Business Removing

GETTING CREDIT 47
losing possession. 15 And then the restrictions come. Specific
descriptions of assets and debt preclude debtors
from using changing pools of assets and future assets as
collateral, preventing inventory and receivables financing.
Some countries have tried to correct the problem. In
1997 Panama introduced a floating charge over an entire
business. But only for assets located outside the country.
Paraguay allows borrowers to pledge inventory. But only
if it consists of mining or industrial products. And each
item must be listed individually. Angola, Egypt, Morocco
and Vietnam permit nonpossessory pledges. But only to
licensed banks.
Such solutions always fall short. Potential borrowers
with the wrong collateral miss out on loans. The answer
is to create a universal security instrument, covering all
assets and all debt, and letting all debtors and all creditors
benefit.
Establish registries for all collateral
Collateral registries work best when they are unified by
region and cover all types of assets. Even rich countries
need reform. Austria, Germany and Switzerland have no
collateral registries. 16 France operates local registries. And
there are separate registries for pledges over shares, bank
accounts, receivables and equipment. Separate registration
with tax authorities is also required. Another 32 countries
require multiple registration, including Cameroon,
Colombia, Ecuador, Japan and Morocco. In Syria charges
over movable property are possible only where there is a
pre-existing registry—namely vehicles, vessels and intellectual
property. Turkey has a similar system. The solution:
create universal charges and a unified registry of movable
property charges indexed by the name of the debtor.
Indonesia established a registry in 2001. And Spain
unified its registries in 1998. But Eastern European
countries have led the way in establishing unified registries
of charges over movable collateral. Bulgaria, Hungary,
Romania and Moldova all successfully introduced
such registries recently. Bosnia and Herzegovina is about
to launch its unified registry. Since it was established in
1998 the Macedonian registry has been used by banks as
a standard part of lending. The most effective registries
permit a simple administrative filing of a notice of the
charge—and do not stall the registration process with
legal review or authentication.
The Romanian registry permits notice filing and is
online, allowing creditors to check for existing liens instantly.
Another 23 countries make the registry accessible
electronically. Those that do often have significantly faster
registration and more credit, controlling for other factors.
Permit out of court collateral enforcement
In 2000 Spain introduced out of court enforcement
through notarial execution, allowing debtors and creditors
to agree on enforcement methods. Time to enforce
was cut from more than 1 year to 3 months. The gains
from reforms in Slovakia were even larger. It took 560
days to enforce a mortgage through the old system. Now
it is possible to enforce in 45 days (figure 6.6).
Ten years ago it was almost impossible to enforce
collateral in India. The process could easily take 25 years.
In 1998 the government established Debt Recovery Tribunals,
with expedited enforcement proceedings. Expected
time to enforce was cut to around 10 years. More
reforms were introduced in May 2004. State-owned
banks, which account for 90% of lending, were permitted
to enforce out of court. On default the bank must
notify the debtor. After a 60 day grace period the bank
can seize the assets directly and sell by public auction.
Introducing the reform was difficult—it had to survive a
Supreme Court challenge. But the new procedure is widely
used. Creditors can expect to enforce within 9 months.
Designing out of court enforcement that doesn’t
collapse at the first objection of the debtor cuts enforcement
time by three-quarters on average. The less
courts are involved, the shorter the time, and the more
willing creditors are to lend. The point of collateral
agreements is to avoid a regular trial. And if the case goes
to court, efficiency can be improved by introducing
summary proceedings—as in Estonia—without judicial
analysis of the cause of the dispute, and with limitations
on debtor’s ability to appeal.
FIGURE 6.6
Reform works—Slovakia before and after
Days to enforce a mortgage
Source: Doing Business database.
Time reduced
from 560 days to 45
2003
Procedures reduced from 14 to 6
2004
Number of procedures