AN EASY OR COMPLEX CONCEPT OF DEBT RECOVERY

AN EASY OR COMPLEX CONCEPT OF DEBT RECOVERY **AJAY SOLANKY & AKSHAY PANDEY India is a large country and being a large country, there are variety of economical challenges faced by the people of India and Banks of India. Debt recovery has been the biggest challenge for banks or financial institutions for time immemorial. This article is for understanding the legal aspects of procedure which is adopted by the banks or financial institutions for recovering of loans. The term generally used for the non recovered loans is non performing assets and as the term suggests, a loan given to a person and he has not worked that loan and as a result he is not able to repay it. As per RBI A non-performing asset (NPA) was defined as a credit facility in respect of which the interest and/ or instalment of principal has remained past due for a specified period of time. According to The Economic Times, A non performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days. The conditions of NPAs reflect the performance of the banks. A large number of NPAs means less profitability and decrease in net worth of the banks, and could even pose a threat to the existence of the banks. It, not only effects the banks but the whole economy of the country is threatened so it becomes important to end the NPAs in order to see the economy of the country flourish. The history of the Debt recovery through banks and financial institutions shows that there was a very difficult procedure which was to be adopted for the recovery of loans. Before the commencement of the era of Debt Recovery Tribunal, the recovery was done by filing a civil suit which was dealt as per Civil Procedure Code,1908 and as the procedure of civil courts is very much long and burdensome, it took a lot of time to arrive at a decision in such a suit and recovery process becomes a walk of a snail. As the process being so difficult, so there was an urgent need for a better recovery system so that a lot of money could be then inserted into the economy. Thus to satisfy the urge of the banking system, a Committee under the Chairmanship of Shri T. Tiwari had been appointed which examined the legal and other difficulties faced by banks and financial institutions and suggested the remedial measures including change in law. The Tiwari Committee,1981 also suggested setting up of a Special 26

Tribunals for Recovery of dues of the banks and financial institutions by following a summary procedure. 1 After the recommendation of The Tiwari committee, there was another Committee(9 member committee) formed by Government of India under the chairmanship of former RBI Governor Shri M. Narsimhan, the committee was appointed to review the working of the commercial banks and other financial institutions of the country and to suggest measures to remodel these institutions for raising their efficiency. The committee also suggested the setting up of Special Tribunals with special powers for adjudication of unproductive assets and speedy recovery of debts. Some of the various points which committee recommended :- The government should not nationalize any commercial banks in future and nationalized banks shall be treated at par with the private sector banks. The private parties should be allowed to establish banks and there should be no licence requirement for increasing the number of branches. The foreign banks should be given easy permission to open banks in India and Government should allow foreign banks to get into the partnership with Indian Banks. The priority sector for lending should be restructured including the small and marginal farmers, the tiny industrial sector, small business operators and other weaker sections. A board to be set up for bad debts and the fund recycled from the same should be inserted into productive assets. THE RECOVERY OF DEBTS DUE TO BANKS AND FINANCIAL INSTITUTIONS ACT, 1993 The Recovery Of Debts Due To Banks and Financial Institution Act, 1993 ( Hereinafter called The Act,1993) was enacted as a result of the recommendations of the committees formed to review the debt recovery system through banks and financial institutions. Debt 2 means any liability (inclusive of interest) which is claimed as due from any person by a bank or a financial institution or by a consortium of banks or financial institutions during the 1 2 Axis Bank Ltd. v. Rajshree Sugars and Chemicals Ltd. [2009]12 SCR 54 s. 2(g) The Act,1993 27

course of any business activity undertaken by the bank or the financial institution or the consortium under any law for the time being in force, in cash or otherwise, whether secured or unsecured, or assigned, or whether payable under a decree or order of any civil court or any arbitration award or otherwise or under a mortgage and subsisting on, and legally recoverable on, the date of the application. Debt under this act includes a liability owed due to banks or financial institutions which may be provided by banks or financial institution in form of loans or any other means which is legally recoverable by the banks or financial institution. This debt should be recovered by the banks in a manner as specified in this act. Now this debt as defined above is to be recovered with the procedure prescribed in The Act, 1993. There are 2 types of tribunals which are established under this act known as Debt Recovery Tribunal (DRT) and Debt Recovery Appellate Tribunal (DRAT). DRT is a one person body 3 which is established by the Central Government and it will have jurisdiction and power to entertain such matters 4. DRT has the jurisdiction to entertain matters relating to debt recovery due to banks and financial institutions and DRAT has the power to entertain appeals from the orders of these DRTs. In order for a bank to initiate the procedure for recovery, the banks or financial institutions shall file an application before DRT (where defendant resides or carry on business or where the cause of action arose) along with related documents, evidences and requisite fees. The DRT after entertaining the application would allow the defendant to produce evidences for his defence and pass the orders as it thinks fit, but the application shall be finally disposed off within 180 days of receipt of application 5 The Constitutional validity of this provision has been upheld in Union of India v. Delhi High Court Bar Association 6. An appeal before DRAT could be made by a person aggrieved form the decision of DRT within 45 days of such decision which could be waived by the DRAT but such appeal shall be decided within the period of six months of receipt of such appeal but it shall be accompanied with the 75% of the amount issued under the order of DRT and the same could be reduced by the Appellate Tribunal 7. There is a provision (S. 18) in The Act, 1993 which bars the jurisdiction of the civil courts 3 S. 4 The Act, 1993 4 S. 3 The Act, 1993 5 S. 19 The Act, 1993 6 (2002) 4 SCC275 7 S. 20 and 21 The Act, 1993 28

where the application is filed before the DRTs by the banks or financial institutions but the same was cleared by the Supreme Court 8 that the intention of Parliament was pretty clear with the enactment of The Act, 1993 that if it is expressly mentioned about the ouster of jurisdiction, in that scenario only the jurisdiction of civil court would be ousted. THE SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND ENFORCEMENT OF SECURITY INTEREST ACT, 2002 The long title of the securitisation and reconstruction of financial assets and enforcement of security interest act, 2002(hereinafter called SARFAESI Act, 2002) is An Act to regulate securitisation and reconstruction of financial assets and enforcement of security interest and for matters connected therewith or incidental thereto. An important concept of securitisations was explained through this act, "Securitisation" means acquisition of financial assets by any securitisation company or reconstruction company from any originator, whether by raising of funds by such securitisation company or reconstruction company from qualified institutional buyers by issue of security receipts representing undivided interest in such financial assets or otherwise 9, the definition provides for securitisation and this means providing of financial assets by the banks and financial institution to the securitization companies and in return the companies provides them security such as a debenture to give an example if a person wants a loan from the bank for a specific purpose the bank would provide him with the required amount of money in return of the documents of mortgage,now if the bank wants to sell the mortgage to investors the bank would pool the mortgages which it has in such a manner the investors would be assured that they are investing in mortgage backed security as investing in the mortgage of a single person would be very risky for the investors so by investing the money in a pool there would be security for the investors company this is the process of securitization. Through an understanding of the long title of The SARFAESI Act, 2002 we can infer that The SARFAESI Act, 2002 is basically made to solve the problems of banks and financial institutions by adding a point of securitisation companies which could act on behalf of the 8 Axis Bank Ltd. v. Rajshree Sugar and Chemicals Ltd. [2009] 12 SCR54 9 S. 2 (z) SARFAESI Act, 2002 29

banks or financial institution. The SARFAESI act is enacted to regulate securitisation and reconstruction of the financial assets and enforcement of security interest and for the matters connected with that. The SARFAESI act enables the banks and financial institutions to realise the long term assets, manage problems of liquidity, asset liability, mis match and to improve recovery of debts by exercising powers to take possession of secured assets of the borrower including the right to transfer by way of lease, assignment or sale. This act also empowers the asset reconstruction company to take over the management of business of the borrower. The constitutional validity of The SARFAESI Act, 2002 was challenged in the case of Mardia Chemicals Ltd. and ors. v. Union of India and ors. 10 and in this case the Supreme Court observed that, in cases where the secured creditor has taken action under s. 13(4) 11, it would be open to the borrower to file an application under s. 17 12 of the SARFAESI Act. In this case The Supreme Court also upheld the constitutional validity of the of The SARFAESI Act, 2002 except with the condition to deposit 75% of the amount as provided in s. 17(2) of The SARFAESI Act, 2002. The important structure which is added due to The SARFAESI Act, 2002 is relating to the securitisation company 13 which shall make application before the Reserve Bank of India and if the terms provided by the Reserve bank of India are satisfied, the company can be granted the status of securitisation company. The Securitisation company shall have the right to acquire the financial assets of any banks or financial institution by issue of bonds, debentures, or any other security in the nature of the debenture, for consideration agreed upon between such company and the bank or financial institution or by entering into an agreement with such bank or financial institution for the transfer of such financial assets to such company on such terms and conditions as may be agreed upon between them. After the acquisition of the secured assets, the securitisation company steps into the shoes of banks or financial institutions and gets the rights which are available with the banks or financial institutions in relation to the secured assets. The important or we could the acting provision under The SARFAESI Act, 2002 is section 13 which explains the enforcement of security interest, if the borrower defaults in repayment of 10 AIR 2004 SC 2371 11 If borrower fails to discharge his liability then the secured creditor can take possession of his assets. 12 right to appeal given to the person aggrieved 13 S. 3 The SARFAESI Act, 2002 30

debt or security interest, then the secured creditor 14 could classify the account of the borrower as non performing asset and provide him with the notice to deposit the liability within 60 days from the date of notice otherwise the secured creditor has the following options :- The secured creditor could take the possession of the assets of the borrower. The secured creditor has the right to take over the management of the business of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset. The secured creditor could appoint any person to manage the secured assets which are in possession of the secured creditor. The secured creditor could ask any person to provide the money arising out of the secured assets which the person owed to the borrower in order to satisfy the secured debt. The secured creditor has the right to acquire the secured assets but the aggrieved borrower also has the right to appeal against the acquisition done by the secured creditor under section 17 of the SARFAESI Act, 2002 and as per the provision, an aggrieved person who is not satisfied with the action done on behalf of the secured creditor may make an application along with the fee which may be prescribed to the Debts Recovery Tribunal having jurisdiction in the matter within forty-five days from the date on which such action had been taken. The Debt Recovery Tribunal may examine the evidences produced by the borrowers and the secured creditor and pass the orders as it thinks fit in accordance with The SARFAESI Act, 2002. According to section 22 (1)of the The Act, 1993, it is established that the tribunals would not be bound by the procedures laid down by the Code of Civil Procedure,1908 but shall be guided by the principles of natural justice. The application made by the borrower has to be dealt by the Debt Recovery tribunal as expeditiously as possible but it should be resolved within the period of sixty days from the receipt of the application. 14 S. 2 (zd) The SARFAESI Act, 2002 : "secured creditor" means any bank or financial institution or any consortium or group of banks or financial institutions and includes (i) debenture trustee appointed by any bank or financial institution; or (ii) securitisation company or reconstruction company, whether acting as such or managing a trust set up by such securitisation company or reconstruction company for the securitisation or reconstruction, as the case may be; or (iii) any other trustee holding securities on behalf of a bank or financial institution, in whose favour security interest is created for due repayment by any borrower of any financial assistance. 31

RECOMMENDATIONS FOR THE MANAGEMENT OF THE NPAs RBI should revise existing credit appraisals and monitoring system Credit appraisal and post loan monitoring are very important steps which need to be take care of. There must be a follow up procedure to be adopted by the bank this process should be followed by the bank at regular intervals. Frequent visits to be made after the sanctioning of loan and close monitoring of the accounts of the customer to be done by the banks. Frequent suggestions of the staff to be taken by the bank and their shall be discussions regarding the same. It could be helpful by developing entrepreneurial skills of the customer which would be helpful in creating good relations with the customer and also help in keeping an eye on his funds. By initiating actions like publishing the names of the defaulters in the newspapers, broadcasting media which would become helpful for other banks and institutions that they don t need to give any kind of loans to these defaulters. Many options for the banks have came up like debt recovery tribunals,lok adalats and the SARFAESI Act to help the banks for the management of the non performing assets. In the cases of reasons beyond the control of the borrower the banks should structure the loans in that particular way. CONCLUSION The research article has been a brief discussion on the procedure of treating a wound present in the economy known as Non Performing Assets. The discussion has led us to the conclusion that there has been a lot of reforms in the procedure starting from the time where banks or financial institutions going to the Civil Court under Code of Civil Procedure, 1908 to the time where the banks or financial institutions just need to file an application to recover the dues. The procedure adopted by the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal is an easy one compared to the procedure adopted by the Civil Court. The need was felt to establish an independent tribunal with the report of Tiwari committee and Narsimhan 32

Committee which resulted in the enactment of Recovery of Debts due to Banks and Financial Institutions Act, 1993. The problems were then further solved with the enactment of SARFAESI Act, 2002. The analysis of the provision of the DRT Act shows that primary object of the act was to facilitate creation of special machinery for speedy recovery of the dues of banks and financial institutions. DRT not only provides for establishment of tribunals and appellate tribunals with the jurisdiction, powers and authority to make summary adjudication of applications made by the banks or financial institutions and specifies the modes of recovery of the amount determined by the Tribunal or Appellate Tribunal but also bars the jurisdiction of all courts except The Supreme Court and The High Courts in relation to the matters specified in section 17 of The Act, 1993. The Recovery of Debts due to Banks and Financial Institutions has not only brought into existence special procedural mechanism for speedy recovery of the dues of banks and financial institutions, but also made provision for ensuring that defaulting borrowers are not able to invoke jurisdiction of Civil Courts for frustrating the proceedings initiated by the banks and other financial institutions. 15 The conclusion is very clear that though there is an easy procedure but complexities are never fully over, this means that there is enormous amount of efforts made in the field of loan recovery or the issue of non-performing assets so that money which became stagnant in form of non-performing asset can be again pooled in the economy. Thus the problem of nonperforming may or may not be solved but efforts show that they will soon be recovered. 15 United Bank of India v. Satyawati Tondon and ors. AIR 2010SC3413 33