This article is written by Jisnu Dutta, pursuing M.A. in business law from NUJS, Kolkata.

Banking sector plays very important role in country’s economic growth which in turn creates job opportunities to fulfil macroeconomic objective. Trust is the most significant aspect of banking industry. All countries in the world has time to time taken credible steps to create an environment of trust between investor and borrower through the banking intermediary. The trust gets lost significantly if some borrower takes line of credit from banking institution and fails to repay the loan as per obligation agreed during the signing of loan agreements. These loans, depending on the days by which it fell outstanding is considered as non-performing assets. This creates pressure on banking system especially in relation to liquidity which drives interest rates to go up. Therefore it is very mush desirable for the banking industry or financial institution to recover the debt from a larger economic perspective.

Debt recovery is the process of debt reduction by the banks and financial institutions. The issue of debt recovery is most critical with respect of loan given to industries primarily due to two reasons. Firstly the loan amount is usually very large and as the companies have many creditors and stakeholders, in case of bankruptcy or liquidation it may happen that only a part of the loan is finally repaid.

In other countries like USA, private parties known as ‘debt collectors’ do the activity of debt recovery. “Debt collector” are the third party who acts as per the fair debt collection practices act of the country. In Australia, the debt recovery is done through courts of law. All State and Territory courts in Australia have a separate claims division. In UK, debt are recovered through the Late Payment of Commercial Debts Regulations 2002 which also allows the claim of debt recovery costs and interest on late payments. In UK, the Private agency also does the baseness of debt recovery much like the practice followed in USA.

In India, Government has made various enabling legislations for debt recovery.initially, the remedy available for debt recovery was a civil suite which was decided as per civil procedure code 1909.The decree passed by the civil court was also executed according to procedure contained in order XXI.The actual procedure usually took a long time, often it took five to fifteen years for adjudication of liability and having the enforcing decree. At the stage of execution, it was often found that the borrower had died and many more claimant came forward for claim on the property of the borrower. As the situation was very unfavorable to creditors, banks started compromising by allowing debtors to settle the pending claim in one go with heavy discount. Smelling an opportunity, many reputed companies also escaped their full payment obligation by one time compromised settlement of debt. This induced vulnerability to the banking and financial system.

The Committee on the Financial System constituted for examining banking sector reforms ,headed by Shri M Narasimhan,  has considered the setting up of Special Tribunals with special powers for adjudication on debt recovery is critical to the successful implementation of the financial sector reforms. An urgent need was also felt for a suitable mechanism through which the debts  due to the banks and financial institutions could be realized.

Sensing the ground realities govt of India constituted one high-level committee for reviewing the legal and other difficulties faced by banks and financial institution.In 1981, the committee under the Chairmanship of Shri T Tiwari examined the same and suggested remedial measures required to overhaul the financial sector which also include recommendation to changes in law.

Tiwari Committee also suggested to set up special tribunals for speedy recovery of debts of the banks and financial institutions by following a simple summary procedure. Consequently, the Recovery of Debts Due to Banks and Financial Institutions Act was passed in 1993.

As per the above act, the Government of India has constituted thirty-three Debts Recovery Tribunals and five Debts Recovery Appellate Tribunals across the country. Later another four acts amending few provisions of DRT act was enacted which are given below:

• The Recovery of Debts Due to Banks and Financial Institutions (Amendment) Act, 1995.
• The Recovery of Debts Due to Banks and Financial Institutions (Amendment) Act, 2000.
• The Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2004.
• The Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2012.

The main features of DRT act are as follows:

• The Act extends to whole of India except State of Jammu & Kashmir.
• The provisions of the Act applies in cases where amount due from debtor is not less than Rs. 10,00,000.
• For debt less than 10,00,000, suite in civil courts may be initiated.
• Only Banks and Financial Institutions (which later includes Public Financial Institutions  & Securitization company / Reconstruction company ) can file original application for recovery of Debts. No other type of application is entertained by DRTs.
• Court fee , will be decided based on amount claimed in original application and shall be limited to Rs. 1.50 lakhs.
• Summary procedure is followed by the debt recovery tribunals.  Evidence is accepted on affidavit and cross examination is generally not permitted except in few deserving cases.
• The defendants have the rights to file counter claim or submit a claim of set off against the claimed amount by pontiff.
• The final order is passed by the debt recovery tribunal directing the borrowers to pay the required amount. If  borrower fails to pay the ordered amount, recovery certificate shall  be issued against the borrower which will then be executed by Recovery Officer of DRT.
• In case a certificate of recovery is issued against a company which is registered under the Companies Act, 1956 ,the Tribunal may order the sale proceeds of such company to be distributed among its secured creditors in accordance with the provisions contained in the section 529A of the Companies Act, 1956 and to pay the surplus, if any, to the company.
• By section 22 of DRT act the tribunal and appellate tribunal is not bound by the civil procedure code, rather they have to follow the principle of natural justice.
• Any person aggrieved by an order passed by DRT may prefer an appeal before Debt Recovery appellate tribunal.  
• However, the DRAT shall not admit the appeal unless the Appellant deposits with the Appellate debt recovery tribunal, 75% of the amount or such other lesser amount as directed by DRAT.

Even after enacting DRT act 1993, there was no legal provision available for finance industry for facilitating securitization of financial assets. It was also not possible for the banks and financial institutions in India to take possession of securities and further sell them to others .However their counterparts in the arena from other countries were allowed to do that. In short, the banking and financial sector did not have a level playing field if compared to other participants in the world financial markets. This had resulted in slow pace of recovery of defaulting loans and high levels of nonperforming assets of banks and financial institutions.

The Securitization and Reconstruction of Financial Assets Act was promulgated on 2002 to allow and regulate securitization and reconstruction of financial assets and enforcement of security interest. The provisions of the act would enable banks or financial institutions to realize assets and improve recovery by exercising powers given in the act to take possession of securities, sell them and thereby reduce the nonperforming assets.

Under this act the following were envisaged:

• Registration of securitization or reconstruction companies with the Reserve Bank of India. Reserve Bank of India shall also be responsible for regulating their activity.
• Provide for securitization of financial assets of banks or financial institutions with securitization or Reconstruction Company with or without the presence of underlying asset (i.e. real assets).
• Provide for easy transferability of financial assets to the Securitization Company or Reconstruction Company by issue of debentures or bonds by those companies to acquire financial assets of banks or financial institution.
• Enabling securitization companies’ / reconstruction companies to raise funds by way of issuing required amount of security to qualified institutional buyers;
• Enabling reconstruction of financial assets acquired by securitization companies’ / reconstruction companies through exercising powers of enforcement or change of management which are already conferred on the banks and financial institutions;
• In case of default,if it is found that the borrower’s account falls in the category of nonperforming asset in accordance with the directions/regulations issued by the Reserve Bank of India from time to time ,then Banks and FIs shall be empowered to take possession of securities for which financial assistance was given and to sell or lease the same or take over management for recovery of debt.
• Provision for an appeal by the debtor against whom action was taken by any bank or financial institution to the concerned Debts Recovery Tribunal and further liberty to prefer a second appeal to the Appellate Debts Recovery Tribunal against the order of debt recovery tribunal.
• Provision for setting up a Central Registry by the Central Government which will administer the registration of transactions relating to securitization and asset reconstruction.
• Provision for application of the legislation, initially to banks and financial institutions while empowering Central Government to extend the application of the Act to non-banking financial companies and other related entities.
• Provided restriction of using the act against agricultural lands, loans below one lakh and in cases where eighty per cent of the due loans are repaid by the borrower.
• Provision for taking over the management by bank/FI(secured creditor) for limited period of time.
• Provision for the requirement for consent of borrower for sale of movable property.

The process of due recovery

In terms of DRT act bank and financial institutes may follow the process outlined below to recover dues:

• An application for recovery of debt shall be submitted to the debt recovery tribunal by Bank or Financial Institution for recovery of debts. (Sec 19).
• The Tribunal shall conduct expeditious trial while at the same time the tribunal shall not be bound by the Code of Civil Procedure, 1908 and shall be guided by the principles of natural justice. (Sec. 19 & 22)
• The Tribunal shall dispose of the application expeditiously and effort shall be made to finally dispose of the application within six months from  the receipt of the application. (Sec. 19(8)).
• The Presiding Officer of the Tribunal shall issue a certificate for recovery of the amount of debt and any other relevant dues to the Recovery Officer. (Sec. 19(7))
• A borrower shall be able for an appeal against the order of the Tribunal within forty days from the receipt of the order of DRT subject to the borrower depositing seventy five per cent of the debt as determined by the Tribunal,. (Sec. 20 & 21)
• Recovery Officer  shall use the following Modes for  recovery of debts , namely:-

(1) Attachment and subsequent sale of the movable /immovable property of the debtor;

(2) Arrest the debtor for detention in prison;

(3) Appoint a receiver for managing the movable or immovable properties of the debtor.” (Section 25)

However after promulgation of Securitization act , banks and FIs were given additional power. Accordingly, the procedure, now followed by Bank and FIs deviates from the earlier procedure followed by them in terms of securitization act read harmoniously with DRT act. The present procedure followed by Banks and FIs is given below:

As a starting point, bank’s/FI’s representatives generally visit to the borrowers’ place While telephonic reminders were also made by the bank. When reminders / personal visits fail to yield fruitful result Bank/FI authorize an official   to take required steps under the Acts through Power of Attorney/ authorization Letter.This is the starting point of legal procedures.

Banks or FIs ordinarily shall not initiate any legal proceeding without giving due notice in writing. Such notice is sent when default in payment is made by a borrower . Notice may be sent through Registered Post /Speed Post /Courier /Fax or E-mail .The notice usually give 10 clear days time to clear or regularize the loan.

The authorized  representative Sends Demand Notice for enforcement of Security Interest. This notice shall contain details of the amount due , security interest, Power and authority to repossess the security with the relevant reference of contract/ loan agreement.

The notice shall be acknowledged by the Borrower . In the event of the failure in the part of the  borrower to acknowledge the notice and to respond by way of payment of dues within the time period, it will be considered that the customer/ borrower/ noticee is deliberately avoiding acknowledgement. Accordingly, the Bank will be free to initiate recovery measures for repossession of security under the loan agreement /contract as required.

If the Borrower avoids demand notice, notice shall be served by affixing the notice in some noticeable place of his residence or business and by publishing the notice in two leading newspapers, among which one shall be in a vernacular language having wide  circulation.In case of  more than one Borrower , individual notice shall be served to each of them.

If any reply/representation is received, then the Bank  has to properly adjudicate upon and decide.The next step is to take symbolic possession of Secured Assets  and Filing an application to the Chief Metropolitan Magistrate or District Magistrate for taking over actual  possession of the asset.

The objective of repossession of security shall be recovery of dues and not to merely deprive the borrower of the property .Compliance to the directions/orders of  Chief Metropolitan Magistrate /District Magistrate shall be made.

The recovery process includes repossession of the property, valuation of the property and realizing/unlocking the property value through appropriate means. All these activities need to be carried out in a fair and transparent manner.

Due process as per law which may include  Liaisoning with the Court Receiver, Police authorities, etc shall be required to be followed while taking repossession of the property. The bank will take  requisite measures to ensure safety and security of the property after taking custody at the expense in the head of borrower. Accordingly, Insurance cover for the property to be arranged  and Security Guards shall be deputed at the Property Site.

Fees of Police authorities, if any, in case of police force made available for repossession of property by police station to be paid.

It is desirable to take photograph of the property and then serve a notice in terms of Appendix IV to the Borrower, which also shall be affixed on the Asset. The Bank or FI’s Name shall be displayed on the Property.

The aforesaid notice is also required to be published in two leading newspapers including one in vernacular language within seven days.  

The next step is to arrange for sale of the property after valuation by an approved valuer. The valuation done by the the valuer shall be communicated to the debtor before proceeding for sale of property.At the same time,  A 30 days notice shall be served to the Borrower .

If sale is planned by way of soliciting tenders from public and public auction, a public notice providing  the detail sail terms is required to be published in two widely circulated news papers among which one will be in vernacular language. The borrower/ mortgager shall also be served notice setting out the detail time, date and venue of the auction.

The Sale of property to be made to the highest bidder. No sale shall be confirmed at price less than reserve price. However , the sale at price  less than Reserve price can be made with the consent of Borrower.

The purchaser is required to submit 25% of the sale price forthwith and balance to be deposited within 15 days. If balance is not paid, the deposit would be forfeited and the property shall be eligible to be resold. Sale  of  Property will be effective from execution of Sale Deed.

If the terms of payment  as set out have been complied with, the Bank or FI shall issue a certificate of sale to the purchaser The certificate of sale will specify that the property is free from encumbrances.

It is advisable for banks /FIs to obtain acknowledgement from buyer that he has taken over the physical possession of property .

Bank/FI  will return the Excess amount, if any, after recovering the outstanding dues and related expenditure made by bank from the money obtained by sale of property.

If the dues of the Bank/FI are not fully recovered with the sale proceeds, Bank/FI shall file an application to Debt Recovery Tribunal  or Court having jurisdiction, for recovering the balance amount.

Any person, aggrieved by any of the measures taken by the secured creditor shall make an application under section 17 of the securities Act to the Debts Recovery Tribunal, within forty-five days from the date on which such measures had been taken.

Procedure as was prescribed under the DRT Act is to be adopted by the recovery tribunal for disposal of these applications  as per section 17 of the Act. Further, any person, aggrieved by an order passed by DRT may file an appeal before DRAT.

The DRAT will not admit the appeal unless the Aggrieved party deposits with the Appellate tribunal, 50% of the amount or lesser amount as directed by DRAT.

Time taken in DRT/DRAT

As per the DRT act, any application made by the Banks and Financial Institutions is to be dealt by the Tribunal expeditiously. The stipulated time period for Tribunal to dispose off the application is 180 days from the date of receipt of application.

The appeal filed before the Appellate Tribunal shall be disposed off expeditiously .All efforts are required to be made by Tribunal to finally adjudicate on the matter finally within a period of six months from the date of receipt of appeal.

Practically the proceedings before DRT/DRAT may take one to three years or longer depending upon the facts and circumstances of the case.

The Supreme Court, few months back, in the course of hearing the matter of mounting non-performing assets (NPAs), asked why these defaults happened and what should be done to strengthen the debt recovery mechanism.

The answers to these questions are very likely to lie in the court’s own pronouncements.

In Satyawati Tondon case, while taking note of the judgment in Thansingh Nathmal Vs. The Superintendent of Taxes Dhubri and Others, the Supreme Court had observed: “It is a matter of serious concern that despite repeated pronouncement of this Court, the High Courts continue to ignore the availability of statutory remedies under the DRT Act and the SARFAESI Act and exercise jurisdiction under Article 226 for passing orders which have serious adverse impact on the right of banks and other financial institutions to recover their dues. We hope and trust that in future the High Courts will exercise their discretion in such matters with greater caution, care and circumspection.”

This issue was also raised by former RBI governor Raghuram Rajan in 2014, when he remarked that “the sanctity of the debt contract has been continuously eroded in India in recent years, not by small borrower but by the large borrower”.

In the same year a World Bank report on judicial procedure in insolvency cases stated that the average time taken to resolve an insolvency case in India is nearly four years, which is significantly higher than 10 months  in Singapore and one year in London.

The future ahead

The Bankruptcy Law Reforms Committee, chaired by T.K. Viswanathan former union law secretary drafted the Insolvency and Bankruptcy Code, which in its report referred to the challenges through judicial process as an intervention to the recovery process. It had, among other thing noted that loan recovery rates in India were one of  the lowest in the world, with lenders hardly managing to recover 20% of the value of debt in the event of a default.

In this respect, the Insolvency and Bankruptcy Code, 2016 (IBC) was passed in the Parliament on 11 May 2016.The code received Presidential assent on 28 May 2016 and was notified in the  gazette on the same day.

Here also, dispute resolution matters related to individuals will be dealt by ‘The Debt Recovery Tribunals (DRT)’ and for the companies the same will be dealt by ‘The National Company Law Tribunal’.

IBC proposes a paradigm shift from  existing ‘Debtor in possession’ to a ‘Creditor in control’ regime.The code Introduces the concept of qualified insolvency professional (IP) as intermediaries to oversee the process.The code further envisages establishment of Insolvency and Bankruptcy board as an independent body for the administration and governance of Insolvency & bankruptcy Law.

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Website references:

www.google.com

drt.gov.in

bankdrt.net

www.sngpartners.in

www.iibf.org.in

www.cuts-ccier.org

www.obcindia.co.in

www.ibbi.gov.in

www.ey.com

www.thehindu.com

www. thewire.in

assets.kpmg.com