Debt Recovery Laws - an understanding

        Most of us and the companies approach Banks and Financial Institutions for loans. The reason for the loan may differ from person to person and company to company. All Banks should function in accordance with the guidelines/norms issued by the Banker’s Bank ‘The Reserve Bank of India’. Subject to the lending norms of Reserve Bank of India, the banks and financial institutions sanction loans for different purposes. Though, the Banks and Financial Institutions can lend money even without security, normally, the Banks and Financial Institutions insist for security for the repayment of loan. The fixed assets, receivables etc. can be securities acceptable to the Banks and Financial Institutions for sanctioning the loans. The loan entitlements, the procedure for sanctioning the loan, the security issues etc., are exclusively governed by the guidelines/norms issued by the Reserve Bank of India. Again, loan, being an agreement or understanding between the Bank and the borrower, the general laws like Law of Contract, Transfer of Property Act, Specific Relief Act, Specific Performance etc., are applicable to all banking transactions depending upon the nature of transaction. The prime objective of Bank is to receive deposits and use those deposits efficiently so as to make money. The Banks will also render certain specific services on behalf of its customers. The Reserve Bank of India will issue guidelines and norms considering the policy of the Government too. Exercising control over flow of money from Banks and Financial Institutions, the Reserve Bank of India promotes the balanced growth. The Reserve Bank of India can contain inflation through certain measures and it is a financial measure to contain inflation as everybody knows.

        When a borrower fails to repay the money to the Bank, what the Bank can do for recovering the loan is to file a civil suit earlier. We all know the issue of delay in rendering justice in traditional civil courts and with the inevitable delay, the Banks could not recover its dues effectively and it resulted in liquidity problems. Bank pays interest to the deposit holders; however, the Banks could not make money by using the deposits as the recovery gets delayed frequently. This led the government to appoint various committees for financial sector reforms. The concentration was on effective recovery by the Banks and Financial Institutions apart from other things.

        Thus, a need has arisen to constitute special tribunals for recovery of debts by the Banks and Financial Institutions. The Government has enacted a law called “The Recovery of Debts Due to Banks and Financial Institutions Act, 1993” under which Debt Recovery Tribunals were constituted to recover dues by the specified Banks and Financial Institutions. The RDDBI Act, 1993 provides Banks and Financial Institutions to approach the Debt Recovery Tribunal by filing an application for recovering its due. Only when the amount of due qualifies under the Act, the Banks and Financial Institutions could approach the Debt Recovery Tribunals under RDDBI Act, 1993.  When the Bank approaches the Tribunal for recovery, then, the Tribunal will look into the claim made by the Bank in accordance with the procedure prescribed under RDDBI Act, 1993 and finally passes an award. The award can be executed by the Bank.

        Despite constituting special Tribunals like Debt Recovery Tribunals under RDDBI Act, 1993, the Banks could not recover its dues to the extent expected. This led to further reforms in the process and curtailing the delay in adjudication.

        In furtherance of financial reforms and extending the object of RDDBI Act, 1993, the Government has enacted “The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002”.  The SARFAESI Act, 2002 is to curtail the delay in the process of adjudication between the Banks and its borrowers.  The question of recovery by the Banks and Financial Institutions will arise when the borrowers commit default in repaying the debt. When there is default, then, the Banks will categorize the account as “Non-performing Asset” in accordance with the norms prescribed by the Reserve Bank of India.

        The main difference between RDDBI Act, 1993 and SARFAESI Act, 2002 is as follows:

1. The RDDBI Act, 1993 enables the Bank to approach the Tribunals when the debt exceeds the prescribed limit.
2. Under RDDBI Act, 1993, the Debt Recovery Tribunal will adjudicate the amount due and passes the final award.
3. The SAFAESI Act, 2002 provides a procedure wherein the Bank or Public Financial Institution itself will adjudicate the debt. Only after adjudication by the Bank, the borrower is given right to prefer an appeal to the Tribunal under SARFAESI Act, 2002.
4. The Banks or Financial Institutions can invoke the provisions of SAFAESI Act, 2002 only in respect of secured assets and not all.

Thus, under SARFAESI Act, 2002, the Banks are given powers under section 13 to carryout the adjudication exercise. The procedure is as follows:

1. The Bank or Financial Institution gives a notice under section 13 (2) to the defaulting borrower whose account was categorized as “NPA”.
2. The borrower who receives the notice under section 13 (2), can send his objections to the Bank’s claim within the time limit.
3. The Bank shall consider the objections and however, it need not pass any order after considering the objections. This enables the Bank to correct itself if it is wrong in the process of adjudication. When the Bank feels that the objections are not tenable, then, the Bank can take possession of the secured asset by issuing a notice under section 13 (4). When it comes to taking possession of the property, there are two things like taking symbolic possession and taking actual possession.
4. Steps under section 13 (4), gives the borrower a right to file an appeal to the Debt Recovery Tribunal under section 17 and further appeal to the Debt Recovery Appeal Tribunal under section 18.
5. Not only the borrower, any person who is aggrieved by the action taken by the Bank under section 13 of the Act, can approach the Tribunal in accordance with the procedure.
6. Initially, the SARFAESI Act, 2002 mandates to deposit certain amount before filing an appeal. The SARFAESI Act, 2002 and its validity was under challenge before the Supreme Court and the Hon’ble Supreme Court has upheld the validity of the Act, however, reduced the amount of deposit to be made before filing an Appeal under section 17.
7.  The Bank will sell the secured asset if it is not prevented by any order by the Debt Recovery Tribunal or any competent court.

While it all appears to be simple, there is lot of criticism on this SARFAESI Act, 2002. The criticism is that it is being misused by the Banks and Financial Institutions. In the course, we had to consider the following aspects:

       a)    Whether a borrower can approach the High Court challenging the action taken by the Bank or Financial Institutions under SARFAESI Act, 2002.

       b)     Whether it is right to say that the provisions are being misused.

       c)     Whether the Borrowers’ right to protect the wrong doing is secured and effective remedy is provided.

     Answering the first issue is very difficult. The High Court exercises extraordinary power under Article 226 of Constitution of India.  Again, the courts say that as the alternative remedy is available under the Act itself, the High Court will not have jurisdiction under Article 226 in respect of SARFAESI proceedings.  But, it all depends upon the facts and circumstances of the Act and there can’t be any straight answer as to whether the High Court can be approached questioning the action taken by the Banks or the Financial Institutions under SARFAESI Act, 2002.

     I have seen many cases and at times, it appears to me that the Act is being misused. But, it can’t be a justification to say that the Act oppresses the borrowers. It’s a special and balancing Act with very good objective and it is to be implemented well. In view of many transactions and issues, the Banks and Financial Institutions may commit some mistakes in the course and it gives rise to the Borrower to approach the Tribunal seeking stay of proceedings etc. What happens normally is that, the borrower gives a request to the Bank seeking to allow him to settle the account under “One Time Settlement Scheme”. Depending upon the norms prescribed by the RBI, the Banks may accept for “One Time Settlement Scheme” or may not.

     In many cases, the borrower ignores the Bank notice under section 13 (2) and then, approaches the Tribunal when the Bank takes steps to take possession of the Property and takes step to sell the same. It is not right. When the notice under section 13 (2) is received, then, the borrower has to make detailed objections if any, as otherwise, his appeal under section 17 of the Act may not sustain normally.  

     Thus, the borrowers are to be careful when the Bank exercises its powers under SARFAESI Act, 2002 and with the expert guidance and assistance; they can protect their rights effectively.

 Note:

 My intention is to give a brief as to how to Debt Recovery Laws are to be understood and complicated issues are not touched at all.