kinds of collaterals such as real estate, buildings, personal guarantee and corporate guarantee when we approach them for loans to buy ships,” said an executive with a local shipping company. “What they don’t understand is that in shipping, the collateral is the ship itself,” he added. “Ship owners and operators find that registration and deregistration of mortgage is a challenge especially when you have multiple lenders; de-registration of the mortgage is equally a challenge. If somebody want to sell the asset and recover the loan, it becomes quite challenging for them to do so. Some reforms are required there,” an official with one of the big four consultancy firms, said.

“For foreign banks, the biggest challenge is the enforcement and mortgage issues while considering loans to Indian fleet owners,” said an executive with a Singapore-based shipping company owned by an Indian business group.

“We have other jurisdictions where we have admiralty courts and ease of enforcement during defaults. In India, you continue to default and yet enjoy the control of the asset. This is a big challenge, and I do not know when and how we should get over it. We are all aware of this and we have been talking about this for the last 15-20 years, (but) we have not made any progress,” added.

Lenders say that India need to reform the legal and judicial system to tackle this issue. India has admiralty courts, but the cases are not heard and disposed of on a fast-track basis.

“If I chose to fund a Singapore flag ship, and this has been tested many times, that from the day of default to money in my hands is 90 days because you can arrest, you can enforce, you can sell it (the ship) off and you are done,” said an official with a large European bank, who declined to be named.

“But, if it is India, it is at least a year, which sounds okay but then my difference is three months against one year and a vessel when not maintained degrades very quickly. You should have the ship back in operation in 30 days, otherwise it’s a big issue because the degradation is very quick. Generally, when you look at flags of convenience, say Liberia, Marshall Islands, Panama, etc they have that provided; the enforcement is quick, easy, painless, sell it off but in India, it’s not like that,” the official added.