Debt Recovery in India - At a Glance

Published on 16 May 2016 by Team

India’s Sick Industrial Companies Act, 1985 ("SICA") put in place a debtor friendly regime in which defaulting borrowers could delay resolution for long periods of time and strip assets of value. This created a huge problem for the economy at a macro level as the Non-Performing Assets of the banks with respect to the debts due kept perennially increasing. The debt recovery tribunals (DRTs created under the RDDBFI Act) in the 1990s attempted to create a more creditor friendly regime but their effectiveness is limited by restrictions on their scope. The SARFAESI Act, enacted in 2002, supplemented the DRTs in regulating an efficient recovery process. SARFAESI permits seizure of secured assets and has been the most effective means of recovery out of all the legislations.

The Recovery of Debts due to Banks and Financial Institutions Act, 1993 (RDDBFI Act), extends to the whole of India except Jammu and Kashmir. This act came into force on 24th June 1993.The provision of the act shall not apply to any bank or financial institutions where the amount of debt due is less than Rs 10 Lakh. The "Debt Recovery Appellate Tribunal" (DRAT) was established under sub section(1) of section 8. The Central Government of India has the power to notify the establishment of one or more tribunals in a state, which are known as Debts Recovery Tribunal, to work under the broad jurisdiction, powers and authority prescribed under this act.

Legislation Relating to Debt Recovery in India

When borrowers cannot pay promised interest or principal on time, creditors can initiate steps to recover the debt. Debt recovery laws determine the process by which recovery proceeds. the Debts Recovery Tribunals (DRTs) were set up under the Recovery of Debts Due to Banks and Financial Institutions (RDDBFI) Act, 1993 to help banks and financial institutions recover their dues speedily without being subject to the lengthy procedures of usual civil courts. The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act, 2002 went a step further by enabling banks and some financial institutions to enforce their security interest and recover dues even without approaching the DRTs. 

Therefore there are 2 crucial legislations which deal with the debt recovery by banks and financial institutions from borrowers or people who have taken loans from these institutions and fail to pay back the principal amount with interest or falter with the instalments- 

1. RDDBFI Act- This piece of legislation is responsible for the creation of DRTs and DRATs. These tribunals are the primary courts of law responsible for the management of cases where debts are to be recovered and provide a forum which in essence claims to be much faster than the normal litigation route through civil courts.

2. SARFAESI Act- This Act provides for out of Court remedies that the banks and financial institutions can undertake, It gives the mandate to these organisations to treat the security provided for any loan which has now become a non performing asset to be treated in multiple ways thereby recovering their dues and releasing any extra monies back to the borrower (i.e not making any profit but mitigating their rightful dues). The various ways in which a Bank can deal with these securities are provided in the Act being inter alia -Taking over the property and selling it off, taking over that part of the business of the borrower which has been used to secure their loans and either taking control of the management or selling the same to recover dues etc.

Hence RDDBFI Act provides for the framework or the specialised forums, and SARFAESI Act provides for remedies or reliefs which the bank can undertake before taking up the matter before the DRT (created by RDDBFI Act) to recover their rightful dues from borrowers.

Banks classify borrowers

While taking care of the accounts of customers from whom debt may be due to banks, it is important to understand the reason for non-payment by the customer. Knowing why the customer cannot pay or are not willing to pay can help to take better actions regarding the recovery of the debt.

It is important to indentify the type of debtor the bank or financial institution might be dealing with. There can be 4 scenarios with respect to Debtors of a Bank, these are as follows-

1)Willing and able- the first category of the debtor is willing and able which means the debtor has the funds to payback and has the intention to pay back the debt. The customer is very confident to repay the debt amount and makes all the efforts possible to repay the debt.

The following get classified as Non Performing Assets by the banks in different categories with different percentage of expected return on the credit given to the borrowers-

2) Unwilling but able- This catagory of debtor involves the people who have the resources to pay back the debt amount but refuse to pay it back to the creditor. The reason for the non-payment can be anything like if he/she is not happy the with services provided or he/she has mismanaged the accounts and has no records of the balance amount left to be paid. 

3)Willing but unable- This person wants to repay the debt but is unable to do so as he/ she has no resources. The are aware of the complete amount which needs to be paid off and may have made some efforts to earn resources but are unable to take care of the whole amount. So they are able to pay the amount partially.

4)Unwilling and unable- This type of debtors are the ones who refuse to pay nor can they afford to pay the debt to the creditor. These types of debtors are the most difficult type to deal with.

Indentifying the customer type is the essential step of the recovery of the debt. Once the bank understands where the customer is coming from, it can try and settle the problem of the debtor on an internal level without moving the DRT in a bid to skip any litigation.

Application to DRT-  initiation of proceedings under DRT

Formally, an application for recovery of debt can be made to the DRTs for all debts valued at more than INR 1 million.1 For lesser amounts, the banks and financial institutions can avail normal remedy process such as the Civil Courts. The Act further authorizes the Central Government to specify such other amount, being not less than INR 1 lakh, that can be assigned to DRTs.

The composition of the Tribunal- "DRT"

The tribunal consists of only one person only who is known as the chairperson who is appointed by the Central Government. No person shall be qualified for the post of chairperson unless the person is qualified to be a district judge. The maximum age bar for being a chairperson in DRT is 65 years. The chairperson can hold the office for the term of 5 years or till he attains the age of 65 years and is eligible to be re-appointed.

Jurisdiction of Tribunal

A Tribunal shall work on jurisdiction, power and authority to entertain and decide appilcations from banks and financial institutions for recovery of debts due to such banks and financial institutions and can also entertain appeals against any order made by a Tribunal under this act.

Section 17 of the RDDBFI Act vests in the DRT the authority to entertain applications from banks and financial institutions for recovery of debts due to such banks and financial institutions.

The DRAT has the power to address appeals made against any order made, or deemed to have been made, by the DRT.

Only the High Court has the authority to deal with cases which are appealed from DRAT followed by the Supreme Court.

Process of Debt Recovery

1. Application Route- Directly Applying to DRT

The recovery procedure under this route is invoked by making an application to (and not filing a suit with) the DRT and paying the prescribed fees. What DRT location is chosen under this route is a good question. There are currently 32 DRTs in India in 22 unique locations. Some cities have multiple DRTs to deal with the inflow of a large number of filings of applications.

  1. Section 19 of the RDDBFI Act specifies the conditions for a choice of DRT to make an application. An application can be made by the bank or financial institution to a DRT that has jurisdiction in the region where the defendant (one or more defendants, if more than one) actually or voluntarily resides or carries business. An application may also be filed to a particular DRT if the cause of action wholly or in part arises within the limits of its jurisdiction.

  2. The recommended time to completion is 180 days from the receipt of the application as per Sections 19(4) of RDDBFI.
  3. The submission of an application to the DRT triggers summons issued to the defendant requiring him to show cause within 30 days as to why relief prayed for should not be granted.
  4. The defendant must present a written statement. The Tribunal may permit additional time for submission of this statement.
  5. The defendant can plead a set-off against any ascertained sum of money legally recoverable by him from the applicant at the first hearing and not afterwards unless permitted by the Tribunal.
  6. A counter-claim against the claim of the applicant can be made by the applicant before delivering his defence.
  7. On the basis of the DRT’s order, the Presiding Officer of the DRT issues a certificate to the Recovery Officer for recovery of the amount of debt specified in the certificate.
  8. The Recovery officer can recover dues by attaching, selling and appointing a receiver for the management of the defendants’ property.
  9. The DRTs can also obtain a police warrant to arrest the defendant

2. SARFAESI Route

An application can also be made to the DRT under the Securitisation and Reconstruction for Enforcement of Security Interest Act (SARFAESI), 2002.

  1. Under section 13 (2) of the SARFAESI Act, after a loan has been classified as a non-performing asset (NPA) by the secured creditor, a notice to this effect is sent to the relevant borrower.
  2. This notice must clearly mention the outstanding amount to be repaid in full within a period of 60 days by the borrower, failing which the secured creditor is entitled to exercise the rights in accordance with section 13 (4) of the Act, which provides for relief in the form of Attachment of property for the purpose of any future sale, taking over of business, appointing manager for business etc. 
  3. The opportunity was given to the defaulter to be heard by the bank- While the initial versions of the Act gave borrowers no rights to appeal against this notice, a later version introduced Sub-section 3A into SARFAESI Act to allow borrower appeals against 13(2) notices. This appeal can be made to the secured creditor alone and not to any Court.
  4. The bank is expected to respond to the appeal of the borrower within fifteen days.
  5. If the borrower is unable to discharge his liabilities, Section 13(4) of the Act authorizes the secured creditor to take recourse to measures of recovery by taking possessionof the secured asset including the right to transfer by way of lease, assignment or sale, take over management of the business or appoint any person to manage the secured asset.
  6. The transition into DRTs occurs when collateral is insufficient to fulfil obligations to creditors. In such instances where dues of the secured creditors are not fully satisfied with the sale proceeds of the secured assets, the creditors may file an application to the DRT for recovery of the remaining portion of the dues. The borrower can also appeal to the DRT against the creditor’s findings.
  7. For applications made to DRT under the SARFAESI Act, DRTs are asked to dispose cases within 60 days, with an outer limit of 4 months. If the period exceeds 4 months section 17(6) of the SARFAESI Act entitles either party to the application to make an application to the DRAT to direct the DRT for disposal of the pending application.

Appeal to DRAT

An appeal against the order of the DRT can be made to the DRAT within whose jurisdiction the DRT falls. There are currently 5 DRATs in Mumbai, Delhi, Kolkata, Chennai, and Allahabad.

The appeal has to be made within a period of 45 days from the order of the DRT, which may be extended by the DRAT.

Additionally, the DRAT can be approached for interim relief on interim applications (IA) or miscellaneous applications (MA) which are sub-sections of the original applications.

Appeals to DRAT can be expensive. The aggrieved party that owes the debt must deposit 75% of the amount determined by the order of the DRT. This amount can be 9 reduced or waived by the DRAT. For appeals to DRAT that originate in the SARFAESI Act actions, the deposit is 50% of the amount which is claimed by the secured creditor or the amount as determined in the order of DRT or the, whichever is less. However, an important point is that unlike applications under RDDBFI, the deposits cannot be fully waived but only be reduced to 25% of the amount.

Comprehensive Powers of DRTs and DRATs

The powers of the tribunal are quite substantial. Section 19 (12) of the RDDBFI Act empowers the DRT to make an interim order against the defendant to debar him from disposing or transferring any property and assets belonging to him without prior permission of the Tribunal.

It also has the power to detain the defendant for a maximum of three months for disobedience of an order or breach of any terms of an order issued under sections 19(12), 19(13) and 19(18) of the SARFAESI Act.

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