After liberalisation of the Indian economy in 1991, Banks and Financial Institutions (FIs) have been experiencing considerable difficulties in recovering loans and enforcement of securities charged with them. The procedure for recovery of debts due to the banks and FIs, which was then followed, was by the filing of civil suit in a court of law, which has resulted in a significant portion of the funds being blocked.
The Narasimham Committee on reforming the Financial System has considered the setting up of Tribunals with special powers for adjudication of such matters and speedy recovery as critical to the successful implementation of the financial sector reforms. An urgent need was, therefore, felt to work out a suitable mechanism through which the dues, to the banks and FIs, could be realised. Keeping in view the recommendations of various Committees, the Recovery of Debts due to Bank and Financial Institutions Act, 1993 (DRT Act) was passed by the Parliament, which resulted in the establishment of Debt Recovery Tribunals, exclusively for recovering debts of Banks and FIs.
Despite the establishment of Debt Recovery Tribunals (DRTs) across India, there was no speedy recovery of debts by the Banks and FI’s through these tribunals as adjudication process was time-consuming and this situation had crippled the viability and strength of Banks and FIs. There were several loopholes in the DRT Act and these loopholes were misused by the borrowers as well as the lawyers. The defaulting borrowers also took shelter of ‘Board for Industrial and Financial Reconstruction’ (BIFR) created under Section 4 of Sick Industrial Companies (Special Provisions) Act, 1985, where the Lender has no power to take over the possession of the secured property. This led the government to appoint another committee under Mr Andhyarujina to examine banking sector reforms and consider changes in the legal system . The Andhyarujina Committee recommended the enactment of a new legislation for the establishment of securitisation and reconstruction companies and to empower the banks and FIs to take possession of Non-Performing Assets (NPAs).
With an intention to speed up the process and convert the NPAs of Bank and FIs, the Parliament has enacted The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), which empowers the Banks and FI’s to recover their NPAs without the intervention of the Court.
Debts Recovery Tribunals have been established for expeditious adjudication and recovery of debts due to banks and FIs and functions under the DRT Act. The DRTs were empowered to adjudicate claims of banks and FIs involving rupees ten lakhs and above.
Where a bank or FI has to recover any debt from any person, it makes an application called Original Application (OA) to the Tribunal against such person. After adjudication, the DRT issues order and Recovery Certificate, certifying the amount payable by the borrower to the bank or FI. This Recovery Certificate is thereafter executed by Recovery Officers attached to the DRTs as per the procedure for recovery of tax under Second Schedule of Income Tax Act, 1961.
The SARFAESI Act provides three alternative methods for recovery of NPAs, namely: – 1. Securitisation; 2. Asset Reconstruction; and 3. Enforcement of Security without the intervention of Court/Tribunal.
The SARFAESI Act empowers Banks and FIs to issue demand notice to the defaulting borrower and guarantor, calling upon them to discharge their dues in full within 60 days from the date of the notice. Thereafter, Banks are empowered to take possession of the security provided for the loan and sell or assign the right to the security, manage the same or appoint any person to manage the same. Proceedings under the SARFAESI Act cannot be initiated, if the secured asset is an agricultural property.
Major difference between DRT Act and SARFAESI Act
|DRT Act||SARFAESI Act|
|1.||It provides for recovery of debts of Banks & FIs through quasi-judicial tribunals called Debt Recovery Tribunals||It empowers Banks and FIs to recover secured debts directly without intervention of judicial process|
|2.||Banks and FIs and recover any debt through DRTs||Only secured debts, ie., those debts which are secured by way of underlying security in the nature of mortgage, charge, hypothecation, assignment, etc|
|3.||Banks and FIs and recovers any debts of more than Rupees ten lakhs through DRTs||Banks and FIs can take action under the Act to recover secured debts of more than one lakh rupees|
|4.||Appeal against the order of DRT to be filed in Debt Recovery Appellate Tribunal||The action of Banks and FIs under the SARFAESI Act can be challenged before the DRT|
Despite enactment of various laws enabling banks and FIs to recover NPAs expeditiously, the NPAs are continuously mounting and the clamour for stricter debt recovery laws is ever increasing. The Insolvency & Bankruptcy Code, 2016 is another step, in opening one more route for expeditious recovery of dues of Banks and FIs. However, how far it will help in reducing the NPAs will be a moot question.