RECOVERY OF DEBTS DUE TO BANKS AND FINANCIAL INSTITUTIONS:

LEGAL FRAMEWORK IN INDIA

1. Introduction:

In India commercial banking has been the hub of the financial system and has played an
important role in economic development. Apart from performing the key-functions of providing
liquidity and payment services to the real sector and managing financial intermediation process,
the banking industry has been able to provide major credits to all sections of economy. Banking
has been termed ‘growth facilitators’ with introduction of concept of ‘global village’. The face of
commercial bank has changed a lot and that too radically. Efficiency in management of liability
has been call of the day. With induction of private Banks, sellers market has changed to buyers
market. It was recognized at an early stage of reform that the weak banking system would not be
able to withstand the pressures of liberalization in their current state. The legislation bringing
about qualitative improvement in the Banks and supporting financial infrastructure in order to
change the environment of recovery where needed. It is noticeable that prior to the enactment of
RDDB Act , the normal remedy for recovery of debts due to Banks and Financial Institutions
was to institute a suit in Civil Court which was tried and decided in accordance with the
procedure laid down in Civil Procedure Code 1908. The decree passed by the Civil Courts was
also executed in accordance with the procedure contained in Order XXI thereof. The procedure
of suit was a long and a cumbersome process. Often it took years and decades to recover the
amount. The position was that a civil suit took five years to fifteen years for adjudication of
liability or for getting a judgment. After such a long period spent in adjudication of liability there
was considerable difficulty at the time of execution for recovery of loan amount or for sale of
goods/property.1

Institutions face considerable difficulties in recovery of dues and enforcement of

securities charged to them due to delays in legal processes. A significant portion of their FUNDS
are thus blocked in unproductive assets, the values of which deteriorate over time. Banks and

1
G.S.Dubey, An Introduction to the Recovery of Debts Due to Banks and Financial Institutions Act, 1993,
<http://www.manupatra.co.in/newsline/articles/Upload/6FDEB5C4-14EF-48ED-B223-19A4003D8410> Accessed on
04-11-2017 at 9:08 pm

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financial institutions also spend substantial amounts on legal charges, which add to their
overheads. In the Indian legal system, the evolution of the legal framework did not keep pace
with changing commercial practices and financial sector reforms. The previous procedure for
recovery of debts due to banks and financial institutions resulted in a significant portion of the
FUNDS being blocked. Therefore, an urgent need was felt to work out a suitable mechanism
through which sums due to the banks and financial institutions could be realized without undue
delay.2

2. Recovery of Debts Due To Banks and Financial Institution Act, 1993

In India, banks and financial institutions had been required to institute a suit in civil court to
proceed with recovery. The suit was tried and decided in accordance with the procedure laid
down in Civil Procedure Code (CPC), 1908. The CPC resolution process was long and
cumbersome. In 1981, a committee under the Chairmanship of Mr. T. Tiwari was formed to
suggest reforms. The committee observed that the Indian civil court system was burdened with
diverse types of cases. Thus, recovery of dues due to banks and financial institutions was often
not given priority. The committee suggested other modes to recover such dues. One measure was
to set up quasi-judicial bodies to deal exclusively with the recovery process of the financial
sector. These bodies could follow a faster “summary proceedings” process for disposing of cases.
However, actual action on the formation of such bodies was not initiated until about a decade
later around the Indian financial market and economic liberalization.3

In 1991, the Committee on the Financial System headed by Shri M. Narasimham

(Narasimham Committee I) endorsed the views of the Tiwari Committee and recommended
setting up Special Tribunals. As backdrop for this recommendation, the committee noted the
workload on the court system due to defaults. As of 30th September 1990, more than 1.5 million
cases filed by the public sector banks and 304 cases filed by the financial institutions were
pending in various courts. The recovery of debts involved more than 5,622 crore owed to public
sector banks and ` 391 crores to other financial institutions. The Narasimham committee
recommendations led to the enactment of the Recovery of Debts Due to Banks and Financial

2
<http://ijra.in/uploads/42148.3481418866Sanket%20Gupta%20&%20Shantanu%20Singh%20KhangarotFullpaper>
last visited on 05-11-2017 at 4:45 pm
3
<http://www.cafral.org.in/sfControl/content/Speech/462016115856AM-Phadnis_Prabhala_Paper_Mar_2015>
last visited on 05-11-2017 at 8:47 pm

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Institutions Act (RDDBFI), 1993. The Act established two types of agencies, Debt Recovery
Tribunals (DRTs) and Debt Recovery Appellate Tribunals (DRATs) and conferred upon them
special powers for adjudication of debt recovery matters. Thus, the earliest establishment of
DRTs as institutional entities to resolve bankruptcy occurred in 1993. The first DRT was formed
in Calcutta (now Kolkata) on 27th April 1994.4

3. Authorities under RDDBFI Act

3.1. Debt Recovery Tribunal

Section 3, provides for the establishment of Debt Recovery Tribunal (DRT), by notification to be
issued by the Central Government, for exercising, jurisdiction, powers, and authority conferred
on such tribunal under the RDDBFI Act. First DRT was established in Kolkata in the year 1994.
Presently 33 DRTs are functioning at various places in India, and 6 more DRTs are also being
established. As per section 4, DRT consists of sole member only, known as Presiding Officer.
Section 5, provides that a person who has been or is qualified to become District Judge can be
appointed as Presiding Office of DRT. Section 6 provides that the terms of the Presiding Office
shall end after the expiry of the period of 5 years from the date he enters the office and he will be
eligible for reappointment provided he has not attained the age of 65 years.5

3.2. Debt Recovery Appellate Tribunal

Sections 8 -11 deals with the establishment, qualification, and term of the Chair Person of the
Debt Recovery Appellate Tribunal (DRAT). DRAT is established to exercise control and powers
conferred under the RDDBFI Act. DRAT consist of sole member to be known as Chair Person. A
person is eligible to become a Chair Person, if he has been an or qualified to become a High
Court Judge, or has been a member of the Indian Legal Services and held a Grade 1 post as such
member for the minimum period of three years or has held office of Presiding Officer of Tribunal
for period of at least three years. The Chair Person of DRAT can hold his office for the period of
five years and is also eligible for reappointment, provided, that he has not attained the age of

4
Ibid.
5
<https://blog.ipleaders.in/recovery-of-money-under-the-recovery-of-debts-due-to-banks-and-financial-institution-
act-1993/> Last visited on 06-11-2017

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seventy years. Presently there are 5 DRATs in India in Delhi, Chennai, Mumbai, Allahabad, and
Kolkata. DRAT has appellate and supervisory jurisdiction over DRTs.6

4. Jurisdiction of debt recovery tribunals

The term ‘jurisdiction’ means the authority to enforce laws or pronounce legal judgments.
Section 1(4) of RDDB Act, 1993 deals with pecuniary jurisdiction of the Tribunal providing that
the Tribunal shall be lacking jurisdiction to deal with the case of a Bank or a Financial Institution
if the crystallized liability is below one lac rupees. Thus following conditions will be necessary
for ousting a claim from jurisdiction of the Tribunal.

(a) When the amount of debt has been less than “Rs. 10 lakhs”; or such other amount has not
been less than one lakh rupees;

(b) for both the purposes the specification by the Central Government through notification is
necessary; as a condition precedent.

“Section 17 – Jurisdiction, powers and authority of Tribunals.–(1) A Tribunal shall exercise, on

and from the appointed day, the jurisdiction, powers and authority to entertain and decide
applications from the banks and financial institutions for recovery of debts due to such banks and
financial institutions.”

Section 18 bars the jurisdiction of all courts in relation to the matters specified in Section 17
(except of the Supreme Court and of a High Court under Articles 226 and 227 of the
Constitution).

The most relevant section is section 34 which is reproduced below: Act to have over-riding
effect.--(1) Save as provided under sub- section (2), the provisions of this Act shall have effect
notwithstanding anything inconsistent therewith contained in any other law for the time being in
force or in any instrument having effect by virtue of any law other than this Act.

Delhi High Court in Cofex Exports Ltd. vs. Canara Bank 7 opined that Debt Recovery Tribunal
is not a court but is a Tribunal having been created by a statute vested with a special jurisdiction
to try only applications by banks or financial institutions to recover any debt. Although having
6
Ibid.
7
AIR 1997 Delhi 355

4
regard to the provisions contained in clauses (a) to (b) of sub-section (2) of Section 22 of the Act
it had all the trappings of a court but it was held not to be a court as such. It was held by the
Supreme Court in the judgment of Ranjan Chemicals Ltd8 that a court has the power in an
appropriate case to transfer a suit for being tried by the DRT.9

5. Powers & Functions of Debt recovery Tribunals

These tribunals are the quasi judicial institution to set up to process the legal suit filed by banks
against defaulting borrowers. They follow the stream lined legal procedure that emphasizes
speedy adjudication of the cases and swift the execution of the verdict. The jurisdiction of the
Tribunal shall be all over the country and shall exercise all powers equal to that of a district
court. All undecided cases lying in the district courts shall be transferred to the Tribunal under
the provision of the Act. The tribunal have the same powers including to issue summons,
summon presence of petitioner, defendant, witness, administer oath, take deposition, examine
proofs, evidence and necessary documents or statements, require submission of documents,
require furnishing of security and impose punishment as the court of law has under the prevailing
law. If the Tribunal holds that its contempt has been committed, it may punish the accused with a
fine or imprisonment or with both.10

6. Procedure of Tribunals

The entire process of the tribunal starts with an application in the prescribed format to be made
by the concerned bank/financial institution. An Application has to be filed within the local
jurisdiction of relevant DRT, as per section 19(1) of the Act, Application can be filed within the
local limit of DRT in whose jurisdiction where:

1. the branch or any other office of the bank or financial institution is maintaining an
account in which debt claimed is outstanding;

2. the defendant voluntarily resides or carries on his business or works for gain;

3. in case there are more than one defendant, at the place where any one of the defendants
voluntarily resides or carries on his business or works for gain;
8
State bank of India v. Ranjan chemicals ltd. And anr (2007) 1 SCC 97
9
<http://jlsr.thelawbrigade.com/wp-content/uploads/2016/06/Nidhi-Ritika> last visited on 02-11-2017 at 6:45 pm
10
< https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2808408> last visited on 07-11-2017 at 04:21 pm

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 4. Where the cause of action wholly or partly arose.

Further, where a bank or a financial institution, which has to recover its debt from any person,
has filed an original application and against the same person another bank or financial institution
also has claim to recover its debt, then, the later bank or financial institution may join the
applicant bank or financial institution at any stage of the proceedings, before the final order is
passed, by making an application to that DRT.11

6.1. Application contents

Along with the Application certified true copies of the documents on which the bank or financial
institution is relying in support of its claim needs to be filed. Further, Applicant inter-alia should
state the following:

1. Grounds of an application under different heads should be stated concisely;

2. Particulars of debt secured by a security interest in the property or assets belonging to the
debtor and estimated value thereof;

3. If the secured assets are not sufficient to cover the debt then the particulars of any other
property or assets owned by the debtor should be stated;

4. If the value of other assets is not sufficient to cover the debt, then a prayer must be made
requesting for direction to the debtor for disclosing his other property or assets details.12

6.2. Service of Summon

On receipt of application under sub-section (1) or sub-section (2), the Tribunal shall issue
summons with following directions to the defendant—

(i) to show cause within thirty days of the service of summons as to why relief prayed for should
not be granted;

(ii) direct the defendant to disclose particulars of properties or assets other than properties and
assets specified by the applicant under clauses (a) and (b) of sub-section (3A); and
11
<http://www.academia.edu/29338632/ANALYSIS_OF_RECOVERY_OF_DEBTS_DUE_TO_BANKS_AND_FINANCIAL>
last visited on 08-11-2017 at 2:12 pm
12
<http://www.drat.tn.nic.in/Docu/RDDBFI-Act> last visited at 07-11-2017 at 10:21 pm

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(iii) to restrain the defendant from dealing with or disposing of such assets and properties.13

6.3. Hearing of the case before Presiding Officer

Filing of reply/written statement – Defendant/Respondent within one month from the date of
service of Notice/Summon on him is required to file the reply. However, with the permission of
DRT respondent/defendant can seek time for filing reply/written statement. Even if in the
extended time period the defendant/respondent failed to file his reply then DRT may precede ex-
party.14

The claim of set off– Defendant at the first date of hearing can file a claim for set
off/counterclaim. He cannot file it afterwards without the permission of DRT. The claim of set
off shall have the same effect as a counter suit in any proceedings.15

Admission of liability by respondent/defendant – If the respondent/defendant admits his liability,

in that event Presiding Officer will pass an order directing respondent/defendant to pay the
admitted amount within the period of 30 days from the date of the order of the DRT. If
defendant/respondent fails to pay the admitted amount within that period, then Presiding Office
may issue a certificate of debt due in terms of section 19 of the Act.16

Interim Order by DRT - In cases where the applicant apprehends that the borrower may take
steps which may frustrate attempt of execution may make an application to DRT along with
details of property to be attached and value thereof, and on such application may pass an interim
order directing respondent/defendant, directing him to deposit before it amount equivalent to
property value or amount which may be sufficient to recover the debt or as and when required by
DRT to place before it disposal the property.17

Wherever DRT finds it fit, it may also pass following orders under the Section 19(18):-

1. appoint a receiver of the property, before or after the grant of Recovery Certificate (RC);

13
Section 19(4), The Recovery Of Debts Due To Banks And Financial Institution Act, 1993
14
Section 19(5)(i), The Recovery Of Debts Due To Banks And Financial Institution Act, 1993
15
Section 19(6), The Recovery Of Debts Due To Banks And Financial Institution Act, 1993
16
Section 19(5B), The Recovery Of Debts Due To Banks And Financial Institution Act, 1993
17
Section 19(12), The Recovery Of Debts Due To Banks And Financial Institution Act, 1993

7
 2. remove any persons from possession or custody of any property;

3. commit the same to custody, management of the receiver;

4. confer power on the receiver to file/defend the suit on behalf of property, or to act in any
manner for the improvement of the property;

5. appoint a commissioner for collecting details of defendant/respondent’s property or sale

thereof.18

6.4. Judgment and Recovery Certificate by DRT

DRT after giving both the parties opportunity of hearing and hearing their submissions will
within 30 days of the conclusion of such hearing pass its interim or final order. Within 15 days of
the passing of the order, DRT will issue RC and forward the same to Recovery Officer. RC will
contain the details of the amount to be paid by recovered by the borrower debtor. RC shall have
the same effect as the decree of the civil court.

6.5. Appeal

An appeal by any aggrieved party against the order of DRT can be filed within the period of 30
days from the date of receipt of the order. No appeal can be filed against any order which has
been filed with the consent of the parties. DRAT shall endeavor to dispose-off appeal finally
within the period of six months.19

6.6. Recovery of debt by Recovery Officer

After receipt of RC from DRT, Recovery Office will initiate recovery by one or more of
following modes:

1. Attachment and sale of movable or immovable property of defendants/debtors;

2. Taking possession of property over which security interest was created or any other
property of defendant/debtor and appointing receiver for the management of the same;
18
Section 19(18), The Recovery Of Debts Due To Banks And Financial Institution Act, 1993
19
Section 20, The Recovery Of Debts Due To Banks And Financial Institution Act, 1993

8
 3. Arrest of defendant/debtor and his detention in prison;

4. Appointment of receiver for management of movable or immovable property of

defendant/debtor;

5. Any other mode as may be prescribed by the central government.20

7. Recovery of Debt determined by Tribunal

Modes of recovery of debts (section 25):-

The Recovery Officer shall, on receipt of the copy of the certificate under sub-section (7) of
section 19, proceed to recover the amount of debt specified in the certificate by one or more of
the following modes, namely:--

(a) Attachment and sale of the movable or immovable property of the defendant;

(b) Arrest of the defendant and his detention in prison;

(c) Appointing a receiver for the management of the movable or immovable properties of the
defendant.

Validity of certificate and amendment thereof (Section 26):-

(1) It shall not be open to the defendant to dispute before the Recovery Officer the correctness of
the amount specified in the certificate, and no objection to the certificate on any other ground
shall also be entertained by the Recovery Officer.

(2) Notwithstanding the issue of a certificate to a Recovery Officer, the Presiding Officer shall
have power to withdraw the certificate or correct any clerical or arithmetical mistake in the
certificate by sending intimation to the Recovery Officer.

(3) The Presiding Officer shall intimate to the Recovery Officer any order withdrawing or
canceling a certificate or any correction made by him under sub- section (2)21

8. Conclusion
20
< https://blog.ipleaders.in/recovery-of-money-under-the-recovery-of-debts-due-to-banks-and-financial-
institution-act-1993/> last visited on 11-11-2017 at 4:23 pm
21
<http://www.drat.tn.nic.in/Docu/RDDBFI-Act.pdf> last visited 08-11-2017 at 09:32 pm

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With the objective, therefore, of providing banks and financial institutions with a speedier and
more efficient mode of recovery of debts, the legislature has provided for the establishment of
special courts for the purpose, designating them as Debt Recovery Tribunals. Lack of judicial
training for recovery officers as they are officers appointed for assisting the presiding officers,
inconsistent procedures followed by different DRTs, significant delay in proceedings as the
recommended time is six months, whereas proceedings actually last for two years or more, are
some of the reasons for ill working of DRTs. The functioning of DRTs needs to improve to
ensure banks are able to recover their existing loans and offer fresh advances at cheaper rates. In
the current scheme, there is no mechanism in place to ensure that the tribunal disposes the case in
a timely manner. There is a strong need to bring in more accountability for the DRT.

The functioning of DRTs is also keeping the Reserve Bank of India (RBI) worried. If
bankers cannot get their money back, they are not going to give loans at cheap price. So, making
sure debt recovery tribunals work better, making sure that we don’t have excess number of stays,
excess number of appeals – this is also needed to be focused. Finally, the law should be
strengthened to ensure mandatory time-bound disposal of cases. Also, performance indicators of
the adjudicating officer could be used to improve the efficiency of the system. And, stay petitions
should be analysed before being accepted as there have been instances where advocates exploit
the loopholes of the Act and plead for stays, leading to piling up of cases.

10