CHAPTER-I

Introduction
1.1 IDENTIFICATION OF PROBLEMS

A healthy banking system is essential for any economy striving to achieve

progress and remain constant in a competitive global business environment. If the
banking system in a country is effective efficient and disciplined, it brings about a
rapid growth in the different sectors of the economy. Banks completes the financial
cycle in a state as it provides a link between governance and governed. It increases the
interests of the finance as it recycles the resources multiple times. The government
provides balance to the public through banks. Public avails the benefits of various
government schemes through these finance repositories. Banks provide credit
facilities to farmers, such as finance not only for their high costing projects but also to
facilitating basic needs of farming sector such as purchasing high yields seeds,
cultivating instruments arranging irrigation amenities. Banks bring prosperity in rural
areas by raising agricultural productivity and income of farmers. Banks encourage
capital formation by accepting deposits and make them available to the required
entrepreneurs, and thereby encourage investment. Growth of bank credit (on Year on
Year basis) has been 14.6 percent as on January 2019, higher as compared to 10.2
percent in the corresponding fortnight end of the previous year. 1 Banks mobilise
money by the right implementation of it for public and government purposes. Banks
contribute to the balanced development of different regions of the country by
transferring surplus capital from developed regions to less developed regions. The
right application of monetary policy and credit control brings price stability in the
country market and promotes the economic growth of the country.Optimal use of
bank drafts, cheques, and bills of exchange, credit cards, letters of credit aggravates
both national and international trade. In the current scenario, e-banking facilities have
not only ease the doing of business trade and industries but accelerated its growth to
global competence. Due to wide coverage of banks through their overseas branches,
cross-border trade has become free from complexities of finance. Role of banks in 21
century has not been confined only to local banking but also in understanding its
global customers. Banks are not only storehouses of the country‘s wealth but also
provide financial resources necessary for economic development.
The best indicator for the health of the banking industry in a country is its level
of Non-performing Assets (hereinafter referred to as NPA). NPAs are the barometer
of the banking sector. NPA ratio in aggregate holds importance as macro financial

1
Government of India, Monthly Economic Report, (Department of Economic Affairs, Ministry of Finance,
January 2019)

Page | 1
indicator.2 It indicates the stability of the banking system. Reduced NPAs generally
gives the impression that banks have strengthened their credit appraisal processes over
the years and growth in NPAs involves the necessity of provisions, which bring down
the overall profitability of banks. NPA has a direct impact on the operation of banks
as it directly affects the productivity of the banks. Because the money gets blocked,
NPA robs the prodigality of the bank and causes to opportunity cost as that much of
profit could have been invested in some return earning projects. So NPA not only
affects current profit but also future stream of profit of the banks. Decreased profit
leads to a lack of enough cash at banks which ultimately affects the lending powers of
banks and infuses inflation in the economy. Bank faces administrative and operational
problems due to rise in NPA ratio. Time and efforts of management in handling NPA
divert its focus from profiteering projects. Now banks have special employees to deal
with and handle NPAs, which is an additional cost to the bank. Also, if a bank is
facing problem of NPA, then it adversely affects the value of bank in terms of market
for credit. It will lose its goodwill and brand image and credit which will have a
negative impact on the people who are putting in their money in the banks. The
magnitude of NPA is comparatively higher in public sector banks. To improve the
efficiency and profitability of banks the NPAs need to be reduced and controlled.

The problem of rising NPA has been globally recognised. Many a time, several
nations of the world have faced a recession in the finance sector. That has struck down
the banking sector and caused a situation of financial crisis in those countries. In
1974, as a consequence of financial crisis evident from Bankhaus Herstatt in West
Germany, the Basel Committee on Banking Supervision (BCBS) was created by the
Central Bank Governors of the Group of 10 countries. Its landmark publications on
capital adequacy are commonly known as Basel I, Basel II and, most recently, Basel
III. According to an IMF report, the percentage of GNPA was highest in Greece, Italy,
Portugal, Ireland and Russia with 45, 16, 13, 11 and 10 percent respectively, while it
was 9.98 percent in India. 3 In April 2017, the BCBS published its guidelines on
Prudential Treatment of problem Assets (PTA), which provides compatible
regulations for ―non-performing‖ and ―forborne‖ exposures.NPA has been one of the
major causes of concern for banks in India also as it reflects the performance of banks.
Since the past few decades, the Indian banking sector has been facing a menace of
NPA. To achieve the constitutional goal of economic justice and to remove the
economic imbalance in the country, the Government of India takes steps in assistance
with RBI, the apex body for the credit control. The RBI has made notable changes in
policies and regulations to help and strengthen the banking sector. These changes
include strengthening prudential norms, enhancing the payments system and
integrating regulations of commercial banks. Public Sector Banks need to strengthen
institutional skill levels especially in sales and marketing, service operations, risk

2
I. Rajaraman, S. Bhaumik et. al., ―NPA Variations Across Indian Commercial Banks Some Findings‖ 34 3/4
EPW 161 (1999)
3
―India‘s NPA and the global scenario‖, available at: https://www.thehindubusinessline.com/ opinion/indias-
npas-and-the-global-scenario/article24145872.ece, (Accessed on 13 June 2018)

Page | 2
management, and the overall organizational performance ethic & strengthen human
capital. Recognizing the gravity of the problem, the government has set up several
committees to consider the existing legal framework.

Prior to 1993, the problem related to loan default was not seriously considered
by the government. Banks and financial institutions had only options to recover loans
through civil courts. However, the problem was unaddressed by the then existing civil
laws as there was no special legislation to deal with loan defaults. The banking
organizations were facing considerable problems in recovering debts. The prevailing
proceedings for recovery of loans have been cause for a huge amount of loans
blocked. Earlier, banks had to file recovery suit in the civil courts for the recovery of
their loan that usually took years and only resulted in increase the pendency of cases
in courts. Thereafter, on the recommendations of Narsimham Committee, 1991, the
Recovery of Debt Due to Banks and Financial Institution Act, 1993 (hereinafter
referred to as the DRT Act) was enacted under which special tribunals namely, Debt
Recovery Tribunal (hereinafter referred to as DRT) and Debt Recovery Appellate
Tribunal (hereinafter referred to as DRAT) were constituted. Various other resolution
mechanisms have also been introduced in the recent past, which include the
Securitisation and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002 (hereinafter referred to as the NPA Act the SARFAESI Act), One
Time Settlement schemes (OTS), setting up of the Corporate Debt Restructuring
(CDR) mechanism, strengthening of Debt Recovery Tribunals (DRTs).

Despite the establishment of Debt Recovery Tribunals (DRTs) and enactment

of the NPA Act, the Gross Non-performing Assets (GNPAs) ratio of Scheduled
Commercial Banks (SCBs), especially Public Sector Banks (PSBs) have shown an
increase during the recent years. India‘s Gross NPA which was around 2 percent on
and before 21st Century has achieved 11 % in 2018.45 Though, the two enactments, the
DRT Act and the NPA Act provide for legislative measures for the recovery of NPAs
directly and indirectly from the borrowers, they have been unable to give the desired
result due to shortcomings underlying them. These issues are pertaining to legal
framework as well as enforcement procedures provided therein. Issues relating to
recovery of NPA may be summarized as follows:

The first question can be raised on the efficiency and effectiveness of the legal
machinery provided under the Acts. The Recovery of Debt Act, 1993 i.e. DRT Act
has established special tribunals for recovery with the object of speedy recovery of the
NPAs. However, the tribunals have been failed in giving appropriate results from
recovery points of view. There are many internal and external issues in the effective
functioning of the tribunals. Data related to the low recovery rate indicates that there
may be a problem in DRT proceedings at any of the stages. There is requirement to

4
The Reserve Bank of India, Report on Trends and Progress of Banking in India 2017-18, available at:
https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/0RTP2018_FE9E97E7AF7024A4B9432173
5
CD 76DD4F.PDF, (Accessed on 4 April 2019)

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analyse the reasons behind the huge pendency of DRT cases. There are 1,00,898 cases
pending in the DRTs all over the India as of June 2018.6

The Pendency may be due to unduly long proceedings, unnecessary

adjournments and stays by the borrowers, trial failures, and other procedural lacunae
residing in the mechanism. The tribunals have been established with an objective of
speed recovery, however, they seem to be plagued with the same disease as that of
Indian civil courts. The DRTs are relieved from the Civil Procedure Code Rules, but
that have created more ambiguity in the recovery of NPAs. Moreover, callousness
and apathy shown on the part of presiding officers and chairman of the tribunals may
be another reason for late and less disposal of DRT cases. The accountability and
efficiency of DRTs‘ presiding officers are required to be checked. Nevertheless, the
captain of the team cannot be held solely responsible for the team‘s inefficient
performance. Hence, the whole administrative and infrastructure of the present
tribunal system is needed to be examined. The DRT‘s enforcement wing is also
required to be overhauled, as the recovery officer is unable to exercise their power
effectively. Recovery officers have also been given certain quasijudicial power. The
extent and legitimate use of these powers is also required to be examined. Moreover,
the provisions of the DRT Act are required to be revised and reconsidered for the
speedy disposal of original applications, miscellaneous applications, and appeals in
the tribunals. Like the DRT Act, the SARFAESI Act, 2002 provides for alternative
actions of recovery directly from the borrower without approaching court and
tribunals. The SARFAESI Act also provides for securitisation and asset
reconstruction of the NPA Accounts. An RBI report states that SARFAESI actions
have contributed 18.3 percent of total debt recovery which is more than recovery
through DRT proceedings i.e. 10.2 percent but not sufficient to clean the balance
sheet of India. The major problems that banks face in SARFAESI actions, are based
on lacunae inside the Act. The Act creates a conflict with the DRT Act in relation to
the jurisdiction of the tribunals.7 As soon as the bankers initiate actions against the
borrower, the borrowers try to escape the action under SARFAESI provisions by
taking shelter of the concerned DRTs. The Act which was enacted to be boon for the
bankers, has been proved futile by the borrowers with malafide intention to defeat the
provisions of the SARFAESI Act. Another problem that comes in the executing
SARFAESI actions, is an acquisition of the secured assets of the borrower. The Act
lacks proper mechanism for the assistance of the authorised officer of the banks.
Provisions relating to assistance by the DM and CMM are still unclear. Applications
under section 14 have been mushroomed in the collectorates of the districts without
disposal. Moreover, the Act does not make any distinction between deliberate
defaulters and general defaulters and treats both classes of borrowers on similar
footings. The Act lacks penal provisions to punish the deliberate defaulters.

6
―Finance Ministry moves to declutter DRTs to ease debt recovery‖, available at:
https://economictimes.indiatimes.com/news/economy/finance/doubling-limit-for-filing-drt-caseswill-
expedite-bad-loan-recovery-finance-ministry/articleshow/65771430.cms, (Accessed on 21 December 2018)
7
Supra note 4

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 Due to the inefficaciousness of DRT and SARFAESI proceedings, a shift has
been perceived in the bank‘s approach to recover bad loans. New trends have been
emerged in international practice to recover the NPA. The UNCITRAL Legislative
Guide on Insolvency Law has provided a new approach to banks in international
regime to resolve the issue of the Nonperforming Assets. Considering the merits of
emerging trends and inefficiency of the existing statutes, the government enacted the
Insolvency and Bankruptcy Code in 2016. Insolvency proceeding was already existing
in the form of different legislative pieces in the country. However, banks were facing
considerable difficulty in initiation of these proceeding against different corporate and
non-corporate bodies. The government passed the Code with objectives of
consolidating and amending the law relating to insolvency and bankruptcy, to
accelerate the recovery of mounting NPA. The code benefitted the bankers and
therefore, banks mostly preferred to approach the Code instead of initiating actions
under the DRT Act and the NPA Act. The Code has shown a significant improvement
in the percentage of NPA recovery. The code does not remove the shortcomings of
both the earlier enactments but provides an alternative course to banks for cleaning
their balance sheet. A comparison of these statutory frameworks will give a clear
picture of the NPA recovery mechanism.
The problem of surge in NPA demands instant and effective solution to
improve the efficiency and profitability of banks. To find out the shortcomings of the
existing mechanism, it is imperative to do an in-depth analysis of the provisions of the
two legislations. Through the present research, an attempt has been made to look into
loopholes of the existing legal framework and to suggest measures to tackle the
menace of Non-performing Assets.
1.2OBJECTIVES OF THE PROPOSED RESEARCH

The present studies aims to achieve the following objectives:

i. To examine the concept of NPA and prudential norms of the RBI relating to
NPA and standardization of assets.
ii. To look into the present legal position in the banking sector in reference to
Non-performing Assets and understanding and examining the
implementation of present statutory banking laws to tackle the problem of
Non-performing Assets.
iii. To scrutinize the international approach for NPA identification and
measurement to evaluate the effectiveness of the present framework for the
same in India.
iv. To analyse and compare the emerging trends in debt recovery with the
traditional mechanisms prevailing under the banking laws.
v. To suggest the best practices to solve the problem related to rising NPA in
Public Sector Banks.

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1.3HYPOTHESES
1. The proceedings under the Recovery of Debt and Bankruptcy Act, 1993 and
the SARFAESI Act, 2002 are not efficient enough to curtail the increasing
ratio of Non-performing Assets and to reduce the burden of loans on the
economy.

2. The Insolvency and Bankruptcy Code, 2016 could able to make much
impact on the loan recovery system and has been successful in speedy
disposal of loan recovery cases.
1.4LIMITATION OF THE STUDY
Since the Gross NPA ratio is highest in Public Sector Banks, therefore, the present
research work is confined to the evaluation of rising Nonperforming Assets in Public
Sector Banks only. Moreover, the present research work is confined to examine the
defects of the RDB Act, 1993, the SARFAESI Act, 2002, and the effectiveness of
remedies available under these Acts. Further, the research attempts to investigate the
current scenario of recovery post the Insolvency and Bankruptcy Code, 2016.
1.5RESEARCH METHODOLOGY
The present research is doctrinal in nature, to be carried out on a legal
proposition by way of analyzing existing statutory provisions of specific banking laws
through legal reasoning. The present research work is based on analytical research
method in order to explore the loopholes in the existing legal measures to contain the
menace of NPA. Further, statistical approach has also been adopted to assist in
analysing the growing ratio of Non-performing
Assets by way of collection of banking statistics and data retrieved from RBI Annual
Reports. The present work takes model regulations for NPA identification and
measurement of five different regions Asia, Europe, America, and Latin America
which reflect five distinct economic circumstances. The present research work
compares the Indian model with the other models in conformity with International
Accounting and Prudential Frameworks for NPA.

1.6FRAMEWORK OF THE STUDY

This doctrinal work has been organized into six chapters dealing with different
dimensions of the growing menace of Non-performing Assets of Public Sector Banks.

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 CHAPTER-II

CONCEPTUAL ANALYSIS OF NON-

PERFORMING ASSETS

In India, the banking system has been evolving through financial sector reforms
as part of economic liberalization and has undergone many noteworthy
transformations. One such reform has been imbibing of best international practices in
controlling and supervising the money market of the country. In order to create a
sound competitive and vibrant banking system, the government and the RBI focus
their policies in eradicating the menace of NPA. Stepping towards the desired banking
reform the government allowed entry of new private sector banks and foreign banks
leading to flexibility in operational work and financial autonomy to public sector
banks in respect of fund mobilization and credit management.

As a concept, Non-performance Asset has been understood differently in the

world economy. It has not only included loans or debts but also other kinds of risks
and exposures. It has been classified differently in different parts of the world. Some
countries have taken more comprehensive criteria to categorize the NPAs, whereas
some have taken the standard five bucket system. In order to seek solution of the
problem of NPA, there is requirement to examine the perception, definitions,
characterization, and classifications of NPA.

2.1 DEFINITION OF NON-PERFORMING ASSET

Like any commercial entities banks also calculate profit on their banking
business. However, the only difference lies that this profit is further used for lending
public further loans and fulfilment of other banking objectives. Banks time to time
evaluate its assets on the basis of risk weight. An asset, including a leased asset, is
called non-performing when it stops generating income for the bank.8

NPLs are a natural and unavoidable component of the balance sheet of any
bank, but following the financial crisis, they have moved from being a physiological
element to becoming a pathological problem.9

8
The Reserve Bank of India, The Master Circular- Prudential norms on Income Recognition, Asset
Classification and Provisioning pertaining to Advances 2015-16, Para 2, July 2015, available at:
https://www.rbi.org.in/Scripts/BS_ViewMasCirculardetails.aspx?id=9908, Accessed on 20 March 2017
9
C. Scardovi, „Holistic Active Management of Non-performing Loans‟, 9 (Springer; 1st ed. 2016)

Page | 7
 The term „Non-performing Assets‟ (NPA) has not been used by the Basel
Committee for Banking Standards (BCBS), an international body dealing with
banking regulations. Rather it is defined as „Non-performing Exposures‟ (NPE)
which has broader implications. The committee has given an inclusive definition of
the term „NPE‟ It states, ―The following exposures are considered as non-performing:
(i) all exposures that are ―defaulted‖ under the Basel framework, where applicable; or
(ii) all exposures that are credit-impaired (in the meaning of exposures having
experienced a downward adjustment to their valuation due to deterioration of their
creditworthiness) according to the applicable accounting framework; or (iii) all other
exposures that are not defaulted or impaired but nevertheless (a) are material
exposures that are more than 90 days past due; or (b) where there is evidence that full
repayment based on the contractual terms, original or, when applicable, modified (e.g.
repayment of principal and interest) is unlikely without the bank‟s realisation of
collateral, whether or not the exposure is current and regardless of the number of days
the exposure is past due.‖10 The identification of an exposure as non-performing is not
intended to affect its categorization as impaired for accounting purposes or as
defaulted in accordance with the regulatory framework.

International Monetary Fund has defined Non-performing Loans (NPL) on the

basis of a uniform criterion of ―principal or interest payments 90 days overdue‖ for
declaring a loan as nonperforming.1112

―NPA is defined as an asset or account of a borrower, which has been

classified by a bank or financial institution as sub-standard, doubtful or loss asset.”13

The terms ―Non-performing Asset‖ (NPA) or ―Non-performing Loan‖ (NPL)

and ―Non-performing Exposures‖ (NPE) are used synonymously. However, the terms
are not the same. Non-performing Asset is the narrowest concept, as it refers only to
problem loans, but is the term most commonly used in the academics as well as
among market stakeholders in several nations. Non- performing Exposures is typically
the widest concept, and it includes loans, debt securities, and certain off-balance sheet
exposures, but may exclude certain asset classes, such as foreclosed collateral. In
some jurisdictions that provide a definition of non-performing assets, they include
various asset classes such as foreclosed collateral whether or not the exposure is
current and regardless of the number of days the exposure is past due. However, by
the
Amendment Act, 2016 in the SARFAESI Act, 2002, the definition of „NPA‟ has been
broadened in consonance with international practice by including

10
The Basel Committee on Banking Supervision, The BCBS Guidelines Prudential Treatment of Problem
Assets 2016, Para 3.1, available at: https://www.bis.org/bcbs/publ/d403.pdf, Accessed on 31 March 2019
11
The International Monetary Fund, The Financial Soundness Indicators (FSI): Compilation Guide
12
, Para 25, available at: https://www.imf.org/external/pubs/ft/fsi/guide/2006/pdf/fsiFT.pdf Accessed on 2nd
February 2019
13
The SARFAESI Act, 2002, Section 2(o)

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„Debt Securities‟. The Debt Securities are those securities that have been listed under
the Security Exchange Board of India.

The past-due period of „180 days‟ was reduced to „90 days‟ overdue period
for identification of NPAs, from the year ending March 31, 2004.

The Reserve Bank of India from time to time introduced Prudential Norms on
Income Recognition, Assets Classification and Provisions pertaining to Advances
every year with effect from 30 June 1992.

Before the year 2001, 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 in a phased manner as for the year ending March 31 specified period
1993, four quarters, for the year 1994, three quarters and for the year 1995 onwards,
two quarters.

―Non-performing Assets asa loan or an advance where interest and or

instalment of principal remain overdue for a period of more than 90 days in respect of
a term loan;

the account remains „out of order‟ in respect of an Overdraft or Cash

Credit (OD/CC),

the bill remains overdue for a period of more than 90 days in the case of
bills purchased and discounted;

the instalment of principal or interest thereon remains overdue for two

crop seasons for short duration crops;

the instalment of principal or interest thereon remains overdue for one

crop season for long duration crops;

the amount of liquidity facility remains outstanding for more than 90 days, in
respect of a securitisation transaction undertaken in terms of guidelines on
securitisation dated February 1, 2006;

in respect of derivative transactions, the overdue receivables representing

positive mark-to-market value of a derivative contract, if these remain unpaid for a
period of 90 days from the specified due date for payment.”6

In an 'out of order' account the outstanding balance is not paid constantly in

excess of the sanctioned limit or drawing power for 90 days.

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6
, Para 2.1.2.
Otherwise, in cases where it does not exceed the permitted limit, but there are no
credits persistently for 90 days as on the date of accounting or credits are not
sufficient to cover the interest debited during the period, these accounts should be
identified as 'out of order'.14

RBI Guidelines for categorisation of assets stipulates that Accounts with

transitory deficiencies should not be characterized as NPA such as unavailability of
enough drawing power according to the in-hand stock statement, balance remains due
beyond the limit temporarily, non-submission of stock report and non-renewal of the
limits on the due date, etc.15

In order to ensure identification of the accounts more accurately, RBI has

issued directions under Para 4.2.4 of the Master Circular 2015-16 which are as
follows:

i) Banks should ascertain that withdrawal in the working capital accounts are
secured by the adequate current assets, since current assets are first realised in
times of stress. Determination of withdrawal power is to be based on the current
stock report. In the case of large accounts, such stock reports must not be older
than three months. Other older dues in the account would be deemed as irregular.

ii) Regular and ad-hoc credit limits mandated to be monitored before three months
from the due date or the date of ad hoc sanction. If borrower is not in situation to
bring financial statement, the branch should assure that review of loan limits is
already on and would be completed soon. In any case, banks should avoid a six-
month delay as is perceived not as a general discipline and such account is
identified as NPA.

2.2 CATEGORIZATION OF ASSETS

Banks are required to classify the loan assets (advances) into four categories16 viz.

Standard Those accounts, which do not disclose any problem and do

Assets not carry more than normal risk attached to the business.

Substandard An asset is consistently recognised as NPA for a period less

Assets than or equal to 12 months

14
Supra note 1, Para 2.2.
15
Supra note 1, Para 4.2.
16
, Para 4.1.
Supra note 1

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Doubtful the asset consistently identified in above substandard
Assets category for a period of 12 months

Loss Assets When bank faces loss in respect of the account in opinion of
internal or external auditors or the RBI inspection but the
dues has not been write off wholly

Para 4.2.2 of the Master Circular 2015-16 envisages that banks should set up
adequate technological infrastructure for effective identification of stressed accounts,
especially in respect of large ones. The banks may fix a limit to determine what would
constitute a high value account depending upon their respective business levels.10 The
sanction limits fixed by the banks shall be effective for the whole financial year. Any
such complications should be solved by a bank‟s internal channels within one month
from the date on which the account would have been identified as NPA as per
prevailing guidelines.

The above four categories, no doubt, provide banks sufficient grounds to

initiate measures to resolve NPA. However, keeping in mind the best international
practice India adopted the five risk bucket system for deeper regulation of the NPA.
The five risk bucket system has narrowed down the categorisation of NPA. It includes
the „watch category‟ in addition to the above four categories. RBI has introduced it as
„Special Mention Accounts‟.

2.3SPECIAL MENTION ACCOUNTS

Many a time, experts have expressed views that to resolve the problem of NPA,
such accounts must be identified as NPA earlier than that prescribed in the law. With
a view to early identification of Non-performing Assets and in compliance of
international practice used by used by FDIC, U.S.A., MAS,
Singapore, etc., the classification of Special Mention Accounts (SMA) was

10
, Para 4.2.2.
recommended by the Department of Banking Supervision, RBI in 200217 but could be
implemented by the RBI in 2014 through a notification
DBOD.BP.BC.No.97/21.04.132/2013-14. 18 Special Mention Accounts are those

17
The Reserve Bank of India, Guidelines on preventing slippage of NPA accounts, (The Department of Banking
Supervision 2012), available at: https://www.rbi.org.in/scripts/Notification User.aspx?Id=899&Mode=0
Accessed on 12 January 2017
18
The Reserve Bank of India, Framework for Revitalising Distressed Assets in the Economy– Guidelines on
Joint Lenders‟ Forum (JLF) and Corrective Action Plan (CAP), February 2014, available at:
https://www.rbi.org.in/Scripts/ Notification User.aspx?Id=8754 &Mode=0 Accessed on 12 January 2017 13
Supra note 11.
Supra note 1
Page | 11
 assets/accounts that show characteristics of bad asset quality in the first 90 days itself.
SMA can be distinguished from NPA in the way that NPA has duration of 90 days.
On the other hand, the worst type of special mention account (SMA-2) has less than
90 days‟ duration. Moreover, there will not be any particular provisioning for SMA
assets.13

2.3.1 Classification of Special Mention Accounts

The Special Mention Accounts are usually differentiated in terms of duration.

For example, in the case of SMA-1, the overdue period is between 31 to 60 days. On
the other hand, an overdue between 61 to 90 days will make an asset SMA-2. In the
case of SMA-NF Non-financial indications about stressed asset is considered.19

SMA Classification basis

Subcategory
SMA-NF Non-financial (NF) signals of stress
SMA-0 Principal or interest payment not overdue for more than 30 days
but account showing signs of incipient stress, delay of 90 days
or more in (a) submission of stock statement / other stipulated
operating control statements or (b) credit monitoring or
financial statements or (c) non-renewal of facilities based on
audited financials.
SMA-1 Principal or interest payment overdue between 31-60days.
SMA-2 Principal or interest payment overdue between 61-90 days.

„Special Mention‟ category of assets is not only on the basis of nonrepayment

or overdue position but also due to other factors that reflect sickness/irregularities in
the account (SMA-NF). The account may be classified as SMA on negligence in
submission of stock report / Other accounts, nonclearance of cheques and other bills,
non-payment of instalments or outstanding of letter of credit, bank guarantee, bills
discounted or undercollection within a reasonable period, business contingencies
sudden collapse of commerce or industries project venture resulted in reduced sale or
profits, erosion of net worth, Improper creation of security interest charge or
mortgage, Non-compliance of documenting or loan or limit sanctioning formalities.15

19
Supra note 12, Para 2.

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Table No. 1 Position of different classes of assets in Public Sector Banks (In
Billion)

Standard Sub-Standard Doubtful Loss Gross NPAs Total

Amount In Amount In Amount In Amount In Amount In Advances
% % % % %
Public Sector
Banks
2018 52461 85.4 2146 3.5 6277 10.2 533 0.9 8956 14.6 61417
2017 51816 88.3 1731 3.0 4904 8.4 213 0.4 6847 11.7 58664
2016 52875 90.7 2005 3.4 3232 5.5 163 0.3 5400 9.3 58275
2015 53382 95.0 1054 1.9 1630 2.9 100 0.2 2785 5.0 56167
2014 49887 95.6 958 1.8 1216 2.3 99 0.2 2273 4.4 52159
2013 43957 96.4 815 1.8 761 1.7 68 0.2 1645 3.6 45601
2012 38255 97.0 623 1.6 490 1.2 60 0.2 1173 3.0 39428
2011 32718 97.8 350 1.1 332 1.0 65 0.2 747 2.2 33465
2010 26735 97.8 288 1.1 254 0.9 58 0.2 599 2.2 27335
2009 22378 98.0 203 0.9 206 0.9 41 0.2 450 2.0 22828
2008 17786 97.8 173 1.0 192 1.1 40 0.2 405 2.2 18191
2007 14262 97.4 143 1.0 198 1.4 48 0.3 389 2.7 14651
2006 10926 96.4 113 1.0 246 2.2 55 0.5 414 3.7 11340
2005 8379 94.6 110 1.2 308 3.5 59 0.7 476 5.4 8856

Source:
RBI Report on Bank Group-wise Classification of Loan Assets of Public
SectorBanks2018

The above table shows the position of different categories of assets of Public
Sector Banks in previous years 2005-2018. Categories of Assets

15
Supra note 11.
enumerated by RBI in Master Circular can be differentiated on the basis of
probabilities of repayment of loans. That is High in standard assets, Good or fair in
substandard assets, Doubtful in doubtful assets, Improbable or negligible in loss
assets. The above chart shows that Standard, Substandard, Doubtful and Loss were 95
%, 1%, 3.5% and 0.7% of total advances respectively in the year 2005. Whereas, in
the year 2005, Standard, Substandard, Doubtful and Loss were 85 %, 3.5%, 10% and
1% of total advances respectively. It is evident from the above report of RBI that asset
quality in the public sector banks has been deteriorated from the year 2005 to 2018
that ultimately resulted in the rise of NPA from 5.4 percent in the year 2005 to 14.6 in
the year 2018.20

2.4 GROSS NPA AND NET NPA

20
The Reserve Bank of India, Report on Trends and Progress of Banking in India 2017-18, available at:
https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/0RTP2018_FE9E97E7AF7024A4B94321734CD
76DD4F.PDF, (Accessed on 4 April 2019) 17 Supra note 1 Para 3.5.

Page | 13
 Banks calculate their NPAs in terms of Gross NPA and Net NPA in accordance
with RBI Guideline.17

Gross NPA is an outstanding amount in the borrower‟s account, in the book of

the bank other than the interest which has been recorded and not debited to the
borrower‟s account.

Whereas Net NPA is obtained from gross NPA after deduction of the
following:

Interest due but not received: i.e. balances in interest suspense account.

Claims received from credit guarantors and kept in suspense accounts pending
final settlement.

Part-payment received and kept in suspensions; and

Total provisions held.

Gross NPA is a better indicator than Net NPAs since the former does not
consolidate the endogenous provisioning process; this is on the grounds that banks
make provisioning for NPAs as per their capacities.Net NPAs does not present a
genuine picture of NPAs so they should be enhanced by gross NPAs figures.

An account is treated as 'out of order' if the outstanding balance remains

continuously in excess of the sanctioned limit/drawing power for 90 days.

Therefore, Assets of the banks may be classified into two ways:

 Performing Assets Standard assets, which do not disclose any problem and
earn profit for the Banks

 Non-performing Assets Those Assets, recovery of which is almost

Impossible

2.5 RESTRUCTURING OF NPA

A restructured account is one where the bank, for economic or legal causes
relating to the debtor's financial hardship, grants to the debtor believes that the bank
would not otherwise taken into account. Restructuring would generally include

Page | 14
modification of terms of the advances or securities, which would normally involves,
among others, changes of repayment period or repayable amount or the amount of
instalments or rate of interest (due to reasons other than competitive reasons).
However, extension in repayment period of a floating rate debt on reset of interest
rate, so as to keep the EMI unchanged provided it is applied to a category of accounts
uniformly will not render the account to be characterized as „restructured account‟. In
other words, extension or postponement of EMIs to individual debtors as against to a
whole class, would render the accounts to be classified as 'restructured accounts.21
Banks may restructure the accounts classified under 'standard', 'sub-standard' and
'doubtful' categories.

While a restructuring proposal is pending, the bank shall continue with the
usual asset and re-classification of an asset should not be dropped merely because the
restructuring process is under consideration. The asset classification status as on the
date of sanction of the restructured proposal by the authorised officer would be
relevant to decide the asset classification status of the account after restructuring or
rescheduling or renegotiation. In case there is an unreasonable delay in sanctioning a
restructuring proposal resulting in account deterioration, it would be a matter of
consideration. Normally, restructuring cannot be done by the banks unless the debtor
consents for alteration in the original loan agreement and the financial viability is
established and there is a reasonable possibility of repayment from the debtor. In case
of nonviable projects bank may proceed with recovery measures. The parameters for
restructuring may include the Return on Capital invested, Debt Service Coverage
Ratio, difference in the Internal Rate of Return and Cost of Funds and the amount of
provision needed in lieu of the diminution in the fair value of the restructured advance
etc. If the debtors indulge in frauds and malfeasance his account shall be ineligible for
restructuring, banks may review the reasons for classification of the debtors as wilful
defaulters.

2.5.1 Stages of Restructuring

Restructuring of advances could be done in the following stages:

(a) before initiation of commercial production or operation;

(b) after initiation of commercial production or operation but before the asset has
been classified as 'sub-standard';
(c) after initiation of commercial production or operation and the asset has been
classified as 'sub-standard' or 'doubtful'.22 The accounts characterized as 'standard
assets' should be immediately re-characterized as 'sub-standard assets' upon
restructuring. All restructured accounts which have been classified as non-
performing assets upon restructuring, would be eligible for up-gradation to the

21
Ibid Annexure- 5, Para iv.
22
Ibid Para 11.2.

Page | 15
 'standard' category after observation of 'satisfactory performance' during the one
year from the date when the first payment of interest or instalment of principal
falls due under the terms of restructuring package.23 In case, however, satisfactory
performance after one year is not proved, the asset classification of the
restructured account would be governed as per the applicable prudential norms
with reference to the prerestructuring payment schedule.

2.6 EXIT OPTION

In addition, the exit option will also be available to all creditors within the
minimum 75 percent and 60 percent. However, the purchaser agrees to be bound by
restructuring proposal permitted by the Empowered Group.21 The exiting creditors
may be permitted to carry their current level of exposure to the debtor provided they
tie-up with either the current creditors or fresh creditors taking up their share of
supplementary finance. The creditors who wish to exit from the proposal would have
the choice to sell their current share to either the current creditors or fresh creditors, at
a reasonable price, which would be determined mutually between the exiting lender
and the taking over lender. The new creditors shall rank equally with the current
creditors for repayment and servicing of the debts since they have taken over the
current debts to the exiting lender. In order to bring more flexibility in the exit option,
Settlement Scheme can also be considered, wherever necessary, as a part of the
restructuring proposal. If an account with any creditor is subjected to One Time
Settlement by a borrower before its reference to the restructuring mechanism, any
fulfilled commitments under such scheme may not be reversed under the restructured
proposal. Further payment commitments of the debtor arising out of such settlement
scheme may be factored into the restructuring proposal.

2.7 WRITING OFF DEBT

Writing off debt is a measure used by banks to clean up their balance sheets
from bad debts. If a debt turns NPA due to the defaults for at least three consecutive
quarters, the debt can be written off.24

A debt write-off sets free the money accumulated by the banks for the
provisioning of any debt. Provision for a debt refers to a certain percentage of debt
amount kept aside by the banks. The standard rate of provisioning for debts in Indian
banks differs from 5-20 percent depending on the commerce and trade sector and the
repayment capacity of the borrower. In the cases of NPA, 100 percent provisioning is
possible in accordance with the Basel-III norms.

23
Ibid Para 11.2.3. 21 Ibid
Para 5.5.1.
24
Ibid Para 8.

Page | 16
 Writing-off debt helps Banks in a way, for example, a bank disburses a debt of
Rs 1 crore to some borrower and is required to make a 10 percent provision for it. So,
the bank saves aside another Rs 10 lakh without waiting for the borrower to default on
repayment.

If the borrower makes a bigger default, say Rs 50 lakh, the bank can write off
an additional Rs 40 lakh mentioning it at the expense of the balance sheet in the year
of default. But as the debt is written off, it also liberates Rs 10 lakh originally kept
aside for provisioning. That money is now profitable to the bank for business.

Another benefit of writing off bad debts is that it does not take away the bank's
right of recovery from the borrower through the course of law. Recovery post writing
off debts is taken as profit for the bank in the year of recovery.
This enriches the bank's balance sheet.

2.8 DATA ANALYSIS FOR ANALYSING IMPACT OF NPA

For an appropriate analysis of the impact of NPA on the Indian economy, it is

imperative to analyse the data pertaining to NPA. A correct analysis of data gives a
real picture of rising NPA in various sectors. Analysis of data pertaining to different
banks indicates the performance of different banks. It also helps banks to improve
their performance in identified sectors. RBI publishes comprehensive reports yearly,
half-yearly, quarterly depicting the real picture of economic scenario. Data
enumerated in the recent RBI reports pertaining to NPA may be interpreted as
follows:

Figure No. 1 Bank Group

-wise Gross
NPA of Scheduled Commercial Banks

15.0
in
Pe 10.0
rc Public Sector Banks
en 5.0
t Private Sector Banks
0.0 All SCBs
20 20 20
20 20 20
05 06 07 20 20 20
08 09 10 20 20 20
11 12 13 20 20
14 15 16
17 18

Page | 17
Source: RBI Report on Bank Group-wise Classification of Loan Assets of
Scheduled Commercial Banks

The above chart indicates the rising problem of NPA. Decade ago in 2008
GNPA of all scheduled commercial banks was 2.3 percent in which the contribution
of Public Sector Banks was 2.2 percent in comparison to 2.9 percent of the private
sector Banks. The situation remained in control in the previous decade as it is
apparent from the chart that in 2010-11 GNPA of all the banks, public as well as
private sector, was 2.3 percent. GNPA of Public sector Banks was 3.0 percent 4.4, 9.3
percent in 2012, 2014 and 2016. It reached 11.7 percent in 2017 and 14.6 in 2018
which resulted into 11.2 percent GNPA of all Scheduled Commercial Banks as the
GNPA of Private Sector
Bank was faced minute growth 2 to 4 percent.25

TABLE NO.2BANK-WISE NPAOF PUBLIC SECTOR BANKS (In Billion)

2018
Sr. No. Banks Gross NPAs Gross Advances Gross NPA Ratio (%)
1 IDBI BANK LIMITED 555883 1988531 27.95
2 INDIAN OVERSEAS BANK 381802 1509993 25.28
3 UCO BANK 305499 1239895 24.64
4 UNITED BANK OF INDIA 165521 686918 24.10
5 DENA BANK 163614 742386 22.04
6 CENTRAL BANK OF INDIA 381307 1774840 21.48
7 BANK OF MAHARASHTRA 184332 946452 19.48
8 PUNJAB NATIONAL BANK 866201 4712966 18.38
9 ORIENTAL BANK OF COMMERCE 261336 1482060 17.63
10 CORPORATION BANK 222134 1280053 17.35
11 ANDHRA BANK 281244 1645345 17.09
12 BANK OF INDIA 623285 3759955 16.58
13 ALLAHABAD BANK 265628 1664359 15.96
14 UNION BANK OF INDIA 493699 3138599 15.73
15 BANK OF BARODA 564804 4607444 12.26
16 CANARA BANK 474685 4008435 11.84
17 SYNDICATE BANK 257586 2233461 11.53
18 PUNJAB AND SIND BANK 78016 697388 11.19
19 STATE BANK OF INDIA 2234275 20483873 10.91
20 INDIAN BANK 119901 1627256 7.37
21 VIJAYA BANK 75261 1186774 6.34
Total 8956013 61416982 14.58

Source: RBI Report on Bank wise NPA 2018

The above chart shows that the IDBI Bank, Indian Overseas banks and
25
Supra note 16.

Page | 18
UCO Bank were the banks in most vulnerable condition among others with

27.95, 25.28 and 24.64 percent GNPAs respectively.26 SBI, the most prominent bank
of India, was in a better position than these depleting banks with only 10.91 percent
GNPA.25 Vijaya Bank and Indian Bank, which had relatively less business previously,
are at the bottom of the list with 6.34 and 7.37 percent.27

FIGURE NO.2POSITION OF GNPAIN DIFFERENT BANKS (In Percent)

80.00
70.00
60.00
50.00
40.00
30.00
2018
20.00
OR 2017
10.00 BA CE IN IE PU PU ST UN UN
AL CO ID
AN BA BA NK CA NT IN DI NT NJ NJ AT
SY
IO ITE VIJ
2016
0.00 LA RP DE BI UC
DH NK NK OF NA RA DI AN AL AB AB E
ND
N D AY 2015
HA OR NA BA O
RA OF OF M RA L AN OV BA AN NA BA
IC
BA BA A
BA ATI BA NK BA 2014
BA BA IN AH BA BA BA ER NK D TI NK
AT
NK NK BA
D ON NK LI NK
NK RO DI AR NK NK NK SE OF SI ON OF
E
OF OF NK
BA DA BA MI
A AS OF AS CO ND AL IN BA
NK IN IN
NK TE NK
HT IN BA M BA BA DI DI DI
D
RA DI NK ME NK NK A A A
A RC
E

Source: RBI Report on Bank-wise NPA 2018

The above chart depicts the increasing rate of GNPA of different banks in the
previous five years. It can be inferred from the above data hat almost all the banks
recorded a rapid increase in their bad loans over the years. The chart clears that Indian
Overseas Bank, United Bank of India, IDBI Bank, UCO
Bank and Central Bank India recorded the highest increase in their NPA Accounts.28
It is apparent from the above chart that despite several measures taken by the
government and the Reserve Bank of India Non-performing Assets shows the

26
Ibid. 25 Ibid.
27
Ibid.
28
Ibid.

Page | 19
increasing trends over the last five years. The chart corroborates the earlier mentioned
graph indicating mounting of NPA in the country. The Rate which was minimum in
the year 2014, 2015 and in 2016 suddenly caught hike in the years 2017 and 2018,
despite the fact that the Insolvency and Bankruptcy Code 2016 had been operative.
Moreover, the rate of NPA has increased in various sectors as follows:

FIGURE NO. 3 INDUSTRY-WISE GNPA RATIO

Previous year, GNPA Ratio of Public Sector Banks was highest in automobile
industry followed by Gems and jewellery industry, Metal industry, Engineering
industry. Construction, Cement and Textile industries which sour the problem of NPA
to a large extent in the previous decade, were at 5th, 6th and 7th position having GNPA
ratio more than 25%. 29 The above chart shows that GNPA Ratio in Private Sector
Bank is very less in comparison to Public sector Banks. That may be due to better
provisioning for the bad assets better management, stricter compliance of the RBI
norms.

2.9 CAUSESFORINCREASINGNON-PERFORMINGASSETS

Various
socio-economic, political and legal factors are responsible for the
increase in Non Performing Assets. Individuals can‟t be straight away blamed for
surge in NPA. Individual choices that collectively brought about the economic
meltdown made by bankers, government officials, and ordinary homeowners
wererational responses to a flawed global financial order in which the incentives to
take on risk are incredibly out of step with the dangers those risks pose.

29
Ibid.

Page | 20
 Banks are public institutions functioning in public and social interests. Banks
contribute to social development by fulfilling the socio-economic needs of a person
from high to low class of society for his day to day transactions for various purposes.
Additionally, banks themselves launch various loan and financing schemes to assist
common man to reshape his dreams. Hence, a borrower takes a loan for fulfilling
personal needs such as house loans vehicle loans education loans etc or for achieving
social objectives such marriage or other kind of celebration, cremation or other kinds
of rituals. These social and personal causes for taking loans though a small fraction of
the country‟s total Gross-NPA are yet a cause for mounting of NPA, if not repaid.

Banks are also the backbone of economic development of the country giving
financial support and mode of payment to commercial concerns industries and
corporate sector. One reason that project financing overexpectations after the initial
success of public-private partnerships (PPPs) in infrastructure during 2006-08 with
slower GDP growth after 2008 with lower traffic and industrial demand later on
stimulated by land acquisition delays, non-availability of gas and coal for power
plants led to explosive expansion without due diligence.30 With loans being available
more easily than before, corporations grew highly leveraged, implying that most
financing was through external borrowings rather than internal promoter equity. But
as economic growth languishes following the financial crisis such as the financial
crisis of 2008 or sometimes business fails due to inherent reasons such as corporate
mismanagement inefficiency, under-performance of their invested project etc. the
repayment capability of these economic entities reduces. This results in what is now
identified as India‟s Twin Balance Sheet problem, where both the banking sector (that
facilitates loans) and the corporate sector (that avails and is accountable for these
loans) come under financial stress.31 The banks at times rely on policy of giving fresh
loans to corporate and public such as banks lend to some promoters even to facilitate
them to pay off their interest. Sometimes these loan friendly policies of banks become
a problem for their balance sheets and get convert into non-performing assets. Once a
person does not pay his loan over a specific period of time prescribed by the law it
becomes Nonperforming assets from the bank‟s point of view.
The menace of corruption which is deeply rooted in society contributes also to
the rising level of NPA. Many a time, promoters and banks connive to circumvent the
situation and to hide the rise of NPAs, long-lived loans. Malfeasance and inflated cost
projection by corporate giants grow, to skim off the excess. Over and above all these,
fraud and diversion of funds were unchecked by banks and RBI, which lacked the
capacity to monitor projects and diversion. The 1998 Report of the (Pannir Selvam)

30
―View: Falling, not rising, cronyism is the main cause of NPAs‖ available at:
https://economictimes.indiatimes.com/news/economy/policy/view-falling-not-rising-cronyism-isthe-main-
cause-of-npas/articleshow/65955859.cms?from=mdr, Accessed on 14 January 2019
31
The Government of India ―Examining the Rise of Nonperforming Assets in India‖, available at:
http://www.prsindia.org/content/examining-rise-non-performing-assets-india Accessed on 19 January 2019

Page | 21
Committee on NPAs of public sector banks mentions industrial and political unrest in
some parts of the country among the contributory factors.32
Political factors are also responsible to cause increase in NPA behind social
reasons. Our constitution, through Part IV, has given the government a responsibility
to maintain a balance between social and economi structure of the society through its
policies. 33 Therefore, the government frames monetary policy for the country in
consultation with the Reserve Bank of India. The government promotes the taking of
more and more loans for the socioeconomic development of the country. Currently,
Start-up India Stand-up India, Pradhan Mantri Mudra Yojna are such schemes
which have encouraged need people to take loans. Apart from encouraging loans, the
government also launches Loan Waiver Schemes from time to time to help the banks
in loan recovery. However, these loan waiver schemes sometimes have repulsive
reactions rather than having a positive impact. A fraction of borrower only either takes
new loans or does not pay his earlier loans intentionally being aware of the fact that he
may be benefitted by these schemes. These loan waivers or concessions become
political agenda to lure the countrymen for increasing vote bank but never launched
after coming in rule and ultimately the loans taken by borrower becomes Non-
performing assets for the banks. Moreover, most of the heavy cost project financing is
done in political pressures. Even after 25 years of eradication of license raj, it is
affecting even today certain areas such as minerals, energy, infrastructure and
government contracts, clearance of which remains in control of politicians, and
outcomes depends on political discretion and bribes. 34 The acute problem of NPA
requires a strong legal framework. If there would be legal flaws in that legal setup,
defaulting parties deliberately take shelter there. Many of these causes are related to
faulty credit management like defective credit recovery mechanism, lack of
professionalization in the workforce, long time lag between sanction and
disbursement, unscientific repayment schedule and many others. 35 Many a time,
Frauds of high magnitude that have contributes to surge in NPAs. Although these
large scale frauds are relatively small to the total volume of NPAs, these instances of
these frauds have been growing, and these high profile fraudsters easily escape from
being punished due to limitation of the recovery law. This is also a reason for the
increasing ratio of Non-performing Assets in India that we never had a complete
compressive law for the recovery of bad loans. Pre and post independence such cases
were solved through civil courts. Thereafter in 1993, the RDDBFI Act so called DRT
Act was passed. Nevertheless, the situation continues becoming grave. In 2002, the
SARFAESI Act was passed. But the situation remains the same. Various amendments
were introduced from time to time by the government in the aforesaid laws. But the
situation is still gruesome. Therefore the present laws related to loan recovery require
reconsiderations to halt the increasing ration of Non-performing assets.

32
I. Rajaraman, S. Bhaumik et. al., ―NPA Variations across Indian Commercial Banks Some Findings‖ 34 3/4
EPW 161 (1999).
33
M. P. Singh, V N Shukla‟s Constitution of India 370 (Eastern Book Company, Lucknow, 13 th Ed. 2013)

Page | 22
Page | 23
 CHAPTER-III

LEGISLATIVE MEASURES FOR

NONPERFORMING ASSETS RECOVERY

Society and human life always go together. Simultaneously, a conflict arises

between social interest and individual interest. There comes the role of law. Roscoe
Pound says that the function of law to reconcile the conflicting interests of individuals
in community and harmonise their inter-relations.36 Pound gave the theory of social
engineering which describes the function of law is to shape the society and regulate
the people‗s behaviour. It is an attempt to control human conduct through the help of
Law.

3.1 CONSTITUTIONAL MANDATE

Constitution is a living document that evolves with the need of society. The
principle like reasonableness rule of law natural justice makes the constitution
coherent and organic whole.37 Describing law as normative science, Kelson explained
that the hierarchy of norms derives their validity form basic norm or ‗Grundnorm‗. 3
Constitution acts as a ‗Grundnorm‗ which checks the validity of different statutes
regulations on the basis of certain principles among which doctrine of basic structure
is one the idea of basic structure flows from the doctrine of constitutionalism i.e.
supremacy of the constitution that cannot be brought down in any circumstance. 4
Impression of exclusiveness of fundamental rights was removed by Menaka Gandhi v.
Union of India through R. C. Cooper v. Union of India (Bank Nationalisation Case,
AIR 1970 SC
564).38

Constitution guarantees fundamental right and State cannot take away these
rights by enacting laws to violate the basic structure of the constitution.
Banking is covered under the term ‗business‗ of Article 19(1)(g) of the constitution.
The impugned law which prohibited the named banks from carrying on the banking
business was protected under Article 19(6)(ii) because it affected the right to carry on
banking business which was a necessary incident of the business assumed by the

36
Dr. N. V. Paranjape, Studies in Jurisprudence and Legal Theory 106 (Central Law Agency, Allahabad, 8th
Ed. 2016)
37
Keshwanand Bharti v. State of Kerala, AIR 1973 SC 1461 3 Dias,
Jurisprudence 362 (Lexis Nexis Gurgaon, 5th Ed. 2013) 4 Supra note 2.
38
M. P. Singh, V N Shukla‟s Constitution of India 224 (Eastern Book Company, Lucknow, 13 th Ed. 2013).

Page | 24
Union under that law.39 In the Bank Nationalisation Case, it is said that the acquisition
which left the banks free to do business other than banking was rendered unreasonable
by reason of the banks being deprived wherewithal to carry on the business. 40 The
right guaranteed under Article 19(1)(g) to carry on any occupation trade or business
were, therefore, held to be directly invaded by the nationalization of banks.8 In this
context, that the bank nationalization case held that in-spite of Article 31(2), the
acquisition of property directly impinged on the rights of banks to carry on business
other than banking guaranteed under Article 19(1)(g) and Article 31(2) was not
protection against infringement of that guaranteed right.41
The definition of ‗property‗ under article 31 includes debts and other rights in
personam capable of transfer or transmission and can be subject matter of compulsory
acquisition.10

The government is nothing but the trustee and the governed are the authors as
well as the beneficiaries. The social contract theories as propounded by Locke,
Hobbes and Rousseau clearly establish this.

The State cannot make a law which contravenes the fundamental rights of the
citizens of India. This makes the governed as the focal point and establishes that the
Government is to act for the Governed in consonance with the Constitutional
Principles.

There is no conflict between directive principles and fundamental rights which

can be illustrated as the public interest and the private interest. In the words of Justice
Bhagwati, ―It is not possible to fit fundamental rights and directive principles in two
distinct and strictly defined categories, but it may be stated broadly that fundamental
rights represent civil and political rights while directive principles embody social and
economic rights. Both are clearly part of the board spectrum of human rights‖42.

Fundamental rights are of great importance for individual freedom, but these
fundamental rights are a very minimal set of rights and therefore, human rights, which
are derived from the inherent dignity of the human person and cover every aspect of
life and no just a small number of preferred freedoms against the State, have
tremendous significance. For the large number of people in a developing country like
India, who are poor, downtrodden and economically backward, the only solution for
making Fundamental rights meaningful would be to restructure the social and
economic, social, and cultural rights.

Part III and Part IV taken together can be safely described as containing the
philosophy of the Constitution. This philosophy can be described as the philosophy of

39
Id at 193.
40
R. C. Cooper v. Union of India AIR 1970 SC 5648Ibid.
41
H. M. Seervai, Constitutional Law of India 1002 (Universal Law Publishing 4th Ed. Vol 2 2017) 10 Supra
note 9 at 1400.
42
Ibid.

Page | 25
the social service state. Both the preamble and the directive principles of state policy
give evidence of the unmistakable anxiety of the framers of the Constitution as a
mighty instrument for the economic improvement of the people and for the betterment
of their conditions.

The theme of fundamental rights and directive principles is to create socio-

economic conditions where there will be distributive justice for all. Fundamental
rights protect individual liberty, socioeconomic structure of the society. Directive
principles are the embodiment of the ideals and aspirations of the people of India and
constitute the goals towards which the people expect the state to march for their
attainment.

In its legislative competence under Article 245 read with 246, the Central
Government passed the RDB Act, 1993 (originally as the RDDBFI Act, 1993) and the
SARFAESI Act, 2002 to deal with menace of NPA in banking sector which is
enumerated under entry 45 of the List I the Union List of Seventh Schedule.

3.1.1 Constitutionality of Special Laws

Setting-up of an adjudicatory body like banking tribunal relating to transactions
in which banks and financial institutions are concerned clearly falls in the Union List,
Entry 45 (relating to banking), List I, Seventh Schedule to the Constitution of India
giving the Parliament a specific power to legislate in relation to it.43
The Supreme Court has also upheld the validity of the SARFAESI Act, 2002. It
has been held that the provisions of the Act are not unconstitutional as the object of
the Act is to achieve rapid recovery of dues declared as NPAs and better availability
of capital liquidity and resources to help in growth of the economy of the country and
welfare of people in general to save public interest.44
Constitutional validity of section 2 (1)(o) of the SARFASEI Act, 2002 as well
as the Master circular of RBI with regard to prudential norms of asset classification
was challenged in Deccan Chronicles Holding Ltd. Case.4546 There is no discrepancy
between the definition of non-performing assets under the SARFAESI Act and assets
classification made under the Master Circular and there is no need to define ‗legally
recoverable debt‗.47
The apex court laid down that section 2(1)(o) of the SARFAESI Act is not ultra
vires Article 14 of the constitution because of excessive delegation legislative
function to RBI. 48 The court observed that classification of asset require immense

43
Union of India v. Delhi High Court Bar Association, AIR 2002 SC 1479 relied in Nahar Industrial
Enterprises Ltd. v. Hong Kong & Shanghai Banking Corporation, (2009) 8 SCC 646
44
Mardia Chemicals Ltd. v. Union of India (2004) 4 SCC 311
45
V. Kothari, Tannan‟s Banking Law and Practice in India, 1524 (Lexis Nexis, Gurgaon, 26th Ed.
46
).
47
Deccan Chronicles Holding Ltd. v. Union of India 2014 (3) Bankers‗ Journal 524
48
Keshavlal Khemchand and Sons Pvt. Ltd. v. Union of India (2015) BC 511 (SC) 17 Ibid.

Page | 26
expertise and authority to issue master circular does not amount to excessive
legislation.
The court made the following remarks that ―to make any attempt to define the
expression „Non-performing assets‟ valid for the millions of the cases of loan
transaction of various categories of loans and advances, lent or made by different
categories of creditors for all time to come would not be only an impracticable task
but could also simply paralyse the entire banking system, thereby producing results
which are counterproductive to the object and the purpose sought to be achieved by
that.‖17

Recently, the Supreme Court of India struck down the Circular dated 12th
February 2018 issued by RBI as ultra-vires the section 35 AA of the Banking
Regulation Act, 1949.49 According to the RBI Circular, if the account with exposure
of more than Rs. 2000 crores remains default for a period 180 days then secured
creditor shall trigger proceedings under the Insolvency and Bankruptcy Code, 2016
within 15 days of such expiry of 180 days.19 The Court held that 180 days limit
applicable to all sectors of the economy without referring to peculiar problems faced
by each sector would be treating unequal equally an therefore arbitrary, discriminatory
and ultra-vires the Article 14 of the Constitution of India. Moreover, the Circular
failed to give regard to section 45L of the Reserve Bank of India Act which deals with
the power of RBI as to Non-banking financial institutions. Both cannot be measured
on the same scale with regard to the effect of Business trends of money and capital
market. As against this, the circular is equally applicable to banking and non-banking
institutions and it is very difficult to segregate the later from the former. Therefore,
the Circular is ultra-vires as a whole.50

3.2 General Laws for Loan Recovery

Before the enactment of the above two special laws, problem-related to non-
payment of debts was tackled by general civil laws. Civil courts were authorised to
deal with suit for payment of money according to the provisions under the Civil
Procedure Code 1908. Specific provisions relating to security created in a loan
agreement have been given under the Transfer of Property Act, 1882, the Indian
Contract Act, 1872, the Specific Relief Act, 1963 etc.

3.2.1 Mortgage

Mortgage is the most common form in which bank keep security of the
borrower. ―A mortgage is the transfer of an interest in specific immovable property
for the purpose of securing the payment of money advanced or to be advanced by way
of loan, an existing or future debt, or the performance of an engagement which may

49
Dharani Sugars & Chemical Ltd Vs. Union of India 2019 SCC OnLine SC 460 19 Ibid
50
Ibid.

Page | 27
give rise to a pecuniary liability.‖51 Definition of mortgage is clear to be understood
by anyone. Mortgage as understood cannot be defined better than by the definition
adopted by the legislature in section 58 of the Transfer of Property Act, 1882. 52
Mortgage is a conveyance of a land or an assignment of chattels as a security for the
payment of a debt or the discharge of some other obligation for which it is given.53

The transferor is called a mortgagor, the transferee a mortgagee; the principal

money and interest of which payment is secured for the time being are called the
mortgage-money, and the instrument (if any) by which the transfer is effected is called
a mortgage-deed. There are six different kinds of mortgage are provided under section
58. English mortgage is borrowed from English law and statutorily recognized under
the definition of section 58(e).54
The interest transferred under mortgage is only an interest not all interests in the
property. A peculiar feature of the interest transferred is that such interest itself is an
immovable property. 55 The nature of interest may depend upon the form of a
mortgage.56 It may be power of sale in case of simple mortgage, right of possession
and enjoyment of the usufruct in case of usufructuary mortgage, conditional right of
ownership in case of English Mortgage etc. transfer of interest under section 58(e) is
absolute in form only, not in substance. English mortgage having borrowed from
English Law, cannot be regarded as transfer of entire estate inconsistent with the
English principle of equitable mortgage. Section 58(e) must be read subject to the
definition of mortgage given under section 58(a) of the Transfer of Property Act,
1882.57 Moreover, English Mortgage is also subject to the right of redemption under
section 60.28 What really passes to the mortgagee under this mortgage in only is an
interest in the property which is liable to be redeemed by the mortgagor under section
60.29

Anomalous mortgage is a mortgage which is not a simple mortgage, a

mortgage by conditional sale, a usufructuary mortgage, an English mortgage or a
mortgage by deposit of title-deeds within the meaning of this section is called an
anomalous mortgage.58 This kind of mortgage takes innumerable form moulded either
by custom such as kanom, otti, peruartham mortgages etc. or the caprice of the
creditor such as combinations of various mortgages.31

3.2.2 Charges

51
The Transfer of Property Act, 1882, Section 58
52
Justice Mahmood in Gopal v. Persotam (1883) ILR 5All 121 p.137
53
MR Lindley in Santley v. Wilde (1899) 2 Ch 474
54
R K Sinha, The Transfer of Property Act 292 (Central Law Agency, Allahabad Ed. 19th, 2018)
55
Id at 276.
56
Justice M R H Nair, B Paul (eds.), Mulla The Transfer of Property Act 442 (Lexis Nexis, Gurgaon Ed. 12th,
2015)
57
Mukerji, J. in Falakrishna Pal v. Jagannath AIR 1932 PC 14 28
Ramkinkar v. Satyanaryan AIR 1939 PC 14 29 Supra note 24 at 293.
58
The Transfer of Property Act, 1882 Section 58(g) 31 Supra
note 26 at 493.

Page | 28
 Where immovable property of one person is by act of parties or operation of
law made security for the payment of money to another, and the transaction does not
amount to a mortgage, the latter person is said to have a charge on the property and all
the provisions hereinbefore contained which apply to a simple mortgage shall, so far
as may be, apply to such charge.59 A charge is nothing but a device to create security
which is enforceable in a court of law.33

No particular form of words is necessary to create a charge and all that is

necessary is that there must be a clear intention to make a property security for
payment of money in prasenti.60 Remarks by Das, J. in a case, clearly demarcated the
difference between charge and hypothecation.35 ―In charge, there is no transfer of
interest. It gives right to payment of particular fund or property without transfer that
fund or property. Mortgage is jus in rem whereas charge jus ad rem. Mortgage is
good against subsequent transferee whereas charge is good against subsequent
transferee with notice.‖36

3.2.3 Pledge

Pledge is another form in which movable property is kept with the bank as a
security. The pledge is bailment of goods as security for payment of a debt or
performance of a promise.61 The purpose of the pledge is only to create security for
payment of debt. When some goods are pledged, the Pawnee becomes a secured
creditor and he has prior claim over the goods pledged than other creditors.62 Delivery
of documents of title which would enable the Pawnee to obtain possession is equally
effective to create a pledge. 63 Railway Receipts could be equated with the goods
covered by the word ―goods‖ under section 172 for the purpose of constituting the
delivery of goods.64 Pawnee may retain the goods pledged not only for the payment of
the debt but also for the interest of the debt as well as for other necessary expenses
incurred by him in respect of the possession of the goods.65 Section 176 entitles the
Pawnee to bring suit against the defaulting Pawnor and to sell the thing pledged after
giving reasonable notice. However, the two rights are disjunctive and independent of
each other.42 The fact that a period prescribed for filing suit would not mean that the
prescribed period would also apply to the alternative remedy of selling the goods.66
3.2.4 Hypothecation

59
The Transfer of Property Act, 1882 Section 100 33 Supra
note 26 at 739.
60
JK (Bombay) Pvt Ltd v. New Kaiser-I-Hind Spinning and Weaving Co. Ltd. AIR 1970 SC 1041 35Raja
Shri Shiv Prasad v. Beni Madhab AIR 1922 Pat 529 36 Ibid.
61
The Indian Contract Act, 1872 Section 172
62
R.K.Bangia, Contract II 381 (Allahabad Law Agency Allahabad, 2018)
63
Avtar Singh, Law of Contract and Specific Relief, 578 (Eastern Book Company Lucknow, Ed. 8 th, 2004)
64
Subba Rao J., in Morvi Mercantile Bank v. Union of India AIR 1965 SC 1954
65
The Indian Contract Act, 1872 Section 173 42 Supra
note 39 at 586.
66
K. M. Hidayatullah v. Bank of India AIR 2000 Mad 251 44 Supra
note 38 at 383.

Page | 29
Hypothecation as such is not defined in the Indian Contract Act, 1872.
However the hypothecation is recognized by usage for a long time.44 ―Hypothecation
is a charge in or upon any movable property existing or future, created by a borrower
in favour of a secured creditor without delivery of possession of the movable property
to such creditor, as a security for financial assistance and includes charge and
crystallization of such charge into fixed charge on movable property.‖ 67 Unlike
mortgage there is no transfer of interest in hypothecation or pledge. The pledge or
hypothecation simply creates a special property in favour of Pawnee or Hypothecatee
and entitles him to have possession of the goods and dispose off them for the
realization of his debts.46 If the Pawnee or Hypothecatee waives his right, his claim in
respect of those goods comes to an end.68 When a loan is secured by a hypothecation,
such transaction does not require delivery of goods for its validity, nor can it be said
to be prohibited by the Contract Act because the Act contains provisions for bailment
of for pledge and none for hypothecation of goods.48 Though such a distinction exists,
yet Hypothecation is treated as a sub-species of pledge and virtually has the same
legal effect.49

3.3 Special Laws for NPA Recovery

The procedure involved in a suit filed for recovery of loans before a civil court
is proverbially disconcerting to the creditor. Very often, therefore, the protracted delay
in recovering loan results into a loss to the creditor in real terms, as the time spent for
the procedure itself would have substantially snatched the value of money, even if
recovered fully.

The RDB Act, 1993 and the SARFAESI Act, 2002 were passed on
recommendations made by the various committees appointed by the Central
Government for analysing the reasons for hindrance in loan repayment by the secured
creditors which were adversely affecting fiscal reforms. The committees
recommended that the current legal framework should be replaced and special forums
be created for ensuring swift recovery of the loans of banks and financial institutions.
The DRT Act provided the establishment of a twotier system of Tribunals. The
Tribunals constituted at the first level were vested with the jurisdiction, powers and
authority to summarily decide the claims of banks and financial institutions in the
matter of recovery of their loans without being bogged down by the technicalities of
the Code of Civil Procedure, 1908. The NPA Act comprehensively empowered banks,
financial institutions, and other secured creditors to recover their dues without
interference of the Courts or Tribunals. The NPA Act also provided for registration

67
The SARFAESI Act, 2002 Section 2(n) 46 Supra
note 38 at 382.
68
Syndicate Bank v. Official Liquidator, M/s Prashant Engg. Co. Ltd. AIR 1985 Delhi 256 48 A. Wadhwa
(ed.), Mulla The Indian Contract Act 300 (Lexis Nexis Gurgaon, Ed. 15th, 2016) 49 Ibid.

Page | 30
and regulation of securitization or reconstruction companies, securitization of
financial assets of banks and financial institutions and other related provisions69.

These remedies may broadly be classified in the following ways.

3.3.1 THE RECOVERY OF DEBT AND BANKRUPTCY ACT 1993

The Recovery of Debt and Bankruptcy Act, 1993 (hereinafter referred to as the
RDB Act or DRT Act) provides for the speedy recovery of the debts due to banks and
financial institutions. These tribunals have been given exclusive jurisdiction to try
cases related to the recovery of such kinds of debts.

3.3.1.1DEFINITION

 Debt
Debt as defined under section 2(g) of the RDB Act, 1993, has given widest
amplitude as it includes any liability (inclusive of interest) from any person by a bank
or financial institution or a consortium of banks or financial institutions. The debt may
be in cash or in other forms such as securities etc., secured or unsecured, assigned or
payable under decree or order or arbitral award.70 Earlier judicial opinion was divided
as to whether a loan due from any person to the secured lender could be called a
‗debt‗ if it was not legally recoverable e.g. time-barred debt. The Supreme Court has
laid down that as long as bank has alleged in the suit that certain amounts were due to
the bank from the respondents that the liability of the respondent has arisen during the
course of its business activity and further, that the said liability is still subsisting and
legally recoverable, the amount claimed would be a ‗debt‗.71 Further, the section was
amended in consonance of the Supreme Court decision to include only legally
recoverable debt in the definition.72
By the Amendment Act of 2016, Debt Securities have also been included in the
definition of the Debt. Debt securities are listed under the SEBI regulations.73 Unpaid
debt securities, overdue after ninety days notice by the debenture trustee or any other
authority for the benefit of‗ holders of debt securities becomes debt.74
 Bank
―Bank means (i) a banking company (ii) a corresponding new bank (iii)
State Bank of India (iv)a subsidiary bank or (v) a Regional Rural Bank.‖56 Sir John
Paget states, ―A bank or banker is a corporation or person (group of persons) who

69
Central Bank of India v. State of Kerala, (2009) 1 BC 705 (SC)
70
Supra note 14 at 1356.
71
State Bank of Bikaner And Jaipur v. Ballabh Das & Co., AIR 1999 SC 3408
72
The Recovery of Debt and Bankruptcy Act, 1993 Section 2(g)
73
Section 2(ga)
74
The Recovery of Debt and Bankruptcy Act, 1993 Section 2(g) 56 Section
2(d)

Page | 31
accept money o current account, pays cheques drawn upon such account on demand
and collect cheques for customers.‖ 75 Hilton Young Commission recommendations
put forward the recommendation that "The bank or banker should be interpreted as
meaning every person, firm or company using its description or its title, “bank” or
“banker” and every company accepting deposits of money subject to withdrawal by
cheque “draft or order”. The Indian companies Act 1936 though rejecting the former
part of the definition proposed above accepted the later part.”58
Section 5(c) of the Banking Regulation Act, 1949 defines ‗banking company‗ as
a company which transacts the business of banking.‖ Such a company may be a
company under section 3 of the Companies Act or a foreign company within the
meaning of section 591 of that Act.76 The term can be understood as any company
accepting the deposits for the purpose of lending or investment from the public,
repayable on demand or otherwise and withdrawal by cheque, draft, order or
otherwise.77
 Financial Institution
As per section 2(h) of the RDB, 1993, ‗financial institution‗ means a public
financial institution or a securitization company reconstruction company registered
under the SARFAESI Act, 2002 or any other institution as the Central Government
specify.78 Section 2(72) of the Companies Act 2013 list down the institutions which
comes under the definition of the financial institutions:
LIC, Infrastructure Development Finance Company Limited, an UTI company,
institution notified under section 4-A (2) of the Companies Act and such other
institutions notified by the Central Government.79

3.3.1.2 FRAMEWORK OF THE FORUM

(a) Establishment of the Tribunals
With the objective of enabling banks and financial institutions to have a
speedier and more efficient mode of recovery of debts, the legislature has provided for
the establishment of special forums for the purpose, known as Debt Recovery
Tribunals. 80 The fundamental difference that lie between a functioning of the
Tribunals and Civil Courts is; firstly in the procedures required to be followed by
each, and secondly in the need of the applicant to establish existence of debt, and
thirdly, in the scope for hearing of arguments over technical lapses of the creditor, if

75
R N Chaudhary, Banking Laws 15 (Central Law Publications, Allahabad 1st Ed. 2009) 58 Id. at
16.
76
R P Nainta, Banking Law and Negotiable Instrument Act 49 (Allahabad Law Agency,Allahabad 5th Ed. 2015)
77
The Banking Regulation Act, 1949 Section 5(c) read with (d)
78
C R Dutta, S K Kataria, Tannan‟s Banking Law and Practice in India, 1926 (Lexis Nexis New Delhi 23rd Ed.
2010).
79
S. C. Tripathi, New Company Law with Highlights and Comparative Charts 14 (Central Law Publications 1st
Edn. 2014)
80
Id. at 1361.

Page | 32
any. Tribunals constituted under the RDB Act alone can adjudicate matters of
recovery as well as matters connected or incidental thereto including counter-claim or
set-off.

Under the DRT Act, the Central Government is empowered to set up Debts
Recovery Tribunals (DRTs)81 and Debts Recovery Appellate Tribunals (DRATs)82 in
various parts of the country through a notification to exercise such jurisdiction,
powers and authority as may be conferred on them under the Act. So far, 39 DRTs are
functioning in various locations in India.83 After the Amendment Act 2016, the DRTs
so established can also exercise the powers of Adjudicating Authority under the
Insolvency and Bankruptcy Code, 2016. 84 The DRTs performs functions of appeal
Court by secured creditors under the NPA Act.

(b) Composition of Tribunals

Section 4 of the RDB Act, 1993 specifies that the Tribunal is to consist of the
Presiding Officer, registrar, assistant registrars, two recovery officers and other
supporting staff appointed by the Central Government. The Government may
authorize the Presiding Officer of one tribunal to discharge also the functions of the
Presiding Officer of another Tribunal.85

After the Amendment Act, 2016, Presiding Officers or other judicial members of
any other tribunal constituted under any other law may also act as Presiding Officer of
DRT upon the notification by the Central Government.69

A person may be appointed as a Presiding Officer of the DRT who is or has

been or is qualified to be a District Judge.86 He may hold the post for five years or
until the age of 6587 years, whichever is earlier.88 Recovery officers89 and other staff
appointed on service conditions and salary prescribed by the Central Government has
to function under the general superintendent of the Presiding Officer.90

The Debts Recovery Appellate Tribunal (DRAT) has to consist of one

Chairperson appointed and authorized by the Central Government to discharge his

81
The Recovery of Debt and Bankruptcy Act, 1993 Section 3
82
Section 8
83
Policy, ―Monetary limit for filing cases in DRT doubled to Rs 20 lakh‖, The Economic Times 6 September
2018, available at https://economictimes. 6 September 2018
84
The Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions the
Amendment Act 2016), w.e.f. 01.09.2016
85
Supra note 62 at 1929 69 Supra
note 67.
86
The Recovery of Debt and Bankruptcy Act, 1993 Section 5
87
Supra note 67
88
The Recovery of Debt and Bankruptcy Act, 1993 Section 6
89
Section 2(k)
90
Section 7

Page | 33
functions91 for five years from the date on which he enters upon his office or until he
attains the age of 70 years whichever is earlier.92 A person qualified to be a judge of a
High Court or a member of the Indian Legal Service and Grade I officer of that
service for at least three years person or the person who has held office as the
Presiding Officer of a Tribunal for at least three years, is qualified to be appointment
as the Chairperson of an Appellate Tribunal (DRAT). 93 Staffs of the Appellate
Tribunal are appointed by the Central Government.94 However, there are no recovery
officers in the DRAT.

(c) Resignation and Removal of the Presiding Officers

The Presiding Officer of DRT or Chairperson of the DRAT resign by

notice addressed to the Central Government. 95 The Government may accept the
resignation but may require him to stay in office for three months or until a suitable
person is appointed or until the expiry of his term.

The Presiding Officer of a Tribunal or the Chairperson of an Appellate

Tribunal may be removed from his office on the ground of proved misbehaviour or
incapacity after inquiry, in the case of—

(a) Presiding Officer of a Tribunal (DRT), made by a Judge of a High Court;

(b) Chairperson of Appellate Tribunal (DRAT), by a Judge of the Supreme Court;

in which the Presiding Officer of a Tribunal (DRT) or the Chairperson of an

Appellate Tribunal (DRAT) has been informed of the charges against him and given a
reasonable opportunity of being heard in respect of these charges.80

However, the Amendment Act, 2013 made provision for suspension of the said
officers during the pendency of their removal proceedings upon satisfaction of the
Central Government after consulting the Selection Committee constituted for
selection of Presiding Officer or Chairperson.96 To ensure stricter compliance of the
Act and quality performance of the Amendment Act, 2016 has given power to the
Chairperson to assess the performance of the Presiding Officer of DRT. If in the
opinion of the chairperson, there is a requirement of initiation of such inquiry by the
central government under section 15 the Chairman may recommend the government
for such action.

91
Section 9
92
Section 11
93
Section 10
94
Section 12
95
The Recovery of Debt and Bankruptcy Act 1993, Section 15 80 Ibid.
96
Ibid.

Page | 34
 Section 16 of the RDB Act or the DRT Act, 1993 (51 of 1993) lends finality to
the orders of the Central Government in this connection putting them beyond
question.

3.3.1.3 JURISDICTION

Section 19 of the DRT Act, 1993 lays down the procedure to be followed by
the Banks and Financial Institutions (FIs) for approaching the Debts Recovery
Tribunal for the recovery of their debts. By virtue of this section, the applicant
creditor must approach that DRT within whose jurisdiction the defendant or each of
the defendants, would resides or carries on business, or where the branch of the bank
where default of debt has taken place is situated. The jurisdiction is also determined as
the place where the cause of action arises.

Public Financial Institutions also comes within the jurisdiction of the DRT
even if it is not notified as such under Section 2(72)(iv) of the Companies Act, 2013.
The Supreme Court has held that the UTI and UTI Trustee Co. P.
Ltd. are ―financial institutions‖ within the meaning of the term in the RDB Act,
1993.97It is wholly irrelevant how the Central Government controls over them, while
considering the question of the jurisdiction of DRT to entertain such claims. The
Administrator of the specified undertakings of UTI are authorised in law to make
recovery of their loans as financial institutions. Hence, the DRT has undoubted
jurisdiction to entertain their claims.98

By virtue of Section 1(4), exclusive jurisdiction has been conferred on the

Debts Recovery Tribunal (DRT) only when the debt to any bank is Rs. 10 lakhs or
more. For an amount less than Rs. 10 lakhs, the ordinary Civil Courts have
jurisdiction. The creditor shall have option only to file civil suit for payment of money
for the recovery of such debt.
(i)Jurisdiction of Civil Court Restricted
Where the Civil Court awarded the decretal amount above Rs. 10 lakhs
inclusive of interest upon the final decree, the execution proceeding for the decree
exceeding Rs. 10 lakhs would be maintainable in the DRT only and not in Civil Court
on the ground that the decree was for less than Rs. 10 lakhs at the initial stage. 99 With
a view to retain the exclusivity of the tribunals, section 31 provides that every suit or
other proceeding pending before any court at any time of the establishment of the
tribunals, shall stand transferred to the tribunal.100

97
Supra note 16 at 1365.
98
Southern Petrochemical Industries Corp. Ltd. v. Administrator of specified Undertaking of UTI AIR2007 SC
533
99
Punjab National Bank, Dasuya v. Chajju Ram, AIR 2000 SC 2671; Krishan Kumar Pareek v. State Bank of
India, AIR 2009 Orissa 100 (DB).
100
Supra note 16 at 1466.

Page | 35
 The jurisdiction of any other court or authority has been snatched away by the
sections of the DRT Act. The power to decide upon liability is exclusively vested in
the Tribunal. The exclusive jurisdiction relates not only to final decree but also to
recovery.101

It has been held that the civil court‗s jurisdiction was restricted only in regard
to banks‗ applications for recovery of loans, not in regard to any suit instituted by a
debtor or any other person against a bank for any relief. The provisions of the RDB
Act do not necessitate the transfer of an independent suit instituted before a civil court
to the Tribunal to be tried as a counter-claim to the bank‗s application. There is
nothing in the Act for the transfer of such suits or proceedings. The borrower had
instituted a suit for compensation for non-disbursal of debts. The debtors‗ claim was
held to be not so inextricably connected with the banned claim, as not to be capable of
being separately tried. Hence, the debtor‗s suit was not to be transferred.102

The RDB Act does not narrow down the civil court jurisdiction to provide
relief under the Transfer of Property Act, 1882. As the plaintiff is not a debtor, the
jurisdiction of the civil court can‗t be ousted. The bank can recover loans to the extent
it directs that other properties be sold first to satisfy the mortgaged debt.88

Held that the right to travel abroad by debtor to be a fundamental right. The
apparent reason for not empowering the Tribunal to restrain borrower from travelling
abroad may be because debtor is not required to appear in person before the Tribunal
when recovery proceedings are in process.

(ii) High Court’s Powers under Articles 226 and 227

However, section 18 of the DRT Act, 1993 which restricts the jurisdiction of
Civil Courts and other Courts, relieves High Courts in exercising their powers under
Articles 226 and 227 of the Constitution of India.103 In exceptional cases, the High
Courts can entertain petitions under the said Articles against DRT orders even if there
is an alternative remedy. Exceptionally, where an order passed by the Tribunal is
without jurisdiction or arbitrary or against the principle of natural justice, a person

101
Allahabad Bank v. Canara Bank, AIR 2000 SC 1535
102
Indian Bank v. ABS Marine Products Ltd., AIR 2006 SC 1899; followed in Nahar Industrial Enterprises Ltd.
v. Hong Kong & Shanghai Banking Corporation (2009) 8 SCC 646. 88 Rakesh Kumar v. Saroj Marwah, 2014
(3) Banker‗s Journal 368
103
Supra note 62 at 1931

141

Page | 36
may invoke the jurisdiction of the High Court.104 This power is exercisable, among
other things, for rectification of errors in orders of judicial and quasi-judicial
Tribunals. Section 18 of the Act provides that the bar of jurisdiction not applicable to
the High Court exercising jurisdiction under Articles 226 and 227 of the Constitution.
The foremost right of the person aggrieved is to appeal to the next higher Tribunal
(DRAT) and not of writ or revision.

3.3.1.4 PROCEDURE TO BE FOLLOWED BY BANKS

APPROACHING DRT

Followings are the proceedings for the Tribunal:

Figure No. 4: PROCEEDINGS UNDER THE RDB ACT, 1993

• Reviews of the application by the Registry, that checks for any flaws, accepts or
rejects it.
Original •Scrutiny by the Registrar, Application registered
Application

•Summon to Defendant to file written statement

•Stay Application ,if any
•Counter Affidavit by defendants
Hearing •Final Hearing

•an order or decree by the presiding officer

Recovery •Certificate of recovery to the recovery officer
Certificate

I.ORIGINAL APPLICATION

Under section 19 banks or Financial Institutions may make an application to

the concerned DRT. All such applications should be made in the prescribed form and

104
Tata Iron & Steel Co. Ltd. v. Presiding Officer, DRT, (2006) 3 BC 31 (Jhar); Suresh Chandra Biswas v. State
Bank of India, (2010) 1 BC 401 (Cal).

Page | 37
accompanied with documents and fee as prescribed in the DRT Act. For the purposes
of this Act, an application would be treated like a plaint in civil suit as well as an
applicant or a respondent like a plaintiff or a defendant. The contents of the
application in substance must conform to the requirements of a plaint under the Code
of Civil Procedure.105 A bank may file the suit through an authorized officer who is
well acquainted with the facts and circumstances of the case. A new section 19A has
been inserted in the DRT Act relating to filing of recovery applications documents in
electronic form.106

(a) Documents Necessary with Application

Section 19(3) lays down that the recovery application shall be accompanied
with all the necessary documents and evidence which the applicant relies on for
expeditious adjudication for such application.93

Rule 9 of the Debt Recovery Tribunal Procedure Rules 1993 describes that
every application to the Tribunal by lenders shall be annexed with details as to debt
and as to the circumstances of debt, documents of the applicant along with their
indexing.107

(b) Court Fee

An application to the DRT has to be accompanied by such fee as may be

prescribed having regard to the amount of loan to be recovered.

Such fee is Rs. 12,000 where the amount of debt due is Rs. 10 lakhs, Rs.
12,000 plus Rs. 1,000 for every Rs. 1 lakh of debt or pan thereof in excess of Rs. 10
lakhs subject to a maximum of Rs. 1,50,000. Rule 7 of the Debts Recovery Tribunal
(Procedure) Rules, 1993 about fee has been held to be valid.108

If the application moved is found to be defective, formal defects may be

allowed to rectify the error in presence of registrar and otherwise, the Registrar may

105
ICICI v. Grapco Industries Ltd AIR 1999 SC 1975; Western Agencies (Madras) Ltd. v. Joint Commissioner
of Income Tax, (2003) 86 ITD 462 (Mad)
106
R. C. Kohli, Taxmann‟s Practical Guide to NPA Resolution, 201 (Taxmann Publications, New Delhi 4th Ed.
2017) 93 Ibid.
107
Supra note 14 at 1376
108
Digvision Electronics Ltd. v. Indian Bank, (2004) 4 SCC 311; Kanak Udyog (India) v. State of Assam, (2007)
139 Comp. Cas. 12 (Gau)

141

Page | 38
allow the applicant such time to rectify the defect as he may deem fit. 109 If the
applicant fails in compliance of the order of the authority, the Registrar may refuse to
register the application. Applicant may go in appeal against such order within fifteen
days to the authority concerned. The decision of such authority is final.110

The applicant should be offered an opportunity to cure the defects. The Tribunal
cannot reject the application merely being defective and not being in accordance with
the Rules. The DRT is not bound by the provisions of the CPC, but shall have power
to regulate its own procedure.111

(c)Impleadment of Other Bank or Financial Institutions 112

There may be joinder of two or more Banks or FIs in case they have different
claims of debts against the same defendant, at any stage of the proceedings before the
Tribunal passes the final order113. As per sections 17 and 19 of the RDB Act, 1993,
and Rule 10 the Debts Recovery Tribunal (Procedure) Rules, 1993 of single
application for more than one debtis maintainable.114Where two Banks or Financial
Institutions, has claims to recover their debts from the same person, the later may join
with applicant at any stage of the proceedings, before DRT passes the final decree.

In a case, it was held that Section 19(2) of the DRT Act, 1993 allows other
banks or financial institutions to join the main application filed under Section 19(1) by
a bank or a financial institution at any stage of the proceedings before a final order is
passed. The final order, here is the order of adjudication under Section 19(1) as to
whether the debt is due or not. In the present case, the decree or final order in respect
of the debt had already been pronounced long back and, therefore, Section 19(2) did
not allow joining of any party in the main application under Section 19(1) at that
stage, hence, this relief for impleadment could not be granted.115

A purchaser of mortgaged property cannot be added in proceedings before

DRT. Where a third person buys the alleged property post-filing the application, the
purchaser cannot be added ex parte. Subsequent transferee is not a necessary party but

109
the Debt Recovery Tribunal Procedure Rules, 1993 Rule 5(3)
110
Supra note 62 at 1938
111
Section 22
112
Section 19(2)
113
Supra note 14 at 1380
114
Syndicate Bank v. Chamundi Industries, AIR 2002 Kant 56
115
Allahabad Bank v. Canara Bank, AIR 2000 SC 1535

Page | 39
a proper party; hence, non-impleadment is not fatal to the suit. 116 Impleadment of
necessary party is only procedural right. The Act does not confer suo-moto powers on
the Debts Recovery Tribunal to add a party.117

The DRT Act, 1993 is a special legislation engrafting a mechanism for speedy
recovery of loans due to Banks and Financial Institutions with summary procedure
and to prevent needless technicalities. Section 22 specifically bars the application of
the provisions of the CPC, 1908 to the proceedings before the DRT and DRAT which
are basically guided by the principles of natural justice.105 The proceedings are
conducted with a justice-oriented approach, short of technicalities. Where the bank
was informed about the death of defendants, the application for substitution of legal
representatives was permitted by the DRT and on appeal by the DRAT.118

II. DEFENCE OF BORROWER

The tribunal issues a thirty days show-cause notice to the defendant why the
Tribunal should not admit the claim made by the Bank or Financial Institution.107 The
defendant shall then present his reply in the form of a written statement of his
defence.119 Through, the written statement, the defendant may claim set-off against
the applicant‗s demand.120 The defendant may also make any counter-claim against
the applicant by stating his grounds.121 Section 19A provides that written statement
may be filed in electronic form.122

The Tribunal may also pronounce an interim order in the form of injunction or
grant stay or an attachment against the defendant barring him from acts that may
undermine the applicant‗s interests.123 The DRT may also call upon the defendant to
furnish security of such value as is required to satisfy the certificate for the recovery
of debt. In case, the defendant fails to comply, the tribunal may command a fiat of

116
Pushpalatha v. South Indian Bank Ltd., (2009) 1 BC 10 (DRAT-Chen)
117
Kamaldheep Synthetic Ltd. v. Debts Recovery Appellate Tribunal, (2009) 2 BC 573 (Mad) (DB) 105 Supra
note 62 at 1941
118
Paresh Gupta v. Punjab National Bank, (2007) 140 Comp. Cas. 955 (DRAT-Del) 107 Section
19(4)
119
Section 19(5)
120
Section 19(6)
121
Section 19(8)
122
Supra note 225 at 201.
123
Section 19(4)

141

Page | 40
attachment of whole or part of the property. Disobedient defendant may be penalized
by the Tribunal for three months in civil prison.124

(a) Right of Defendant to Copies of Documents in OA

The defendant has the right to make copies of the documents which are
mentioned in the original application before they can be directed to file their written
statement.114 The defendant is entitled to have copies of all those documents
mentioned in the original application before he can be directed to give his written
statement.115 Once a document is specified in the pleading, the adverse party has a
right to get a copy of the same. The defendant has to be given all the documents
mentioned in Original application and then only he can be called upon to present his
written statement.125
The provision empowering the DRT to deal with counter-claims is only meant
to bring about a final order. Earlier, there was no provision for payment of fee for
filing a counter-claim before the Amendment Act, 2016 without giving retrospective
effect.
(b) Judgment in Absence of Written Statement
If there be found no reply to be the mark of active participation in the
proceedings, the Tribunal may, after following the civil court system, pronounce
judgment for want of the reply which is in the nature of a counter pleading.126

(c) Judgment on Admission of Liability

Where a borrower admits the full or part of the amount of loan due to a bank or
financial institution, the tribunal shall order such borrower to pay the loan, to the
extent of the admission, by the applicant within a period of one month from the date
of such order failing which the Tribunal may issue a recovery certificate to the extent
of amount of loan due admitted by the borrower.127

It may be noted that the Tribunal (DRT) is not only an executing authority to
recover loans but is empowered to decide loans by seeking into actual reasons shown
by borrower and such cause could be express in the form of counter-claim and set-off

124
Section 19(5) proviso 114
Supra note 14 at 1376 115 Ibid.
125
State Bank of Patiala v. Arihant Industries, (2001) 2 BC 84 (DRAT-Del)
126
The Recovery of Debt and Bankruptcy Act, 1993 Section 19(24)
127
The Debt Recovery Tribunal Procedure Rules, 1993 Rule 12(5)

Page | 41
by the borrower as put forth against the claim of bank.128 Having regard to reasons as
shown, the DRT has to fix the liability of borrowers who if succeeds, Tribunal has to
adjust such claim against loans alleged by the bank or financial institution.129

The Tribunal has to strike a balance between the parties‗ interests while
considering imposition of costs. Hardship and expenditure incurred by the parties in
defending or prosecuting the claim can be taken into consideration.130 The amendment
sought by the party was neither belated nor resorted to for protracting the litigation.

(d) Cross-examination of Witnesses

Rule 12(6) of the Debt Recovery Tribunal Procedure Rules 1993 explains the
method of cross-examination of witnesses. The adjudicating authority has no option to
deny production of witnesses for crossexamination.131 There were contentions that the
bank created false and forged balance confirmation acknowledgment and revival
letters to defeat the restrictions of limitation. The authority rejected the prayer. The
court said this approach of the tribunal as an authority violated the principles of
natural justice and Rule 12(6). Writ jurisdiction could be used to set right such
injustice.132

The right to cross-examine the witness of the adverse party who has filed
affidavits in evidence depends upon the facts and circumstances of each case.124
Endeavour has to be to serve substantial justice to the parties. Under the DRT Act,
1993 all the tribunals follow the principles of natural justice. 133 When necessary,
cross-examination of the witness of the adverse party should be allowed to straighten
the facts of the case and to bring clarity for the just decision of the case. 134 Where the
petitioner had given good and sufficient justification for cross-examining the

128
Supra note 62 at 1942
129
Mudit Entertainment Industries Pvt. Ltd. v. Banaras State Bank Ltd., AIR 2000 All 181 (DB); Ultamatix
Systems Pvt. Ltd. v. State Bank of India, (2008) 1 BC 365 (Bom) (DB); National Housing Bank v. Mal
Chand Periwal, (2008) 2 BC 606 (Del).
130
The Recovery of Debt and Bankruptcy Act, 1993, Section 19(25)
131
Supra note 14 at 1380
132
Allied Chemical Laboratories v. Presiding Officer, DRT, AIR 2005 Ori 32 124 Supra
note 62 at 1940.
133
Ibid.
134
Supra note 14 at 1380

141

Page | 42
witnesses in appeal, both the sides were directed to appear before the tribunal on a
specified date for cross-examination of witnesses.135

Cross-examination should be allowed when it is necessary and not when it is a

game, of the other party to prolong the case. Such cross-examination has to be
allowed where the witness concerned has presented an affidavit.136

Writ jurisdiction cannot be invoked for fetching a fiat of crossexamination of

the deponent in recovery proceedings where an effective remedy of appeal is available
under the Act.129

III.137 RECOVERY CERTIFICATE

When the bank achieves an order in its favour the Presiding Officer shall issue
a Recovery Certificate under his signature on the basis of the order of the Tribunal to
the Recovery Officer for recovery of the amount of loans stated in the certificate.138
Thereafter, the Recovery Officer proceeds to recover the loan. Moreover, once a
certificate is issued by the tribunal to the Recovery Officer, the defendant has no
option to dispute the correctness of the certificate. 139 Any order passed by the
Recovery Officer shall be deemed to have been dictated by the DRT and an appeal
against such order shall lie to the DRAT. Therefore, even against the order of refusal
passed by the officer, it was open to the petitioner to appeal before the DRAT. But the
petitioner cannot invoke the jurisdiction of the High Court under Article 226. The writ
petition does not lie.140

The adjudicating body under the DRT Act is adorned with all powers essential
to ensure enforcement of securities so as to give effect to its own certificate of
recovery. Where the Tribunal issues a certificate against a company, the fiat may call

135
AK. Bhardwaj v. Punjab National Bank, (2007) 140 Comp. Cas. 706 (DRAT—Del): S.P. Kanudia v.
Chairperson, Debts Recovery Appellate Tribunal (2007) 139 Comp. Cas. 144 All.); Veer Singh Kothari v.
State Bank of India, AIR 2009 Orissa 29 (DB); Sonu Textiles v. Punjab National Bank, AIR 2009 (NOC) 50
(Bom.) (DB); Krishan Kumar Soni v. Bank of Rajasthan, (2008) 3 BC 12 (DRAT-Delhi); Gurucharan v.
Andhra Bank, (2009) 1 BC 85 (DRAT-Del)
136
Dimapur Town Committee v. Debts Recovery Tribunal, (2004) 1 BC 145 (Gau-DB); A.K. Bhardwaj v. Punjab
National Bank, (2007) 140 Comp. Cas. 706 (DRAT-Delhi); S.P. Kanudia v. Chairperson
Debts Recovery Appellate Tribunal, (2007) 139 Comp. Cas. 144 (All)
137
Kowa Spinning Ltd. v. Debt Recovery Tribunal, AIR 2004 MP 1
138
The Recovery of Debt and Bankruptcy Act 1993, Section 19(7)
139
The Recovery of Debt and Bankruptcy Act 1993, Section 26(1)
140
R. Adavaiah v. Union of India, (2000) 102 Comp. Cas. 25 (AP) (DB); Sharda Fuels Distributors Pvt. Ltd. v.
Central Bank of India, (2008) 3 BC 209 (All) (DB)

Page | 43
for the sale proceeds of the securities to be distributed among its secured creditors, in
the manner prescribed by section 326 of the Companies Act, 2013.

(a) Validity of Certificate

The defendant is prohibited from questioning the correctness of the amount of

loan called upon to be repaid by him by the Tribunal or the Appellate Tribunal after
judgment.141 However, the section empowers the
Presiding Officer to withdraw the Certificate of Recovery or make alterations therein
by way of rectification of errors.

(b) Object of Recovery Certificate

The purpose of the Act is to enable the Presiding Officer of the Tribunal to
adjudicate upon the final amount of the loan and issue Recovery Certificate for being
executed and also to see whether the loan under recovery was subsisting, not time-
barred and legally enforceable.142

(c) Power of Presiding Officer to Withdraw Certificate

Power of the Presiding Officer under Section 26 to withdraw the certificate

issued by him is limited. They do not enlarge the scope of review as if the fresh suit or
appeal is being decided. Withdrawal is contemplated on setting aside of the decree in
appeal. Secondly, in case of any settlement or adjustment between the parties, the
certificate can be withdrawn. Otherwise, the Presiding Officer can‗t withdraw his own
certificate which has the effect of finality on adjudication of ―debt‖. After the issue
of Recovery Certificate, the Presiding Officer becomes functus-officio to enquire into
the constitutionality or validity of the decree passed.143 Under Section 26 of the DRT
Act, the correctness of the amount mentioned in Certificate cannot be challenged
before the Recovery Officer.144 The Presiding Officer of the DRT cannot go beyond
the terms of the decree on the pretext of review.145 Only to serve the ill motive of the
party concerned review petition could not be entertained by the Presiding Officer. The
adjudicating officer thus erred with illegality in entertaining the Review Petition and

141
The Recovery of Debt and Bankruptcy Act 1993, Section 26
142
Supra note 14 at 1452.
143
Id at 1453.
144
Ibid.
145
Supra note 62 at 1998

141

Page | 44
in granting stay of the recovery proceedings. The appeal was allowed with cost
following the consequences.146

(d) Power of Presiding Officer to Correct Clerical or Arithmetical Mistakes

The power of the Presiding Officer to correct clerical or arithmetical mistakes

is akin to Section 152 of the Code of Civil Procedure, 1908. Clerical or arithmetical
mistakes connote those of adding up, subtraction, multiplication or division. Where an
application filed to the DRT under Section 19(25) read with Section 26(2) of the DRT
Act, 1993, by the appellant bank for the amendment of the recovery certificate issued
by the Recovery Officer of the DRT was rejected. On appeal, the DRAT, dismissing
the appeal, held that there was no such clerical or arithmetical mistake in the decree
passed in the Original Application in accordance with which the recovery certificate
was prepared. If the bank was aggrieved by the decree in the Original Application, it
was entitled to prefer an appeal against it but the bank could not seek rectification of
clerical or arithmetical nature.147

Section 31A gives power to the Tribunal to issue Recovery Certificate in case
the decree or order passed before the commencement of the Amendment Act, 2000,
has not yet been executed and the decree-holder applies to it for recovery of the
amount.

3.3.1.5 MODES OF RECOVERY OF DEBTS UNDER DRT ACT, 1993

Recovery of debts can be done in the following modes:

• By attachment and sale;

• By taking possession;
• By arrest or detention in the prison;
• By appointment of the receiver;
• By any other method prescribed by the central government.148

146
Bank of Baroda v. Jitendra Kumar Achratlal Sheth, (2000) 2 BC 64 (DRT-Mum)
147
Punjab National Bank v. Rama Fibres Ltd., (2008) 141 Comp. Cas. 423 (DRAT-Del)
148
The Recovery of debt and Bankruptcy Act, 1993 Section 25

Page | 45
 The duty of recovery of debt has been cast upon recovery officer who shall
recover the amount of debt specified in the recovery certificate by adopting one or
more above mentioned modes as provided under section 25 and 28 of the RDB Act
1993.149

The RDB Act, 1993 is quiet about the forces to designate Receiver. The parties
under Section 22 of the Act are governed by the principle of natural justice. The
expression "principle of natural justice" is wide enough to include the power to
appoint a receiver.142 Recovery Officer who acts under the supervision of the
Presiding Officer has the forces under Section 25(c) to name a Receiver during
execution procedures.150

A.Power to grant Injunction

The DRT, no doubt, has the power to pass other kinds of stay orders or
injunctions. It may issue notice and after hearing the adverse party, pass orders, or, it
may pass ad interim orders without hearing the adverse party and then by giving a
subsequent hearing to it, pass final orders. Section 22(2) of the DRT Act, 1993 does
not narrow down the powers of the tribunal to those referred under section 22(1). All
that section 22(2) states that in case applications fails under (a) to (h), the Tribunal has
all powers vested in civil courts.151

The factors which tribunals should weigh for the grant of exparte injunction
may be enumerated as follows:

(a) Whether irreparable or serious mischief will ensure to the plaintiff;

(b) Whether the refusal of exparte injunction would result in greater injustice than
that of in case of granting it;

(c) The tribunal will also consider the time at which the plaintiff first had notice of
the act complained so that the making of improper order against a party in his
absence is prevented;

149
R. C. Kohli, Taxmann‟s Practical Guide to NPA Resolution, 205 (Taxmann Publications, New Delhi
4th Ed. 2017) 142 Supra note 14 at 1451.
150
Ibid.
151
Allahabad Bank v. Radha Krishna Maity, AIR 1999 SC 3426

141

Page | 46
(d) The court will consider whether the plaintiff had acquiesced for some time and in
such circumstances it will not grant ex-parte injunction;

(e) The court would except a party applying for ex-parte injunction to show utmost
good faith in making the application;

(f) Even if granted, the ex-parte injunction would be for a limited period of time;

(g) General principles like prima facie case, balance of convenience and irreparable
loss.152

The Debts Recovery Tribunal can pass any kind of order, final or interim order,
to achieve the objectives of the Act without any procedural lacunae, but at the same
time being guided by the principles of natural justice. It is pertinent to note that Banks
are within their right to pray to the DRT to attach and issue garnishee orders in case of
receivables of the defendants and amount so received can be appropriated in the
account with the orders of the DRT.146 The Tribunal is empowered to pass the
garnishee order directing the garnishee to deposit a certain amount with the applicant
bank, pending proceedings of recovery of debts under the Act, though not specifically
provided in Section 19(12) of the DRT Act.153

B. Other Modes of Recovery

152
Supra note 14 at 1394 146 Supra
note 141 at 211.
153
Singareni Collieries Co. Ltd. v. State Bank of Hyderabad, (1998) 2 BC 241 (AP)

Page | 47
 The Recovery Officer is empowered to adopt modes of recovery other than
those offered to him by Section 25. 154 He may adopt one or more than one of the
modes provided under this section for the recovery of adjudicated debt. Section 28
provides that the recovery officer may require by notice any person from whom a debt
is due to the defendant, to pay to such officer such amount as to satisfy the debt of the
defendant.155 He may also require by notice any person or persons, as the case may be,
who holds or subsequently hold the money individually or jointly with any other
person on account of the defendant to pay such officer the amount of the debt due
from the defendant.150 In case such payment made by such person or persons they
shall be discharged from their liability.151 In case of failure to pay such amount, such
person or persons shall be deemed to be defendant in default in respect of the amount
specified in the notice. A copy of such notice shall be transmitted to the defendant
also.

If the person required objects by making a statement on oath about holding any
money on behalf of the defendant, the person so objecting shall not be required to pay
the amount stated in the notice. However, if such a statement is found to be false later
on, such person shall be personally liable to pay such amount stated n the notice. This
mode specified under section 28 is, however, subject to any subsisting attachment
order issued by the Court. The Recovery Officer may also apply to the Court, in
whose custody money of the defendant is lying, for payment to him of so much of the
amount as is necessary for the recovery. It is further open for the Recovery Officer to
demand of the defendant to declare on affidavit the particulars of his assets. The
Recovery Officer is also empowered to recover any amount of loan by restraint and
sale of the movable property of the defendant in the manner laid down in the Third
Schedule of the Income Tax Act, 1961.156

Recovery Officer is empowered to issue orders at any stage of the execution

proceeding under a certificate of recovery and call any person to declare in an
affidavit the particulars of his or her estate. Requisition for filing of affidavits and
declaration of estate by the Recovery Officer under Section 28(4A) cannot be said to
be unwarranted. It cannot be said that calling the petitioner to file an affidavit and to
be examined on oath is beyond the powers of the Recovery Officer.

154
The Recovery of debt and Bankruptcy Act, 1993 Section 28
155
Supra note 141 at 205 150 Supra
not 14 at 1460 151 Ibid.
156
The Recovery of Debt and Bankruptcy Act, 1993 Section 29

141

Page | 48
 The Recovery Officer can‗t modify or cancel a certificate issued by a Presiding
Officer. The Recovery Officer is not empowered to accept any out of court settlement
or compromise even if it has entered into the terms of RBI Guidelines.

C. Application of Certain Provisions of Income Tax Act

The provisions of the DRT Act have been given penal effect only by application of
the Income-Tax Act, 1961. The intention of the legislature appears to be that a
defaulter of a loan amount due to a bank or financial institution is not to be forgiven
but the law against default should be severe even to the point of being dubbed
draconian. 157 Section 29 gives a way for the application of Second and Third
Schedules to the Income-Tax Act, 1961. Apart from this schedule of the said Act, the
Income-Tax (Certificate Proceedings) Rules, 1962 of the said Act is applicable with
required modifications.158

Borrowers from Banks and Financial Institutions are usually taxpayers and are
well versed with the process of recovery of tax. Keeping this in mind it is was realised
to recognize the Income-tax (Certificate Proceedings) Rules, 1962, with required
modifications, as one of the modes to be taken resort to for enforcing the recovery of
loans against judgment-debtors of banks and
Financial Institutions.159

D. Appeal against the Order of Recovery Officer

The defendant may move an appeal before the DRT within thirty days to
modify or set aside the order passed under section 25 to 28 by the Recovery Officer.

The statutory right under section 30 is an alternative remedy. There should be

no right to invoke the writ jurisdiction under such circumstances. It is always open to
the applicant to satisfy the Appellate Tribunal that since the amount sought to be
recovered was not in the nature of a debt, the Tribunal could not saddle the petitioner
with liability as a condition precedent to filing an appeal.160

157
Supra note 62 at 2004.
158
Supra note 14 at 1461.
159
Supra note 62 at 2004.
160
Oswal Agencies v. Recovery Officer, DRT, (2004) 2 BC 395 (All)

Page | 49
 Section 30 does not recognize any difference between a ―final order‖ and an
―interim order‖. An appeal can be moved against any dictate of the recovery officer,
be it a ―final order‖ or an ‗interim order‖. If a difference can‗t be drawn between a
―final order‖ and an ―interim order‖ of the Recovery Officer for going in an appeal,
on the same reasoning, a difference can‗t be drawn between two sets of appeals filed
against an order of the Recovery Officer for the purpose of the payment of court fees.

After the Amendment Act, 2000, an appeal is permitted to the DRT from the
order of the Recovery Officer and further to the DRAT. This is sufficient safeguard if
the Recovery Officer acts in an arbitrary and unreasonable manner. 161

Tribunal‗s power under Section 22(2) of the Act, 1993 are wider than the
powers of a civil court. Only limitation is that it should observe the principles of
natural justice.162

When an Auction purchaser acquired right in the property; his right to

get sale confirmation and right to recover possession of property depends on the result
of an appeal by the adverse party, the addition of the auction purchaser as a party to
the appeal is absolutely necessary.163

A second appeal is maintainable against an order passed by the Adjudicating

Officer under Section 30 of the Act. The petitioners may be granted time to prefer an
appeal before the Appellate Tribunal.160

3.3.1.6APPEALS TO APPELLATE TRIBUNAL (DRAT)

Section 20 of the RDB Act grants opportunity to the aggrieved party before the
adjudicating body for questioning its order and to prefer an appeal before the
Appellate body.

No appeal shall be preferred where the Tribunal‗s order had been obtained with
the consent of all parties. The aggrieved party should move its appeal within thirty
days of the receipt of the order along with fee as prescribed.

161
Continental Construction Ltd. V. State Bank of India, AIR 2004 Del 121 (DB)
162
Brihatakuchambal v. Presiding Officer, DRT-Chennai, 2010 (3) Banker‗s journal 502
163
Suresh Chandra Biswas v. State Bank of India, 2010 (1) Banker‗s Journal 809 160 Supra
note 62 at 2006.

141

Page | 50
 In the context of Sections 17(2) and 20(1), the words ―any order‖ or ―an order‖
include every order of the Tribunal dictated under the Act which affects the rights or
liabilities of the parties. Even an interim order passed under the DRT Act is subject to
appeal in case it affects some right or liability of any party.

(a) Condonation of Delay by Appellate Tribunal (DRAT)

If the appeal is filed after the limitation period lapsed, the Appellate body may,
however, condone the delay if it is satisfied with the sufficient cause shown by the
party.164 The Appellate Tribunal (DRAT) shall attempt to decide on the appeal within
six months. This provision manifests the intention of the lawmakers to ensure that the
remedy for recovery of loans by banks or financial institutions should be swift and
more effective under this legislation than any remedy for such recovery by a suit
before a civil court.165

(b) Scope of Section 20 of the RDB Act

Section 20 provides that any person aggrieved by an order pronounced by a

tribunal under this Act, may file an appeal to DRAT having jurisdiction within a
limitation of 45 days from the date of the order in question. Where an alternative
remedy is prescribed, the court may decline to intervene until the alterative remedy is
exhausted, particularly, when the decision of the case depends upon the
preponderance of evidence. A writ petition against orders passed by the DRT is not
amenable. 166 The court cannot intervene with such orders. It will leave it with the
petitioner to avail the statutory remedy of appeal. Where the bank moved an
application before the tribunal and obtained Recovery Certificate, giving the bank a
right to recover some of its loans from the defaulter. The option open to the
respondent is to move an appeal before the DRAT and a writ petition is not
maintainable.167

A writ petition against interim orders of the Tribunal is not maintainable. An

effective remedy of Appeal to DRAT is provided under

164
Supra note 14 at 1404.
165
Ibid.
166
Id at 1407.
167
Radha Ravi v. Indian Bank, Alwarpet Branch, (1999) 96 Comp. Cas. 272 (Mad); Continental
Construction Co. Ltd. v. State Bank of India, AIR 2004 Del 121; Canara Bank v. Paul D‟Souza, (2003) 2
BC 19 (Kar-DB); ATV Projects India Ltd. v. State of Maharashtra, (2008) 4 BC 221 (Bom-DB)

Page | 51
Section 20. In the context of sections 17(2) and 20(1), the words ―any order‖ or ―an
order‖ of the DRT, include every order of the tribunal which alters the rights or
liabilities of the parties. Even an interlocutory order passed by the tribunal is an order
passed under the Act and is subject to appeal under Section 20(1) provided it
adversely affects some right or liability of any party. The DRT Act provides an
adequate and efficacious remedy for getting relief in respect of any adverse order
passed by the Tribunal. The writ remedy provided under Article 227 of the
Constitution of India is not meant to supersede the methods of getting relief before
Appellate Tribunals.168

However, a verdict of the Appellate Tribunal is not final in itself. It can be

judicial reviewed by the High Court under the Constitution.169 In appropriate cases,
the High Court would not delay to interfere if justice demands despite the statutory
remedy of appeal. The remedy of appeal does not prohibit the remedy of writ
jurisdiction in case the order of the Tribunal was prima facie arbitrary, erroneous and
unreasonable.170

It was held that while approaching the High Court directly under Article 226, it
is self-evident that the petitioner will have to prove an exceptional case. It held that
aggrieved person must have raised objections at the earliest possible opportunity and
they cannot take recourse to any deliberate tactics to indefinitely prolong the recovery
forcing buyer to back out.168

(c) Additional Evidence at Appellate stage

Additional evidence may be produced at the appellate stage as provided by

Rule 27 of Order XLI of CPC subject to the conditions for adducing additional
evidence which has to be satisfied.169

(d) No Review or Revision of DRT order

168
National Bank v. Presiding Official, DRT (2003) 2 BC 695 (Cal); Mohd. Yunus v. Mohd. Mustaqim AIR 1984
SC 38
169
Union of India v. Delhi High Court Bar Association, AIR 2002 SC 1479; relied in Nahar Industrial
Enterprises Ltd. v. Hong Kong & Shanghai Banking Corporation, (2009) 8 SCC 646.
170
Hindustan Ferro & Industries Ltd. v. DRT, AIR 2001 All 155 168M/s. Hotel
Paras Garden v. Central Bank of India, 2015 (4) ABR 375 169 Supra 14 at 1404.
170
Id at 1409.

141

Page | 52
 The adequate remedy against DRT orders is to file an appeal to the DRAT
under Section 20 of the DRT Act. An application for judicial review or revision by the
High Court is not amenable.170 A person can‗t invoke the High Court‗s writ
jurisdiction under Article 227 of the Constitution of India. The power of judicial
supervision by the High Court through writ orders has its source as the Constitution of
India and not the Civil Procedure Code, 1908. Therefore, civil revision under Section
115 of the C.P.C. is also not amenable.

The DRT Act does not contemplate for review DRT‗s own judgments.
However, this power is controlled by the Code of Civil Procedure and appeal against
such review is not amenable.172 Appellate Tribunal under the DRT Act should not
allow appeal against orders passed by the Tribunal on review application.171

(e) Pre-deposit on Filing Appeal and Waiver

Section 21 provides for deposit of fifty percent amount of debt due on filing
appeal, in case the borrower intends to file an appeal.174

However, the Appellate Tribunal is empowered to reduce the amount to be

deposited by twenty-five percent of the amount of such debt so due to be deposited
under this section. But such reduced amount cannot be less than twenty-five
percent.172

The petitioners could not place anything on record for not complying with the
conditions of Section 21. The order of rejection by an appellate tribunal could not be
interfered with in the exercise of writ jurisdiction and the validity of the section was
upheld.173

No third party, neither a borrower nor a guarantor and under no contractual

obligation for discharging the loan, can move an application for pre-deposit under
section 21 of the DRT Act.174

Section 18(1) of the SARFAESI Act entitles a statutory right on a party to the
case aggrieved by any order made by the DRT under Section 17 of the Act to move an
appeal to the Appellate Tribunal after deposit of fifty percent of loan amount that may

171
Hemender Sharma v. Indian Overseas Bank, (2001) 1 BC 81 (DRAT-Del) 174 Supra
note 14 at 1966.
172
Ibid.
173
Jamshed M. Pandey v. Indian Renewable Energy Dev AG, (2006) 4 BC 245 (Del-DB)
174
Sajeda Khatoon v. Bank of India, 2013 (1) CHN (Cal) 316

Page | 53
be reduced by DRT up to twenty five percent. Keeping in mind the object of the Act,
the conditions provided in the said proviso cannot be said to be onerous. Thus, the
court holds that the requirement of deposit under Section 18(1) of the Act is
mandatory and the provisions contained in Section 18 of the Act should be enforced
with full effect. In that view of the matter, no court, much less the Appellate Tribunal,
a creature of the Act itself, may decline to give full effect to the provisions of the
Statute. The court held that deposit under the second proviso to Section 18(1) of the
Act being a condition precedent for filing an appeal under the said Section, the
Appellate Tribunal had committed an error in law in admitting the appeal without
directing the Appellant to make compliance with the said mandatory requirement.175

(f) Appeal by Third Person

The remedy is also available to a person who is not a party to the case before
DRT but whose assets have been declared by the Tribunal to be validly mortgaged in
favour of the bank. Such persons have the right to go for an appeal. 176 Under Section
19(25) if the aggrieved party is permitted to take participation in the proceedings, the
Tribunal can, in order to prevent abuse of the process, exercise jurisdiction and
adjudicate upon that issue and exercise powers granted by Section 22 of the Act. It
was held that the Tribunal was bound to entertain the application so filed and dispose
it off in accordance with the law. Opportunity should be given to all parties before
DRT to put their objections, if any.177

3.3.1.7 POWERS OF TRIBUNALS

i. Tribunals Deemed to be a Court

The Tribunals are empowered under Section 22 of Act to regulate their own
procedure. Such enactment is thus a departure from the general rule that the Civil
Procedure Code govern the proceedings conducted in tribunals. The Act also provides
for the passing of final orders within six months. If the oral evidence is permitted to
be produced in all the cases, it will hamper the very object of the Act.178 However, the
Tribunals are deemed to be a Civil Court for all purposes of the Civil Procedure,
Criminal Procedure and Penal Codes.

175
Narayan Chandra Ghosh v. UCO Bank, AIR 2011 SC 1913
176
The Debt Recovery Tribunal Procedure Rules, 1993 Rule 5A(1)
177
Anil Nand Kishore Tibrewala v. Jammu & Kashmir Bank Ltd., (2007) 1 BC 6 (DB); Rishi Gupta v. State
Bank of India, (2008) 3 BC 30 (DRAT-Delhi); Lalit Kumar Jivabhai Thakkar v. State Bank of India, AIR
2010 Guj 4 (DB)
178
Supra note 14 at 1418

141

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 ii. Tribunal Guided by Natural Justice

Section 22 contemplates that DRT and DRAT shall follow the principle of
natural justice and shall not be bound to follow the procedural provision under the
Code of Civil Procedure, 1908. It is now well settled that where passing of an order
requires application of civil rules, in such case principle of natural justice have to be
followed.179

The object underlying the rules of natural justice is ―to prevent miscarriage of
justice‖ and secure ‗fair play in action‗.180 Where an order results in adverse or penal
consequences, the order must be passed in accordance with the principles of natural
justice.184

Even if the provisions of the Civil Procedure Code are not applicable to the
procedure of DRT, it shall be guided by principles of natural justice besides the
Tribunal follows the procedure provided by the Act and Rules and Regulations framed
under it.185 The Tribunal can‗t stop the cross-examination of a witness on the ground
that he has stayed in the witness box for a long time. The time period for cross-
examination cannot be strictly fixed. Only the abuse of the right should be required to
be prevented.

But, the Legal Rules are meant to facilitate and not to obstruct the Court or
Tribunal from doing substantial justice. 181 The technicalities of law and procedure
cannot come on the way of the Court or Tribunal from doing substantial justice.

Not only Tribunals, even High Court should also try to see those defaulters,
who are trying to avoid or delay repayment of loans taken from banks and financial
institutions. These borrowers cannot claim that some procedural law was not strictly
followed in the matter of recovery of loan payable by borrowers.182

The Tribunal (DRT) and the Appellate Tribunal (DRAT) have been vested with
the same powers as Civil Courts possess under the Code of Civil Procedure, 1908.

179
Hindustan Lever Ltd. v. Director General (Investigation & Registration), AIR 2001 SC 66; Chandmal Gupta
v. Central Bank of India, (2010) 1 BC 190 (DRAT-Del)
180
S.N. Mukherjee v. Union of India, AIR 1990 SC 1984 184 K.L.
Tripathi v. State Bank of India, AIR 1984 SC 273 185 Supra note 14
at 1419.
181
Ibid.
182
Bhanu Constructions co. Ltd v. Recovery Officer, DRT, Hyderabad, 2010 (3) 563

Page | 55
Therefore, Section 22 has to be read with CPC, Order IX Rule 13, which contemplates
for setting aside an ex-parte decree passed against a defendant.

3.3.1.8 LIMITATION ACT APPLICABLE TO TRIBUNAL (DRT)

By virtue of Section 24 of the RDB Act, 1993, an application before the

Tribunal (DRT) or an appeal preferred before an Appellate Tribunal (DRAT), should
be made within a period of three years. The provisions of the Limitation Act, 1963 are
implemented to applications under the DRT Act. Hence, limitation is applicable under
the RDB Act, 1993. It was proper to give an opportunity to the bank to apply for
condonation of delay.183

Provisions of Limitation Act, 1963 are also implemented in case of appeal

against the order passed by the recovery officer under Section 30. Furthermore,
applications under Section 19, 30(1) and 31-A will also come definition of
―application‖ under Section 2(b).184

The period for filing an application under Section 19 is limited to three years.
Every suit instituted, appeal preferred and application made after the prescribed period
shall be dismissed although limitation has not been set up as a defence. 185
Unfortunately, the section does not prescribe the point when limitation should begin.
By analogy, it would appear safe to consider the date appearing on the documents
related to the alleged debt as the date of commencement of limitation.

The time taken for obtaining certified copies is to be excluded. 186 The
application was filed in this case within three years from the close of the year 1995 in
which the credit was made. This was held to be within limitation as per
Article 1 of the Limitation Act.187

3.3.1.9 OVERRIDING EFFECT OF ACT

183
Theatre Mathi v. Indian Bank, (2004) 4 BC 406 (Mad); Ramesh Suri v. Punjab Co-operative Bank,
(2000) 1 BC 61 (P&H); Dr. Satish Sharma v. Sundicate Bank, (2008) 2 BC 28 (All) (DB)
184
Madhukar Govindrao Taware v. Central Bank of India, 2011 (2) Banker‗s Journal 170
185
The Indian Limitation Act, 1963 Section 3
186
Fertiliser Mfg. Co. of India v. State Bank of India, (2002) 2 BC 60 (DRAT-Cal)
187
Allahabad Bank v. Bajarang Enterprises, (2004) 1 BC 141 (DRAT-Ran)

141

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 Section 34(1) of the DRT Act, 1993 provides an overriding effect over other
laws for the time even these laws are inconsistent with this Act. Subclause 2 is a
saving clause for special laws such as the Industrial Financial Corporation Act, 1948,
the State Financial Corporation Act, 1951, the Unit Trust of India Act, 1963, the
Industrial Reconstruction Bank of India Act, 1984, the Sick Industrial Companies
(Special Provisions) Act, 1985 and the Small Industries Development Bank of India
Act, 1989.

Once the Recovery Certificate is issued, then it has an overriding effect on all
other laws in force. Section 34 of the RDB Act has an overriding effect over the state
acts i.e. the U.P.Z.A. L.R. Act.188

The UTI Act has since been repealed. The SICA, 1985 is repealed and replaced
by Chapter XIX of the Companies Act, 2013 (Section 253 to 269).

The RDB Act, 1993 (51 of 1993) and the SARFAESI Act, 2002 being special statutes
hall prevail upon the provisions of general statute like the Arbitration and Conciliation
Act, 1996 (26 of 1996). Only the DRT has exclusive jurisdiction to adjudicate
disputes in the absence of an arbitration clause in the Loan Agreement.189

3.3.1.10 CHALLENGES IN THE RDB ACT, 1993

DRT was initially set up for speedy adjudication and recovery of debts due
tobanksand financial institutions. DRTs deal with two different Acts: the RDB Act,
1993, and the SARFAESI Act, 2002. While the aim of both the Acts is one and the
same, but their route is different.

Like any other tribunal system, DRT has also certain shortcomings. Initially,
DRTs did perform well and helped lenders recover substantial parts of bad debt, but
their progress stumbled when it came to large and powerful borrowers, who were able
to stall proceedings on various grounds, including that claims against the borrowers
were pending in civil courts. If theDRTwere to adjudicate the matter and auction their
properties, irreparable damage would occur to them while cases were still pending
elsewhere in the judicial system.

So what are the major problems that the DRTs face?

188
Urmila Devi v. Allahabad Bank Civil Misc. 2013 (1) Bankers Journal 361
189
Surya News Print & Papers Pvt. Ltd. v. Branch Manager, State Bank of India, AIR 2010 Ori 32

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 Time taken for a case is driven largely by the number of trial failures.

Pushed by the Reserve Bank of India, Indianbanksare on an overdrive to

recognise and provide for stressed loans. While this will undoubtedly clean up the
books, bankers are worried about how they will recover the bad debts, fraught as the
process is with inordinate delays and hurdles.

The Indian court system is very famous for the time taken to resolve the cases.
It has been remarked that the most effective method of dispute resolution in these
courts are the out of the court settlement, withdrawals and compromises. The cases
both in the district court and the High Court are subject to long delays. While the legal
scholars point various for the inefficiency of the court system, it is widely
acknowledged that the loopholes are important factors. The code which is known as
the civil procedure code allows for numbers of applications, counter applications and
special leaves by both the plaintiff as well as the defendant. Although both the central
and state legislature has attempted to reform the code by enacting the various
amendments but the general consensus is that these attempts have been unsuccessful.
In this setting, the benefit from filing a legal suit against the defaulting borrower is
very low and the cost has been very high. In addition to this, the bankruptcy procedure
for the firms is time-consuming and the banker complains that it creates incentives for
the borrowers to mismanage the funds.

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 theDRT.

 Delaying Tactics by Large Borrowers

A prime example is the debt racked up by Vijay Mallya-

promotedKingfisher Airlines.A consortium of banks, led by India‗s largest lender
State Bank of India, is fighting 20 cases across various courts, including the DRT,
since June 2013. So far, more than 500 hearings have been held with over 180
adjournments. It appears that the Act is being misused. But, it can‗t be a justification
to say that the Act oppresses the borrowers. Moreover, 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.

141

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 As a standard process, borrowers should give a request to the bank to allow
them 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. Whereas, practically, due to already stretched proceedings of the
tribunal, the bank officials are obliged to offer One Time Settlement Scheme to the
borrowers but on the other hand the borrowers prefer to wait to negotiate their
borrowings on their own terms at their own convenience.

In many cases, when the Bank takes steps to take possession of the property
and takes step to sell the same, the borrowers ignore the Bank notice under section 13
(2) and then approach the tribunal which is not right recourse for the borrowers. Thus,
the borrowers have been careful when the Bank exercises its powers under the
SARFAESI Act, 2002 and with the expert guidance and assistance; they can protect
their rights effectively.

 Lack of Clarity on Procedural Law

The DRT Act being a special law must deal with clear provision related to
substantive and procedural rights of the parties. However there are certain anomalies
in certain provisions within the Act itself that helps borrower to escape from the
liability to pay his debts

The question is whether borrowers must choose this remedy or whether they
are also entitled to file an independent suit in the appropriate civil court. There are two
conflicting Supreme Court decisions on this point and two others which are
ambiguous.

In Indian Bank v. ABS Marine Products, (2006) 5 SCC 72, Indian

Bank asked for a suit filed by ABS Marine in the Calcutta High Court to be
transferred to the DRT. The Supreme Court held that such an independent suit filed by
a borrower could not be transferred to the DRT without his consent, since his right to
approach a civil court cannot be taken away. This decision raised fears that the
jurisdiction of the DRT could be easily evaded by a borrower filing an independent
suit in civil court asking for the exact opposite of what the Bank was asking for in the
DRT.

In SBI v. Ranjan Chemical Ltd. (2007 1 SC 97) the SC held that its power to
transfer the suit does not depend upon the consent of the parties. It is difficult to

Page | 59
reconcile this decision of court with ABS marine especially since the court ordered
the transfer of the suit on the ground that it would avoid duplication of evidence,
counsel, expenses etc. The concern that this decision raised is that the DRT may be
unable to handle suits that involve complex questions of law or fact and that the Bank
could prevent a borrower from approaching a civil court to resolve these questions by
merely filing a claim in the DRT. The DRT has summary proceedings and has
traditionally been considered ill-equipped to consider claims like misrepresentation or
fraud, which require cross-examination of witnesses.

Thus, the law on this point is unclear. This dispute has important implications
for the role of the DRT in Indian law and commerce and the ability of the borrowers
to have legitimate disputes adjudicated by the civil courts. Equally important is
ensuring the objective of setting up the DRT expeditious disposal of banking cases is
hampered by allowing the borrower to frustrate its jurisdiction.

The tribunal has no jurisdiction to adjudicate to entertain application for

winding up of a company, as an application for winding up is a special right or
remedy given under the Companies Act, 1956. The tribunal has also no jurisdiction
over co-operative banks: Sec 2(d) of the Banking Regulation Act, 1949 does not
include co-operative banks.190

Though DRT was brought into existence to provide for speedy procedure
different from general civil proceedings but these seem going on the same track as the
general civil courts. DRTs have been plagued with Complications like filing of
application and counter pleadings, stay of the proceedings Adjournments of the
hearings etc. Moreover, different DRTs are following different procedures for the
conduct of the hearings.

 No Penal Provisions

The DRT Act provides for civil remedy to the banks to recover their dues. With
the passage of time and increasing incidence of NPA, the borrowers have become
courageous to default their huge loans deliberately. Since the Act provides only for
civil action by the banks, the banks do not have options to prosecute the defaulters.
Moreover, the general penal laws are insufficient for the prosecution of defaulters. It
is important to note that the Act though provides for arrest but that hardly affects the
borrower as it has limited implications due to its civil nature. Due to the inadequacy of

190
Phonix Impex v. State of Rajasthan, 1998 (2) WLC 59 (Raj) (DB)

141

Page | 60
the penal laws in this reference, the bankers hesitate to move FIR against the
defaulting borrowers.

 Inadequate Infrastructure

There are a total of 39 DRT, 4 DRATs currently functioning in the country.

However, with a view to rising pendency of cases, the number of DRTs and staffs
working therein are still inadequate. Only Few DRTs are having separate benches in
the same cities. Moreover, since banks have their branches even in rural and remote
areas, the Bank officials find it difficult to file and follow DRT proceedings due to
distance from their branch.

Understaffing and lack of recovery experts in banks are other causes that create
major problems to deal with NPA accounts of the banks. What happens practically
that once due period is lapsed; banks have to declare these accounts as NPA and to
send it to their recovery cell for the treatments. Banks does not have recovery expert
in their branch. Ultimately, the same became the responsibility of the Bank Managers
and other officers who are generally already occupied with several other banking
duties.

Moreover, with most of the Recovery Officers holding more than 1000 files per
person, it is humanely impossible for such Officers to undertake or complete the
proceedings in a time-bound manner. It should also be noted that the Recovery
Officers are also required to undertake inspection, physical verification of all the
properties brought by them for enforcement.

3.3.2 THE SECURITISATION AND RECONSTRUCTION OF FINANCIAL

ASSETS AND ENFORCEMENT OF SECURITY INTEREST ACT, 2002

Apart from the RDB or DRT Act, the SARFAESI or NPA Act 2002 plays a
vital role in the recovery of bad loans. With a view to regulate the operations of the
securitization market in India, and to ensure financial discipline and control in respect
of the rights and obligation of the players, the legislature has enacted the SARFAESI
Act, 2002. The Securitization Act also contains the following provisions:

a) The rights of a secured creditor to be exercised by one or more of its officers

authorized in this behalf in accordance with the rules made by the
Central Government;

Page | 61
b) An appeal against the action of any bank or financial institution to the concerned
Debts Recovery Tribunal and a second appeal to the Appellate
Debts Recovery Tribunal;
c) Setting up or causing to be set up a Central Registry by the Central Government
for the purpose of registration of transactions relating to securitization asset
reconstruction and creation of security interest;
d) Application of the proposed legislation initially to banks and financial
institutions and the empowerment of the Central Government to extend the
application of the proposed legislation to non-banking financial companies and
other entities.
e) Non-application of the proposed legislation to security interests in agricultural
lands, loans not exceeding rupees one lakh and cases where eighty percent of the
loans are repaid by the borrower.

3.3.2.1 SCOPE OF THE SARFAESI ACT

a) Retrospective in Nature:

The provisions of the SARFAESI Act, 2002 are procedural in nature and being
procedural, are retrospective in nature. The provisions in the Act giving an option of
enforcement of security interest in secured assets, not through the court or tribunals
but by the secured creditor directly. The language used by the Legislature in the Act is
more than sufficient to show the intention of the legislature to include the transactions
of loan already entered into on the date when the Act came into force and, therefore,
merely because in Section 13(2) of the SARFAESI Act there is a use of words
―makes any default‖, it cannot be read that the SARFAESI Act would not apply to
the loan transaction and security interest created prior to the Act came into force.191 It
is well settled that all procedural laws providing for remedial measures, either of
realisation of money or for imposition of penalty are retrospective to the extent for
covering the conditions for applying the remedy already accrued earlier or
retroactive.192

b) Simultaneous proceedings under the RDB Act and the SARFAESI Act

The two types of suits, namely a suit to recover a debt and to enforce security
given to secure repayment are entirely different. The former suit under the DRT Act,

191
Supra 14 at 1481.
192
Apex Electricals Ltd v. ICICI Bank Ltd., (2003) 117 Comp. Cas. 412 (Guj)

141

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1993 which is a general Act is different from the later one instituted under the
SARFAESI Act which is a special legislation. The DRT Act covers loans and
advances and all types of recoveries of receivables whereas the SARFAESI or the
NPA Act deals only with a given amount becoming irregular or out of order. 193 The
relief granted under the SARFAESI Act, 2002 is complementary to the remedy under
the RDB Act, 1993. Together, they compose a single remedy and, therefore, the
principle of election does not apply.194195

Withdrawal of the original application pending before the DRT under the RDB
Act 1993 is not a pre-condition for taking recourse to the SARFAESI Act, 2002.200 It
is for the bank or Financial Institutions to exercise its discretion as to cases in which it
may apply for leave to withdraw and cases in which it may not do so.201 The purpose
of the SARFAESI Act, 2002 and the RDB Act is to bring about rapid realization of
security. The difference between the two Acts lies in the way that under the
Securitisation Act, the banks or Financial Institutions are empowered to assign
security interest to the securitisation and reconstruction company. The borrower is
under an obligation to repay as well as to keep up the margin and value of securities
so as prevent mismatch between asset and liability in the bank‗s books. 196 Non-
performance of this obligation attracts the provisions of the twin Acts.197

For attachment of mortgaged property, enforcement of simultaneous

proceedings under the RDB Act and the Securitisation Act is permissible. The
requirement of law is only to issue notice under Section 13(2) of the Securitisation
Act. The Act does not bar the bank from proceeding under the SARFAESI Act even if
the original application is pending before the Debts Recovery Tribunal (DRT). 198
Permission of the Debts Recovery Tribunal (DRT) is not a pre-requisite for a bank or
FI to invoke the provisions of Section 13 of the Securitisation Act. Power has been
conferred on the DRT under Section 19(1)(c) third proviso of the RDB Act only to
refuse or grant permission for withdrawal and not prevent a bank or financial
institution from invoking provisions of the Securitisation Act.199

193
Unique Engineering Works v. Union of India, (2004) 2 BC 241 (Utta-DB); Pradeep Kumar Gupta v. State of
U.P. AIR 2010 All 3 (DB)
194
Transcore v. Union of India, AIR 2007 SC 712; Sat Parkash v. State of Punjab, AIR 2008 (‗NOC)
195
(P&H) (DB); Anil Kumar Akela v. State Bank of India, (2015) BC 386 (Jhar) 200 Supra
14 at 1503 201 Ibid.
196
Ibid.
197
Transcore v. Union of India AIR 2007 SC 712; Ace Media Advertisers Pvt. Ltd. v. Bank of Baroda AIR 2009
All 120 (DB)
198
Punjab and Sind Bank v. Harsh Vardhan (2010) 2 BC 39 (DRAT)
199
Sahir Shah v. Bank of India (2007) 138 Comp. Cas.745 (Ker) (DB)

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 Analysing the scheme of the NPA Act, 2002, the DRT Act and State Sales Tax
Acts, the Supreme Court emphasis that the NPA Act, 2002 enables banks and
financial institutions to realize long-term assets, manage the problem of liquidity,
assets-liability mismatch and to improve the prospect of recovery by exercising
powers to take possession of securities, sell them and reduce the non-performing asset
(NPA) by adopting measures for recovery and reconstruction. This SARFAESI Act is
not in derogation of the DRT Act, 1993.200 The Act removes fetters which were in
existence on rights of secured creditors. The DRT Act provides for various modes of
recovery. It incorporates the provisions of Schedule II and III of the Income-tax Act,
1961. It provides for adjudication of disputes so far as the recoverable debt is
concerned. It covers secured as well as unsecured debts.201

c)Exemption from the NPA Act 2002

Transactions related to a lien on any goods, money or security, a pledge of
movables, security interest in any aircraft or any vessel or in agricultural

land, rights of unpaid seller properties exempted under section 60 of the CPC, 1908
are exempted from SARFAESI proceedings under section 31 of the Act. In case the
amount due is not more than twenty percent of the loan amount and interest, it is also
exempted under the Act.208d)Pecuniary Limit

There is no provision in the NPA Act, 2002 like the DRT Act 1993 that draw
any limit on the debt required to be securitized or recovered. However, an appraisal of
Section 31(h) of the NPA Act, 2002 indicates that the Securitisation Act does not
apply to the security interest not exceed Rs. one lakh.209 Therefore, all financial
assistance exceeding Rs. one lakh are covered by the provisions of the NPA Act,
2002. Powers given to the DRT under the
NPA Act 2002 may be exercised over and above the Tribunal‗s powers conferred on it
under the RDB Act, 1993.

e)Agricultural land

It can be inferred from section 31(i) that the Act does not apply to agricultural
210
land. In a case, the petitioner has failed to repay the dues of the bank even upon a
possession notice, the landed property of the petitioner was acquired by the
respondent-bank. The petitioner challenged the action of the bank contends that the

200
Central Bank of India v. State of Kerala, (2010) 153 Comp. Cas. 497 (SC)
201
Transcore v. Union of India, AIR 2007 SC 712

141

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land is agricultural land immune from proceedings under the SARFAESI Act by
virtue of section 31(i) of the Act, 2002. The DRT held that the property had been
bought for the purpose of processing seafood commercially and could not be treated
as used for agricultural objective. Higher Court dismissing the revision petition held
that existence of buildings and plant and machinery in the land was undisputed fact.
However, by mere payment of land revenue, the land could not be treated as
agricultural land. But on the other hand, there were no materials placed by the
petitioner to show that

208 209
The SARFAESI 2002, Section 31 Supra
note 14 at 1550.
210
141 at 130.
any agricultural operations were being conducted on any part of the land. The seafood
business of the petitioner could be said to be an industry related to pisciculture and the
land could not treat as being used for agriculture. Therefore, it was not exempted
under the SARFAFSI Act, 2002.211 The concept of Agriculture land under the
SARFAESI Act is narrower than that under Land laws.
In a case the Court held that in order to be exempted under Section 31(i), the
alleged land should be used for agricultural purposes and has a nexus with the
agricultural user. Further, a depiction of a land cannot be held be only pinpointing the
agricultural nature of the land.212f)Jurisdiction of Civil Courts Barred
Section 34 bars the Civil Court from exercising jurisdiction to entertain any suit
or proceeding in respect of any matter which a DRT or DRAT empowered by or
under this Act.213 Civil Court cannot take cognizance of the proceedings initiated
under the Securitisation Act. Therefore, only DRT is empowered to exercise
jurisdiction and to take cognizance of the matter concerning the Act.
Stringent measures have been allowed to recover cash loaned by banks and
budgetary organizations. Statutory sanctions have been conceded for recovery of
public loans. The objective behind restriction in the application of procedural law
under the Code of Civil Procedure is to serve the public interest under the SARFAESI
Act. In absence of the provisions under the SARFAESI Act, banking and financial
institutions were not able to make quick recoveries of cash loaned to borrowers.
Having barred the jurisdiction of the civil courts, the lawmakers did not fail in their
obligation to acknowledge the vital protections to aggrieved parties by moving to the
DRT under section 17 of the SARFAESI Act, 2002 for defending their interests.214

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 In the event that bank or Financial Institutions proceeds under section 13(4)
under the SARFAESI Act, such action can't be subject to an order of injunction of the
civil court. 202 However, the determination of other rights of the mortgagor in the
mortgaged property is not barred.203

3.3.2.2 DEFINITION
 Bank
The definition under section 2(1)(c) of Bank is broad enough to include the Co-
operative Banks for recovery purposes under the DRT Act, 1993 and the SARFAESI
211
Gajula Exim P. Ltd. v. Authorised Officer, Andhra Pradesh (2009) 149 Comp. Cas. 489 (A.P.)
212
Silicon Valley Auto Components Pvt. Ltd. v. Indian Bank 1 (2015) BC 347
213
14 at 1554.
214
14 at 1554.
Act, 2002.204 Therefore, their recovery proceedings have to be before the Debts
Recovery Tribunal (DRT) and not before Authorities under the Co-operative Societies

Act. Awards, certificates of recovery or orders passed by such authorities

without jurisdiction were invalid.218 The provisions of the State Co-operative Societies
Act were to be read down to exclude the power of authority to adjudicate or order
recovery of claims of co-operative banks from borrowers.205206

It must be noted that the Central Government has specified vide notification
that ―Regional Rural Banks‖, as defined under clause 2(f) of the
Regional Rural Banks Act, 1976, falls within the definition of ―bank‖ for the purpose
of the SARFAESI Act.220

 Borrower

The expression ―Borrower‖ occurring in Sections 2(1)(f) and 13(2) of the

SARFAESI Act, 2002 read with Section 58 of the Transfer of Property Act,

202
Abdul Azeez v. Punjab National Bank (2005) 127 Comp. Cas. 514 (Ker.)
203
Krishna v. Kedarnath (2006) 3 BC 9 (Kar-DB)
204
Manorama Mohanty v. Authorised Officer, Urban Co-operative Bank Ltd., 2013 (1) OLR 613 218 Supra
note 53 at 2025.
205
Greater Bombay Co-operative Bank Ltd. v. United Yarn Tex (P) Ltd., AIR 2007 SC 1584; Nakodar Hindu
Urban Co-operative Bank Ltd. v. Deputy Registrar, Co-operative Societies, AIR 2010 P&H 20; M. Babu
Rao v. Deputy Registrar of Co-op. Societies, (2005) 126 Comp. Cas. 708 (AP-FB); George Kutty Abraham v.
Secretary, Kottayam District Co-operative Bank Ltd., AIR 2008 Ker. 137 (DB); Rama Steel Industries v.
Union of India, AIR 2008 Bom 38 (DB); Hafiz Zakir Hussain v. Akola Janta Commercial Co-operative Bank
Ltd., AIR 2008 MP 193 (DB)
206
at 1484.

141

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1882 shall include the original mortgagor and after his death his legal
representatives.207

Definition has to be understood in light of Object of the Act rather than a literal
reading. Thus, liability of borrower (also the mortgagor) under SARFAESI cannot be
said to have extinguished on account of the death of mortgagor.222 His legal
representatives would be equally bound and covered under the definition of
borrower.208

Even the guarantor or surety is included in the definition of the word

―borrower‖ under Sections 2(1) and 13(13). The guarantor is also given 60 day‗s
time to carry out his obligation pursuant to notice under Section 13(2) of the
SARFAESI Act, 2002.209210

3.3.2.3 ASSET RECONSTRUCTION AND SECURITISATION

A-Genesis and development

The first structured asset securitization occurred in 1970 in the United States
when the newly created Government National Mortgage Association began publicly
trading in securities backed by a pool of mortgage loans.225 These securities, known as
―mortgage pass-through securities‖, facilitated the investors to purchase a fractional
undivided interest in a pool of mortgage loans by providing for a share in the interest
income and in the principal payment generated by the underlying mortgage. In
creating pools of mortgages, the lenders were careful to put together those assets with
similar characteristics in regard to quality, term and interest rate. 211 The pool of
mortgages placed with a trust was actually sold in the form of certificates to investors,
either directly or through private placement.

In recent years, more complex securitization structures have been evolved to

provide some classes of investors with an instrument that has more certain maturity,

207
Kamal Gupta v. Bank of India, AIR 2008 Delhi 51 (DB) 222 Supra
note 14 at 1484.
208
G. Manohar v. Indian Bank (ADB), Nagiri Branch, Chittoor, 2010(1) Banker‗s Journal 352.
209
Unique Engg. Works v. Union of India, (2004) 2 BC 241 (Utta-DB); Anushree Sah v. Bombay Mercantile
Bank Ltd., (2008) 2 BC 63 (DRAT-Mum); Lingaraj Oil Industries Pvt. Ltd. v. State Bank of India, AIR 2009
Ori 132; Krushna Chgandra Mallick v. Chief General Manager, State Bank of India, AIR 2009 Ori 99; Vijay
Verma v. Dena Bank, AIR 2008 Chd 54
210
at 2016.
211
Ibid.

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average life and more predictable average yield. New features have added complexity
to asset securitization, but have enhanced marketability of Mortgage-Backed
Securities (MBS) or Asset-Backed Securities (ABS) in a big way.212

In the United States of America (US), asset securitization has grown on a large
scale since its beginning in 1970 and the annual issuance of securities backed by
assets other than mortgage increased to almost $60 billion by the end of 2000.228

By the end-June 2008, securitization has evolved into a vital funding source
with an outstanding of MBS or ABS debt obligation about $ 10.24 trillion in the
United States and $ 2.25 trillion in Europe. In 2007, ABS issuance amounted to $
10.24 trillion in the United States and $ 2.25 trillion in
Europe. In 2007, ABS issuance amounted to $ 3,455 billion in the US and $ 652
billion in Europe.213

The asset-backed securities market in the U.S., however, is dominated by

securities backed by automobile loans, credit card receivables, computer and
automobile leases, mortgaged home receivables, insurance premium receivables, etc.

Securitisation is a more recent development in the U.K. compared to the U.S.

The first mortgage securitization issue arranged in London for the international
market was MINI, a 50 million refinancing of certain Bank of America Finance Ltd.
U.K. property mortgages launched in 1985.214 Thereafter, the business has taken off in
both variety and forms. France, Italy, Australia and Canada have also developed a
market for securitized assets. The reason for the quick success of asset securitization
in both the U.S.A. and the U.K. has been simple legal procedures in respect of
mortgage and debt securitization.

B- Stakeholders
The major stakeholders involved in the process of securitisation are the
originator, the Special Purpose Vehicles (SPVs), the merchant or investment banker,
the credit rating agency, a servicing agency, and of course the original borrowers and
the buyers of the securities.215 The originator is the owner of the financial assets which
is acquired by an asset reconstruction company for the purpose of securitization or
212
Ibid. 228 Ibid
213
Ibid
214
Ibid
215
Supra note 14 at 1479.

141

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asset reconstruction. 216 The originator, generally, a bank or a financial institution,
identifies and selects a pool of loans and receivables with a view to creating liquidity
that is of homogeneous nature. Asset Reconstruction Company (ARC) is a company
registered with RBI under section 3 for the purpose of carrying on the business of
asset reconstruction or securitization, or both.217218 The ARCs or SPVs generally, an
organization different from originator, rather an extended arm of the originator,
structure that deal, raise proceeds by issuing pass-through certificates, as they are
known, and thereby arrange for payments of interests and principles to the debtors.234

Merchant Bankers advise on timing of sales, their pricing, make arrangements

for marketing and underwriting, etc. In case, issues are of similar size, they may
arrange for private placements.219 Hence, they play a key role in

asset securitization. The underwriters take into consideration the originator‗s

creditworthiness, the expected performance of assets or sale, collection activities
involved etc.220

C- Registration of Securitisation or Reconstruction Companies

To start or carry on the business, a Securitisation Companies (hereinafter called

as SCs) or Reconstruction Companies (hereinafter called as RCs) must have got
registered and granted a certificate of registration under section 3 and also must have
capital not less than two crore rupees or such other higher amount notified by the
Reserve Bank to commence such business.221

Nevertheless, the Apex Bank in its discretion may notify different amounts of
owned funds for different classes or classes of SCs or RCs. Such an SCs or RCs,
existing on the commencement of this Act, are mandatorily required to apply for
registration to the RBI before the expiry of six months.222 That company may continue

216
The SARFAESI Act 2002, Section 2(r)
217
The SARFAESI 2002, Section 2(ba)
218
at 1479.
219
Ibid.
220
Ibid.
221
Supra note 62 of 2026.
222
The SARFAESI 2002, Proviso to Section 3(1) 239 Ibid.

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or indulge in securitisation or asset reconstruction business until a certificate of
registration is granted to it or until the rejection of such application for registration.239

D- Application for Registration

Section 3 of the SARFASI Act, 2002 provides for a procedure for the
registration of SCs and RCs. Every SC and RC shall apply to the RBI for getting
registration. Such application shall be in such form and manner as it may specify by
the RBI.223 The following conditions must have been fulfilled to the satisfaction of the
RBI, prior to grant registration, either by an inspection of records or books of such
company or otherwise,

(a) that company is without loss in any of the three preceding financial years;
(b) that company has arrangements and infrastructure to realise the financial assets
acquired and such company is in position to pay periodical returns and redeem in
case the qualified institutional buyers or other persons invest;
(c) that adequate professional experience of company‗s director in matters
concerning finance, securitization and reconstruction and directors must not have
been convicted of any offence involving moral turpitude;
(f) that a sponsor of SC or RC IS a fit and proper person as per RBI rule; (g) that
proper compliance of RBI prudential norms and conditions.224
RBI shall register such SC and RC to commence or carry on business of
securitisation or asset reconstruction after being satisfied. 225 Nevertheless, the RBI
may reject the application if the above conditions are not satisfied after giving the
applicant a reasonable opportunity of being heard.226227

E-Cancellation of Registration

Section 4 provides for cancellation of certificate of registration of

asecuritisation company or a reconstruction company.244 When an SC and RC ceases
to carry business as such or to receive or hold any investment from a qualified
institutional buyer or has failed to comply with any conditions upon which certificate

223
at 102.
224
Supra note 62 at 2026.
225
Ibid.
226
Ibid.
227
at 102. 245 62 at 2027.

141

Page | 70
of registration has been granted, its registration as such may be cancelled by the
RBI.245 Moreover, if such company fails to fulfil any of the conditions referred to in
clauses (a) to (g) of sub-section (3) of section 3 or fails to-

(i) comply with RBI direction under the Act; or

(ii) maintain accounts in accordance with the requirements of any law or any
direction or order issued b the Reserve Bank under the provisions of this Act;

The RBI may cancel the registration of such SC and RC.228 However, under
certain circumstances, the RBI shall give an opportunity to such company on such
terms as it may specify for taking necessary steps to comply with such provisions or
fulfilment of such conditions, unless the RBI is of the opinion that the delay in
cancelling the certificate of registration granted under sub-section (4) of section 3
shall be prejudicial to the public interest or the interests of the investors or the
securitisation company or the reconstruction company. 229 A Remedy of appeal is
available to any securitisation company or reconstruction company aggrieved by the
order of cancellation of certificate of registration. Such a company may file an appeal
to the Central Government within a period of thirty days from the date on which such
order of cancellation is communicated to it.230 Despite cancellation and rejection of
registration certificate of a securitisation company or reconstruction company holding
investments of qualified institutional buyers, it shall be deemed to be a securitisation
company or reconstruction company until repayment of the entire investments held by
it within such period as the RBI may direct.231

3.3.2.4 SARFAESI ACTIONS

SARFAESI Act provides secured creditors i.e. banks or financial institutions

have the option either to securitise or reconstruct the financial assets through
securitization and reconstruction companies or to recover its debts directly from the
borrower without approaching Court or tribunals. Banks or financial institutions may
sell their bad loans to the ARCs and these ARCs may also proceeds under SARFAESI
to recover it from borrowers like other creditors.

228
Ibid.
229
Ibid.
230
Ibid.
231
at 208.

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 Proceedings under the SARFAESI Act 2002, commonly known as SARFAESI
Actions broadly be classified under three heads-

A. Securitisation
B. Reconstruction
C. Recovery without intervention of the court.
A.SECURITISATION

When the financial assets move from originator to ARC, it is called

securitization. Therefore, securitisation is defined under section 2(z) the SARFAESI
Act as taking possession of financial assets by any asset reconstruction company
from any originator, either by raising funds by the ARC from the qualified buyers. 232
The qualified buyer issues security receipt representing undivided interest in such
financial assets or otherwise.

i.Process of Securitization

The originator, in fact, picks up a pool of assets of homogenous nature. A

variety of receivables or loans could be used for asset securitisation. 233 Thus, housing
loans, loans, credit card loans, vehicles, trade receivables finance etc. of varying
maturities can be converted into securities of appropriate duration. However, it is
absolutely necessary to pool assets of homogenous natures together to ensure follow
up.234

The originator lifts them from its balance sheet and passes them on to the SPV
through, what is called, a pass-through transaction. Pass-through certificates directly
confer ownership rights over the underlying assets, repayment pattern interest rates
with a spread etc.253 The issuer normally has little freedom to restructure cash flow
from receivables into payments on several ‗debts with varying maturities. There are
also pay through certificates, which are more flexible in nature permitting sequential
retirement of bonds, higher collateralization of assets where needed, thus raising the
quality of instruments.

232
Id at 97.
233
Supra note 57 at 1478.
234
Id at 1479. 253 Ibid.

141

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 The SPV converts the homogenous pool of assets into the appropriate form of
marketable securities for further investments. Where the securities are publicly issued
credit rating may be obtained to make transaction, the credit rating provides a
message to the investor that the issuer is strong enough to make timely payment of
the principal and interest.235 While rating, the credit rating agency will examine the
risks comprising, credit risk, income risks, liquidity risks etc. along with other
relevant factors.

The periodical cash flows from the underlying collaterals by way of repayment
of loans and interest payments enable the SPV to pay off its obligations of principal
and interest to its debtors.236

Section 5 provides for the modes in which such acquisition may be made by
the securitization company. Any securitisation or reconstruction company may take
possession of financial assets of lender-

(a) by issuing a debenture or bond in favour of financial institutions; or by entering

into an agreement with such lender for the transfer of such financial assets to
such company. 237 There can‗t be any agreement to the contrary. Moreover,
section 5 prevails over any other law with regard to a matter related to the
acquisition of financial assets.257

235
Ibid.
236
Ibid.
237 257
The SARFAESI Act, 2002 Section 5 Supra
note at 103.

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 For the purpose of facilitating and promoting these kinds of acquisitions by
ARCs, the Government has exempted these transactions from Stamp duty under the
Indian Stamp Act, 1899.238By the Amendment Act, 2016, ARCs have been put into
shoes of lenders. Therefore, all the rights of such lenders shall vest in such companies
after the acquisition of financial assets.239 If the banks or financial institutions have
entered into any such contracts deeds bonds instruments NOCs under any law or
otherwise and other instruments of whatever nature relating to the said financial
asset, all such arrangements shall be binding in favour of or against the securitization
company or reconstruction company with full force and effect after acquisition of
such financial assets.240 Moreover, any suit, appeal or other proceeding of whatever
nature relating to the said financial asset initiated, prosecuted and enforced by or
against the bank or financial institution may be continued, prosecuted and enforced
by or against such securitisation or reconstruction companies.241ii.Notice to Obligor

Section 6 of the SARFAESI Act, 2002 stipulates notice to obligor and discharge
of obligation of such obligor by financial institutions about the possession of
financial assets by the SC and RC. Such notice shall be given also to the Registrar of
companies concerned. 242 Upon such notice of acquisition of financial assets, the
obligor shall make payment to the concerned SC and RC; and such payment shall be
deemed as complete discharge of the obligor from all the liabilities in relation to the
financial asset.243

Where a bank or financial institution does not give such notice, any money or
other properties subsequently received by the bank or financial institution shall
constitute monies or properties held in trust for the benefit of and on behalf of the
securitization company or reconstruction company. Such a bank or financial
institution shall deliver forthwith such payment or properties

238
Supra note 67.
239
Supra note 14 at 1489.
240
Ibid.
241
Ibid.
242
Ibid.
243
Id at 1491.

141

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 Legislative Measures For Non-Performing Assets Recovery
to such securitization company or reconstruction company or agent duly authorized by
such company.244iii.Issue of Security Receipts

After acquisition of financial assets, any securitisation company or

reconstruction company may offer security receipts to qualified institutional buyers or
such other category of investors including non-institutional investors as may be
specified by the Reserve Bank in consultation with the Security Exchange Board,
from time to time for subscription in accordance with the provisions of those Acts.
However such issuance must not be contrary to the provisions contained in the
Companies Act, the Securities Contracts (Regulation) Act, 1956 and the Securities
and Exchange Board of India Act, 1992.245 A securitisation company or reconstruction
company may raise funds from the qualified institutional buyers. Such company
formulates schemes for acquiring financial assets. Such a scheme may be in the nature
of a trust to be managed by the securitisation or reconstruction company. The
securitisation or reconstruction company shall hold the assets so acquired or the funds
so raised for acquiring the assets, for the benefit of the qualified institutional buyers
holding the security receipts or from whom the funds are raised. 246 Except in so far as
they are contrary to the provisions & this Act, the provisions of the Indian Trust Act,
1882 shall be, apply with respect to the trust so created.267

Such company shall keep and maintain separate and distinct accounts in respect
of each such scheme for even financial assets acquired out of investments made by a
qualified institutional buyer. It is to be ensured that realisation of such financial asset
is applied towards redemption of investments and payment of returns assured on such
investments under the relevant scheme.247

In the event of non-realisation of financial assets, the qualified institutional

buyers of a securitization company or reconstruction company, holding security
receipts of not less than seventy-five percent of the total value of the security receipts
issued, may call a meeting of other qualified institutional buyers.269 The procedure
followed at meetings of the board of directors of the securitization or reconstruction

244
Ibid.
245
Ibid.
246
Id at 1492. 267 Ibid.
247
Id at 1491. 269 Id at
1492.

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company shall be applicable to such meeting of qualified institutional buyer 248. Every
resolution passed in such meeting shall be binding on the company.249250

Section 8 provides an exemption from registration of security receipt issued by

the securitization or reconstruction company. These transactions do not require
compulsory registration. Section 17(1) of the Registration Act, 1908 does not apply to
such transactions by virtue of section 8.

B.ASSETS RECONSTRUCTION

Approaching ARCs is a completely distinct recourse for the banks /FIs to clean
up their balance sheets by transferring the bad assets to ARCs which are specialized in
the NPA resolution effectively and speedily.Asset reconstruction is acquisition by any
Asset Reconstruction Company (ARCs) of any right or interest of financial
institutions in any financial assistance.272 Conveyance of financial assets to ARCs is
provided either on outright sale basis or on an agency basis as per section 5(1) or
section 10(1), respectively under the SARFAESI Act, 2002.

ARCs may hold the assets, thus, conveyed under a ‗trust‗ setup for this
purpose or in its own balance sheet. The decision to convey the bad assets to ARCs is
taken at corporate or board level by the different banks or Financial Institutions.
ARCs are empowered to change or take over management or conversion of debt into
equity of a borrower company and sale or lease of assets under the Act. ARCs operate
as debt aggregator and indulge in acquisition of NPAs and their resolution by isolating
NPAs from the banking system, liberating the banking system to focus on the core
activities and facilitating their return to equity market and normal banking business.
ARCs make an assessment of the realizable value of financial assets offered by banks
or Financial Institutions, and issue an offer letter containing the bid price for the
transfer of the same. ARCs consider the principal outstanding of the financial asset of
the seller and the value of the collateral available by giving indicative offer to the
seller. However, there are no specific guidelines in the matter.

In case it is accepted by the seller, they may receive cash, bonds or debenture,
security receipts as a sale consideration for their financial assets. Security receipts are
merchantable at stock exchange. However, there is no guarantee of return on security

248
Ibid
249
Id at 1491.
250
at 91.

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 Legislative Measures For Non-Performing Assets Recovery
receipts as per prevailing conditions of ARCs. These instruments are categorized as
non-SLR investments as per RBI Guidelines.

Financial assets are transferred or sold through an agreement or assignment of a

debt directly to ARCs or to the trust set up and represented by ARCs as a trustee.

Section 9 provides for measures to be taken by the ARCs for asset

reconstruction in accordance with the policy to be determined by the reserve bank and
directions issued by it regarding management and fee to be charged by ARCs. An
asset reconstruction company may, for the purposes of asset reconstruction, may
change or taking over the management of the business, the sale or lease of the
business of the borrower, rescheduling or settlement or conversion of dues,
enforcement of security interest in accordance with the provisions of this Act.251

Section 10 of the Act depicts different characters of ARCs to be played by it in

SARFAESI actions. Any SC and RC may act as a recovery agent as well as manager
for financial institutions charging fees or charges. However, no securitization
company or reconstruction company shall act as a manager if acting as such gives rise
to any pecuniary liability. Moreover, any court or tribunal may appoint it as a
receiver.252

Further it is provided under section 11 that resolution of disputes relating to

securitization of reconstruction or non-payment of any amount due including interest
arises amongst any of the parties, namely the banking companies, an SCs and RCs or
qualified institutional buyers, shall be done by conciliation or arbitration as provided
in the Arbitration and conciliation Act,
1996, and it works as consent of the parties to the dispute.275

i. Arbitration and Conciliation Act, 1996 (26 of 1996)

Every dispute between the creditor and debtor in relation to security interest or
secured debt does not fall for arbitration under Section 11 of the SARFAESI Act,
2002.
Resolution of disputes through arbitration or conciliation is provided for only in cases
disputes between the parties referred to in Section 11 of the Securitisation Act, 2002.
Section 1 of the SARFAESI Act, 2002 does not stand in the way of initiation or
continuance of securitisation proceedings under Sections 13 and 14 of the

251
Supra note 141 at 104.
252
Supra note 141 at 108. 275
62 at 2031.

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SAR.FAESI Act. Bank can also invoke the proceedings of the NPA Act
notwithstanding pendency of civil suit concerning the very same subject matter.

ii. Directions to ARCs

Section 12 authorizes the RBI to issue directions as well as to frame policies

for all or any of the asset reconstruction companies in the interest of investors. All
such companies are obliged to honour RBI policies and guidelines, which, inter-alia
includes income recognition, accounting assets, bad and doubtful assets, weights of
assets and fund deployment etc. In term of this section, the RBI has capacity to call
for statement and information relating to the business and affairs of the ARCs as it
may consider necessary or expedient to obtain for the purposes of this Act. 253 Further,
as per the Amendment 2016, section 12 B has been appended whereby RBI has been
also empowered to audit and inspect ARCs books. The section imposes a duty of an
asset reconstruction company and its officers to provide assistance and cooperation to
the Reserve Bank to carry out audit or inspection. The RBI may remove the chairman
or any director or appoint additional directors on the BOD of the ARCs. However, no
such removal of chairman or director shall be made except after giving him an
opportunity of being heard. It may appoint any of its officers as an observer to
monitor the working of the BOD of such ARCs ensuring proper management of an
ARC.254 Section 12 B mandates the duty of every director or other officer or employee
of the asset reconstruction company to produce before auditor or inspecting officer all
books, accounts and documents, statements and information relating to the affairs of
the asset reconstruction company as may be required by such person within the
stipulated time specified by him.255

C.RECOVERY OF DUES WITHOUT INTERVENTION OF THE COURT OR

DRT

Generally, banks approach to the tribunal for recovery of their dues under the
Recovery of Debt and Bankruptcy Act, 1993. Similar power to approach court to
recover dues has also been provided section 67 and 68 of the Transfer of Property Act,
1882, whereas section 69 empowers the mortgagee to exercise the power of sale
without intervention of the court.

I.Section 69 of the Transfer of Property Act 1882: Earlier such provision has been
provided under section 69 of the Transfer of the Property Act, 1882. The section

253
Supra note 14 at 1499
254
Ibid
255
Ibid

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 Legislative Measures For Non-Performing Assets Recovery
provides for sale of the property privately i.e. without intervention of court.256 Such
a sale can be made upon the conditions provided under the section. The section is
applicable on English mortgage between the parties not being Hindus,
Mahomedans, Buddhists or members of notified classes or where one of the parties
is government with express power of sale under mortgage deed and mortgage
properties is situated in one of the specified towns. The power can be exercised
when default occurs on the part of the borrower. But when such default occurs in
respect of interest, sale can be effected only if the amount exceeds Rs. 500/- and
remains due for at least three months. Moreover, in any case, such power can be
exercised only after serving three months notice in writing. The statutory
requirement of notice cannot be curtailed even by the agreement between the
parties.280 In the absence of such notice, sale shall be illegal. Such sale may be
made by private contract, or by public auction. Section 69(3) takes care of
bonafide purchaser interest. The power to sale under section 69 does not affect
mortgagee‗s right of realization by suit.257 The right to sell is independent of the
right to have receiver under section 69-A and can be exercised even after
appointment of the receiver.258259 A sale made in exercise of the power conferred
by section 69 is not affected by the attachment made by the court and purchaser of
such property gets an absolute title free of encumbrances.283 However, due to
limitation application of section 69 and also due to other technicalities and other
disadvantages of general civil remedies, banks are restricted to invoke the section
in all situations and prefer to move tribunal under the RDB Act 1993.

When even after establishment of DRT it became difficult to stop the mounting
NPA, the Narsimham Committee II, recommended conferring such powers on the
banks and financial institution in order to tackle the grave situation. Chapter 3 of the
SARFAESI Act, 2002 provides for recovery of the debts directly from the debtors
without approaching Court and tribunals.

The Act empowers banks and financial institutions to take possession of

securities given for financial assistance and sell or lease the same or take over
management in the event of default. It is not necessary that acquisition of right or
interest in financial assets can be done by securitization company or reconstruction
company only and not by banks or financial institutions. Such transactions are legal
and valid under SARFAESI, RDB and BR Act and are not in violation of RBI
guidelines or norms.284 The Procedure to be followed in such cases is provided under
section 13 of the Act which can be summarised as followings:

256
Supra note 24 at 360. 280 Id at
361.
257
Supra note 26 at 608.
258
Saraswathi Bai v. Varadrajulu N Dicker AIR 1956 Mad 385
259
at 609.

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 Demand Possession
Sale Notice
Notice Notice

Figure No. 5: SEQUENCE OF SARFAESI NOTICES SERVICE

284
BPL and PSP Workers Union v. BPL Ltd. 2011(2) Banker‗s Journal 124
II.Demand Notice [Section 13(2)]

To send demand notice concerning any debt or any instalment prior conditions of
default on such payment and declaration of such account as NPA must be satisfied.
Such a notice in writing is a call for the borrower to discharge in full his liabilities
within sixty days from the date of notice. The issue of a second or successive notice
under Section 13(2) prior to the proceeding under Section 13(4) has not held to be
completely forbidden.260 Pursuant to the notice under section 13(2), if the borrower
fails to satisfy his obligations in full then the secured creditor may take all or any
recourse under section 13(4). Section 13(2) proviso inserted by the Enforcement Act,
2016 absolve the banks from requiring to classify the account as NPA shall not be
applied to funds raised through the issue of debt securities. In cases of debt security,
in the event of default, the debenture trustee has been given similar powers to enforce
security under this section.286

The notice under Section 13(2) of the NPA Act is not an only show-cause notice.
It constitutes a ground for the bank/FI to proceed for securitisation. It is like last

260
Omeshwar Baldwa v. Vasavi Co-operative Urban Bank Ltd., 2010 (1) Banker‗s Journal 320 286 Supra
note 14 at 1500.

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 Legislative Measures For Non-Performing Assets Recovery
warning for clearing his dues within 60 days failing which the bank may take all or
any recourse under section 13(4) of the Act.261262

On receipt of the notice, if the borrower makes any representation or raises any
objection, the lender shall consider such representation or objection. In case, such
representation or objection is not tenable in the opinion of the lender, he shall convey
it to the borrower within fifteen days.288 However, pursuant to such rejection the
borrower cannot move an application to the DRT under Section 17 or to the Court of
District Judge under Section 17A. In case,
Authorised Officer has reason to believe that the borrower or his agent is avoiding the
service of the notice or that for any other reason, the service cannot be made as
aforesaid, the service shall be effected by affixing a copy of the demand notice on the
outer door or some other conspicuous part of the house or building in which the
borrower or his agent ordinarily resides or carries on business or personally works for
gain and also by publishing the contents of the demand notice in two leading
newspapers, one in vernacular language, having sufficient circulation in that
locality.263 After issue of demand notice under sub-section (2) of Section 13, if the
borrower makes any representation or raises any objection to the notice, the
Authorised Officer shall consider such representation or objection and examine
whether the same is acceptable or tenable.290 The reasons for not accepting the
objections must be intimated to the borrower. The reasons so communicated shall
only be for the purposes of the knowledge of the borrower without giving rise to any
right to approach the DRT under Section 17 of the Act, at that stage.264

The legality of the notice cannot be examined by the High Court because this
involves a factual inquiry as to repayment by the borrower. The onus is on the
borrower to approach the bank and to satisfy it as to the fact of payment. The
allegation that the notice was, in essence, an order or malafide intent of the authority
cannot be challenged in High Court. Aggrieved may move to appellate court against
the DRT decision.265

III. Possession Notice [Section 13(4)]

261
Transcore v. Union of India, AIR 2007 SC 712; Dayanath Pandey v. State of U.P., AIR 2008 All 103 (DB)
262
at 1506.
263
Ibid. 290 Ibid.
264
Mardia Chemicals Ltd. v. Union of India (2004) 4 SCC 311; relied in Nahar Industrial Enterprises Ltd v.
Hong Kong & Shanghai Banking Corporation, (2009) 3 BC 539 (SC); Nihar Ranjan Bhattacharjee v. Union
of India, (2007) 139 Comp. Cas. 27 (Gauhati); Luxco Electronics v. Corporation Bank, (2008) 1 BC 93
(DRAT—All)
265
Ravindra Agarwal v. Bank of India, (2003) 2 BC 235 (MP); Ashok Sharda v. Small Industries Development
Bank of India, AIR 2008 (NOC) 42 (AP) (DB), Jai Electronic v. Central Bank of India, (2008) 2 BC 251
(Mad—DB); Sari Engineering and Auto Company v. State Bank of India, AIR 2009 Thar.102

Page | 81
 Upon demand notice, if the debtor does not pay his dues accordingly, the
authorized officer of the bank may proceed to realise the amount by adopting any one
or more of the measures specified in Section 13(4) of the SARFAESI Act for taking
possession of movable property.293

Rule 4 of the Security Interest Enforcement Rules, 2002, the bank may proceed
to take possession of the secured assets of the borrower. In the case of movable
property, a Panchnama shall be drawn in the presence of two witnesses that shall be
signed by such witnesses after taking possession. The authorised officer shall also
make an inventory of the property and deliver a copy of such inventory to the
borrower.294

In case of Immovable property, the bank may take actual possession and in
case of any obstruction by the borrower in taking possession, it may also approach to
the District Magistrate or Chief Metropolitan Magistrate under section 14 for
assistance in taking possession of the secured assets.295 However, if such property is
subject to speedy or natural decay, or the expense of keeping such property in custody
is likely to exceed its value, the authorised officer may sell it at once. It is the duty of
the authorised officer to take steps for preservation and protection of secured assets
and insure them, if necessary, till they are sold or otherwise disposed of.

The bank may also take symbolic possession. The procedure of taking
possession of the movable and immovable properties of the debtor is provided in rules
4 to 7 and rules 8 to 9 of the Security Interest Enforcement Rules, 2002 respectively.

After taking possession of movable properties an inventory of the acquired

shall be prepared. The borrower shall be intimated by notice enclosed with such
inventory prepared. However, in case of immovable properties, possession is taken by
affixing a possession notice on the outer door of such property. Such possession
notice shall be published not later than 7 days in two

293
Supra note 14 at 1506. 294 Ibid.
295
141 at 116.

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 Legislative Measures For Non-Performing Assets Recovery
newspapers having circulation in that locality. A right of appeal has also been
provided under the SARFAESI Act, 2002 to an aggrieved borrower against any steps
taken by banking or financial institutions under Section 13(4) of the Act.266

Possession of property or dispossession of defaulter from his residential house

could not be done by merely sending notice under Section 13(2) of the SARFAESI
Act, 2002. Separate Possession Notice under Section 13(4) is a mist before taking
measures tinder Section 13(4) of the Act. Unless notice tinder Section 13(3) is given,
the right of appeal given under Section 17 of the statute would become illusory.267

IV. Sell Notice [Section 13(4)]

After taking possession, the authorized officer shall obtain the valuation of the
property, movable268 or immovable269, from an approved valuer and in consultation
with the secured creditor fix the reserve price of the properties. The authorized officer
may sell the whole or the part of the property, movable270 or immovable271, secured by
the following methods:

A. By obtaining quotations from the persons dealing with similar secured

assets or otherwise interested in buying such assets; or
B. By inviting tenders from the public; or
C. By holding public auction including through e-auction mode; or
D. By private treaty.

The officer shall serve a 30 days sale notice to the borrower.272 No sale shall
take place before the expiry of 30 days from the date on which notice of

sale is given. Further, if the borrower has tendered the amount due to the secured
creditor before publication of such notice, no secured assets shall be transferred by
way of sale. Nevertheless, if a step has been taken for such a sale before tendering of
such amount, no further step shall be taken for such transfer. 273 However, such shall

266
Unique Engineering Works v. Union of India, (2004) 2 BC 241 (Utta-DB) Srinivasa Rice Flour Mill v.
Authorised Officer, State Bank of India, (2007) 138 Comp. Cas. 185; (Sitan Commodities Pvt. Ltd. v. Punjab
& Sind Bank, AIR 2009 Jhar. 14
267
Prashant Khushe v. State of Maharashtra (2007) 3 BC 417(Bom)
268
The Security Interest Enforcement Rules, 2002, Rule 5
269
Rule 8(5)
270
Rule 6
271
Rule 8(5)
272
Rule 6(2) read with Rule 8(6)
273
Supra note 141 at 115. 304 Rule 7
read with rule 9(6) 305 Ibid.

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be subject to confirmation304 by the secured creditor who shall confirm such sale in
favour of the highest bidder only on payment of sale price. If the immovable property
sold is subject to encumbrances, the surplus money required to free the asset shall be
paid by the purchaser. On payment of sale price or the other amount required to be
paid, as the case may be, the secured creditor shall issue a certificate of sale of such
property.305
V. Right of Redemption
Redemption is the act of buying back the property after tendering the amount
due to the creditor. Generally, in a transaction of mortgage, the mortgagor has the
right to redeem his property after paying off the debt amount. The right of redemption
is statutory and inalienable right, that is, it cannot be taken away by the provisions of
the contract. Section 13(8) the SARFAESI Act, 2002 provides the right of redemption
by the borrower. Any sale or transfer of a secured asset effected without complying
with the statutory requirement of giving notice to the borrower of the date and lime of
such sale would be a nullity and would also be in violation of the constitution.274
The Supreme Court recently pronounced a judgment on the extinguishment of
this right of redemption. 275 It was laid down categorically that right to redemption
exists only till the time sale of the mortgaged property has been confirmed. Once the
sale is confirmed, the right to redeem is lost within the meaning of the proviso.

In a case, the right of redemption was exercised by the borrower after

confirmation of the sale of property by bank in favour of auction purchaser. It was
held that Section 13(8) does not permit the bank to accept the amount from the
borrower after the sale is confirmed.276 It was held that after confirmation of the sale
in favour of auction purchaser and issuance of sale certificate, right of redemption of
the borrower is completely erased.277

VI. Issuance of Sale Certificate and Possession by Secured Creditor

The issuance of sale certificate to auction purchasers in respect of enforcement

of security is not a restriction on bank to acquire possession under Section 14(2).
Whereby notice was served under section 13(4), the bank had secured constructive

274
Mathew Varghese v. M. Amritha Kumar, AIR 2015 SC 50
275
Allokam Peddabbayya & Ors. v. Allahabad Bank & Ors 2017 SCC Online SC 671
276
Gaurav Enterprices , Gwalior v. State Bank of India 2012 (2) banker‗s journal 601
277
G Gnanavadhivu v. Abdul Aziz Son & Co 2015 (3) banker‗s journal 577

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 Legislative Measures For Non-Performing Assets Recovery
possession; he can take actual physical possession even after issuance of sale
certificate.278

A. secured creditor cannot convey a sale certificate to a stranger nominated by

auction purchaser. Sale certificate requires to be registered as the authorised
officer of issuing bank is neither civil nor revenue officer.279

The Supreme Court in a case set aside the High Court judgment that the
borrower or any other person in possession of immovable property could not be
physically dispossessed on notice under Section 13(4) of the NPA Act, 2002 so as to
defeat adjudication by the DRT on the rights of the parties. There is no dichotomy
between symbolic and actual possession and the authorised officer‗s powers under
Rule 8 are broader even than the Court Receivers as the security interest in the
property has already been formed in favour of the secured creditor. The court opined
that third party interests are sometimes generated overnight in that case the authorised
officer can even take actual possession. Rule 8 read with Rule 9 avoids disputes of
this kind. He can take actual possession even without taking the assistance of the DM
or CMM under section 14.280

Section 13(4) read with Rule 8 of the Security Interest (Enforcement) Rules,
2002 authorises the bank to take possession of the secured asset as well as to sell it.
The rules provide for a notice to the defaulting borrower as well as to the public in
general. In a case, a notice under Section 13(4) of the SARFAESI Act, 2002 was
issued by the bank upon committing default in payment of monthly instalments
towards the loan amount. The bank published the details of the properties as well as
the photograph of the borrower and the surety in the newspaper to enforce the security
and to sale it. On a writ petition, dismissing the petition, the court held that there was
no violation of any right or legal provision by the bank in publishing the photographs
of the borrower and the surety for default in repaying the loan amount. 281 Where the
appellant bank failed to publish notice in vernacular dailies and leading English
newspapers, the order of the DRT quashing the notice was confirmed.282

VII. OTHER MEASURES

278
Kathikal Tea Planatations Nilgiri v. State Bank of India 2010 (1) Banker‗s Journal 127
279
Mid India Power and Steel Ltd. v. MP Adhyogik Kendra Vikas Nigam Indore Ltd. 2011 (1) Banker‗s Journal
539
280
Transcore v. Union of India, AIR 2007 SC 712; State Bank of Bikaner v. Vandana Rani, (2008) 3 BC 151
(DRAT-Del)
281
K. J. Doraisamy v. Asst. Genenral Manager, State Bank of India (2007) 136 Comp. Cas. 568 (Mad); State
Bank of India v. Kandhari and Kandhari Pvt. Ltd. 2009 4 BC 39 (DRAT- Del)
282
Vysya Co-operative Bank Ltd. v. B.V. Govindaraj, (2008) 2 BC 99 (DRAT-Chen); Garments India Exports v.
Dhanalakshmi Bank Ltd., (2008) 2 BC 106 (DRAT-Chen).

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 In case the borrower fails to fulfil his obligations within sixty days even after
the receiving demand notice, following measures under section 13(4) may be adopted
by the bank or financial institution besides taking possession and selling secured
assets:

i. Take over the management

Section 13(4)(b) provides that the bank or financial institution may take over the
management of the business of the borrower. The section also empowers the bank to
transfer the secured asset by lease assignment or sale. However, such right may be
exercised only when the substantial part of the business is held as a security for the
debt. In case the management of the business is severable, the secured creditor shall
take over it in proportion of the security for the debt.

ii. Manner of Take-over of Management

Section 15 provides that a securitization company or reconstruction company

or a secured creditor intends to take over the management of business of a borrower
under clause (a) of section 9 or by under clause (b) of sub-section (4) of section 13,
respectively, the secured creditor, the securitization company or reconstruction
company or the secured creditor may do it by publishing a notice in a newspaper in
English language as well as in a newspaper published in an Indian language in
circulation in the place where the principal office of the borrower is situated. 283 Such
Securitization Company or Reconstruction Company or secured creditor appoint by
such notice as many persons as it thinks fit –

(a) to be the directors of that borrower in accordance with the provisions of that
Act, in a case in which the borrower is a company as defined in the Companies
Act, 1956 (1 of 1956); or
(b) to be the administrator of the business of the borrower, in any other
case.316

In LPL Infrastructure Ltd. v. Kumar‗s Metallurgical Corp. Ltd., it has been

held, ―When the Act provides the method and the manner of taking over management
under Section 15(1), there cannot be any other method of taking over management.
The notice and the proceedings of the District Magistrate authorising the Mandal
Executive Magistrate to take possession of the mortgaged properties of the respondent

283
Supra note 14 at 1530 316 Ibid.

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 Legislative Measures For Non-Performing Assets Recovery
and hand them over to the reconstruction company would not amount to taking over
management under Section 13(4)(b) read with Section 15(1) and (3). Even if
possession of the respondent-company was taken over under Section 15(3) by the
reconstruction company as secured creditor, unless the management was shown to
have been taken over as per Section 15(1), Section 15(3)(c) did not bar a winding-up
petition. Section 13(4)(a) speaks of taking possession of the secured assets of the
borrower and also the takeover of the management of the business of the borrower
under Section 13(4)(b). Admittedly, the respondent-company was not a going concern
and it had stopped its business for various reasons. Therefore, there could not be a
takeover of management of the business of the respondentcompany nor was it shown
that the management was taken over by the reconstruction company as provided
under section 15(1) of the SARFAESI Act,
2002.‖284iii. Taking over possession of unsecured and secured
assets

Sections 13 and 14 of the SARFAFSI Act provides for taking over possession
of secured and also unsecured assets and notice before such takeover is a part of the
principles of natural justice. Once that notice is given under Section 13, it need not be
given again under Section 14 of the Act. The secured creditor can take possession of
unsecured assets, whether movable or immovable.285

The bank takes over possession of the secured assets when the borrower in
violation of the agreement illegally sold the hypothecated stock. The secured creditor,
in enforcing its rights, need not provide the opportunity of being heard. The NPA Act
provides enough safeguards to the interests of the borrowers. The right of appeal has
been provided against any measures taken under Section 13(4) of the SARFAESI Act,
2002.286

iv. Appointment of the Manager

The bank or the financial institution may manage the business taken over or it
may appoint a manager for the purpose. Section 13(4)(c) provides for the appointment
of such manager by secured creditor.287 Rule 10 provides that the Manager shall be
appointed by the Board of Directors or Board of Trustees in consultation with the
borrower.288 The manager so appointed shall not be adjudicated insolvent, or a person

284
(2008) 142 Comp. Cas. 952 (AP);
285
Prashant Khushe v. State of Maharashtra (2007) 3 BC 417 (Bom)
286
Siddh Industries v. Central Bank of India 2010 (1) Banker‗s Journal 788
287
Supra note 141 at 111.
288
Supra note 62 at 2039. 322 Ibid.

Page | 87
who has suspended payment or has compounded with his creditors, or who is, or has
been, convicted by a criminal court of an offence involving moral turpitude.322

v. Requisition from borrower

Bank or financial institution may require any person who has acquired the
secured assets from the borrower and from whom money is due to pay the secured
creditor so much of money as is sufficient to pay the secured debt. 289 Such payment
shall be valid discharge as if the person has made payment to the borrower.290 Notice
to require such payment is given under Section 13(2) of the SARFAESI Act and
action to be taken is contemplated under Section 13(4)(d). The order passed by the
DRT directing bank to proceed under the section during the pendency of the petition
was upheld.291 vi.Procedure for Recovery of shortfall of secured debt

In case the sale proceeds of the secured assets do not clear the dues of the secured
creditor, he may apply to the DRT in the form annexed as Appendix VI and in the
manner prescribed under the SARFAESI Rules, 2002.326 Section 13(10) read with
Rule 11 provides that such application accompanied with fee as provided in rule 7 of
the DRT Rules, 1993, may be moved by the authorized officer or his agent or by a
duly authorized legal practitioner to the Registrar of the concerned Bench.327 The
application shall be sent by registered post addressed to the Registrar of the Debts
Recovery Tribunal.328

Moreover, section 13(11) gives secured creditors a choice to continue against

the guarantor without first taking any of the measures for implementation of security
interest against the borrower. In a case, the bank had a second charge over the fixed
assets of the borrower company. An extra power has been endowed with the secured
creditor to continue against the guarantor by continuing against the asset charged to
the secured creditor by the guarantor by method for pledge, hypothecation or
mortgage. The court held that the bank appropriately continued to pull out which
alluded to the immovable properties pledged to the bank by method for security by the
guarantor. The court additionally said that the idea of pledged assets as utilized in
Section 13(11) of the SARFAESI Act, 2002 can't be translated as a similar thing as
pledge under Section 172 of the Indian Contract Act, 1872.

289
Supra note 141 at 111.
290
Ibid.
291
Nutan Warehousing Co. P. Ltd. v. Indian Bank, (2004) 4 BC 214 (DRAT-Mum) 326 Supra
note 141 at 116.

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 The petitioners who stood guarantor to advance transaction had not executed
any equitable mortgage for the bank. Without any security interest made for the Bank
by the petitioners, the Bank can't turn to SARAFAESI Act and action under the
Securitisation Act in connection to the properties of the petitioner would be illicit.

Discretion of the Bank to continue against any of the properties ought to be

practiced in similarity with law. Where the bank decided not to continue against the
assets of the company or directors, however continued against the assets of the retired
director, the Bank was coordinated to issue fresh notice under Section 13(1) of the
SARFAESI Act.

328327 Ibid.

3.3.2.5 ASSISTANCE OF CMM OR DM

Where the bank or financial institution needs to proceed under section 13(4)
and intends to take possession in order to enforce the security, it may take aid of
District Magistrate or the Chief Metropolitan Magistrate having jurisdiction by
moving an application accompanied by an affidavit by the authorized officer of the
secured creditor under section 14.292 Such CMM or DM shall move to take control of
such property and document and further such asset and document to the secured
creditor.330
The Application shall be accompanied with declarations of the aggregate
amount and the total claim of the Bank as on the date of filing the application, the
security interest of borrower over various properties giving the details of properties.
The application shall also declare that the debtor has committed default in repayment
and consequent upon such, the account of the borrower has been classified as a non-
performing asset. It shall affirm that the demand notice has been served on the
borrower and the borrower‗s objection has been considered and rejected by the
secured creditor with reasons. The application also states that the borrower has not
made any repayment of the debt and the authorised officer is, therefore, entitled to
take possession at the property under the provisions of section 13(4)read with section
14 of the principal Act and that the sections of this Act and the Rules made there-
under had been complied with.331
On receipt of such application, the said authority, as the case may be, shall after
being satisfied, pass appropriate orders for taking control of the secured property
within a period of thirty days further period but not exceeding in aggregate sixty days

292 330
Supra note 141 at 116 Id at
117. 331 Ibid.
Ibid.

Page | 89
from the date of application and may take such actions and use such force, as may, in
his opinion, be necessary293

The DM or CMM may also hand over any of his subordinate officers to
forward such assets and documents to the secured creditor after taking possession of
such assets and documents concerning thereto. No action steps proceedings taken by
the CMM or DM in pursuance of this section shall be called in question in any court
or before any authority‖.

3.3.2.6 APPEAL TO DEBTS RECOVERY TRIBUNALS (DRT/DRAT)

Section 17 provides for the right to appeal to the DRT. This right to appeal to
DRT is available to any person, borrower or non-borrower, aggrieved by any of the
proceedings under section 13(4) with prescribed fee within fortyfive days. Under
section 17A, in case a borrower residing in the State of Jammu and Kashmir, the
application shall be made to the Court of District Judge in that Store having
jurisdiction over the borrower which shall pass an order on such application.294

The section also fixes the jurisdiction of DRT. Newly inserted clause 1A to
section 17 provides that an application shall be filed before the Debts Recovery
Tribunal within the local limits of whose jurisdiction the cause of action arises or the
secured property is situated or the account is maintained in which debt claimed is
outstanding295. The DRT shall monitor proper compliance of section 13(4) and the
Rules made there-under by the secured creditor for enforcement of security.335 Section
17(3) provides that after examining the facts and circumstances of the case and
evidence produced by the parties, if the DRT finds that Section 13(4) or the rules
made there-under are not complied with and there is requirement of restoration of the
management or of the possession of the secured assets to the borrower or other
aggrieved person, it may, by order-
335

(a) declare such recourse to proceedings under Section 13(4) by the secured creditor
as invalid; and

(b) restore the possession of secured assets or management of secured assets to the
applicant, as the case may be; and

293
Id at 117.
294
Id at 121.
295
Supra note 14 at 1531

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(c) pass such other direction as it may consider appropriate and necessary in relation
to any of the recourse taken by the secured creditor under subsection (4) of
Section 13.296

Section 17(4) provides that if the DRT is satisfied and declares the compliance
of section 13(4) and its rules, the secured creditor shall be entitled to take one or more
of the measures specified under section 13(4) to recover his secured debt 297. Moreover
if applicant claims any tenancy or leasehold rights upon the secured asset, under
section 17(4A) the DRT have the jurisdiction to examine as to existence of lease or
tenancy, its validity contrary to Section 65A of the Transfer of Property Act, 1882 or
contrary to terms of mortgage or its creation after the issuance of notice of default and
demand notice by the Bank. After examining the facts and evidence produced by the
parties, if the tribunal finds that tenancy or leasehold rights claimed in secured asset
falls under the above category it may order under this Act as it deems fit.298

Section 17(5) provides limitation for such application to be disposed of within

sixty days not exceeding four month from the date of such application299 Moreover,
section 17(6) provides that in case if the application is not disposed of by the DRT
within the prescribed period, any party to the application may move to the DRAT for
directing the DRT for expeditious disposal of the application.300

No outer period of limitation for filing application or discretion to entertain if

after the expiry of 45 days provided under Section 17(1) of the SARFAESI Act, 2002
has been prescribed. Therefore, the DRT would have discretion under Section 5 of the
Limitation Act, 1963 (36 of 1963) to entertain application after the period of 45 days.
It is for the appellant to show sufficient cause for delay in filing the appeal.

Section 18 provides remedy of appeal to any person aggrieved by DRT order

made by depositing fifty percent of the debt amount due along with such fee within
thirty days from the date of receipt of the order of DRT.341 However, different fees
may be prescribed for filing an appeal by the borrower or by the person other than the
borrower. However, the DRAT may, for the reasons to be recorded in writing, reduce
the amount to not less than twenty-five percent of debt due.

Section 18(2) provides that save as otherwise provided in this Act, the DRAT
shall, as far as may be, dispose of the appeal in accordance with the provisions of the

296
Supra note 14 at 1531.
297
Id at 1532.
298
Ibid.
299
Ibid.
300
Id at 1533.

Ibid.

Page | 91
RDB Act, 1993 and rules made there-under.342 Section 18 B provides that An
applicant under section 17A residing in the State of Jammu and Kashmir and
aggrieved by any order made by the Court of District Judge, may prefer an appeal, to
the High Court having jurisdiction over such Court, within thirty days from the date of
receipt of the order of the Court of District Judge343 However, Proviso to above
section provides that deposit of no appeal shall be preferred unless the borrower has
deposited, with the J&K High Court fifty percent of the amount of the debt due from
him as claimed by the secured creditor or determined by the Court of District Judge,
whichever is less.344
Provided further that the High Court may, for the reasons to be recorded in

341 342
Supra note 141 at 121. Id at
122
344343 Ibid.

writing, reduce the amount to not less than twenty-five percent of the debt referred to
in the first proviso301

3.3.2.7 PROTECTION OF INTEREST OF BORROWERS

Section 19 provides equitable rights to the borrower to protect their interest. If

the DRT or the Court of District Judge, on and application made under Section 17 or
Section 17A or the Appellate Tribunal or the High Court on an appeal preferred under
Section 18 or Section 18A, holds that the possession under section 13(4) by the
secured creditor is ultra-vires the Act and it may make direction to return such secured
assets to the concerned borrowers or any other aggrieved person along with such
compensation and costs as may be it determines.

The provisions regarding notice to the borrower, rights of appeal, right to seek
restitution and compensation as contained in sections 13, 17, 18 and 19 protects of
interests of borrowers in respect of any action proposed to be taken against them
under subsection 4 of section 13. The SARFAESI Act is not ultra vires the article 14
of the Constitution of India in any manner and, therefore, it does not suffer from the
vice of arbitrariness.302

301
Ibid.
302
M.R. Utensils v. Union of India (2003) 113 Camp.Cas. 667 (Guj)

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 It cannot be said that the borrower does not get ample opportunity of hearing
before, the action is taken under Section 13(4) of the SARFAESI Act.303

3.3.2.8 CENTRAL REGISTRY

Section 20 provides for establishment of a central registry, with his own seal,
for the purpose of registration of transaction of securitisaton and reconstruction of
financial assets and creation of security interest under the NPA Act.304 Newly added
section 20A in 2016 Amendment Act authorises the Central Government for making
rules to provide for the manner of integration of all records with central registry to
provide a central database.305 Section 20B empowers the government to delegate its
power to the Reserve Bank of India.306 Section 22 provides that for the purposes of
this Act, Register of securitisation, reconstruction and security interest transactions
shall be maintained wholly or partly in soft copies subject to such safeguards as may
be prescribed at the head office of the Central Registry under the control and
management of the Central Registrar.307308

Section 23 envisages that filing of particulars related to the transactions of

securitisation, reconstruction and creation of security interest shall be done with the
Central Registrar in the manner and on payment of such fee as may be prescribed352
The central Government may notify the requirement of registering the transaction
relating to different types of security interest created on different kinds of property
with the Central Registry353. It may also, by rules, prescribe forms for registration for
different types of security interest under this section and fee to be charged for such
registration.354

The Section 24 casts a duty upon the securitization company and the
reconstruction company or the secured creditors that upon modification of security
interest registered under this Act, it shall send to the Central Registrar, the particulars
of such modification, and the provisions of this chapter as to registration of a security
interest shall apply to such modification of such security interest.355

303
Garlon Polyfab Industries Ltd. v. State Bank of India 2004 All LJ 2575
304
Supra note 141 at 126.
305
Ibid.
306
Ibid.
307
Ibid. 352 Id at 127
353
Ibid.
308
Ibid.

Ibid.

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 Emergence of New Trends for Non-Performing Assets Recovery
Section 25 provides that SC or RC or secured creditor shall report satisfaction
of security interest to the Central Registrar of the payment or satisfaction in full, of
any security interest relating to the securitisation company or the reconstruction
company or the secured credit and requiring registration under chapter IV, within
thirty days from the date of such payment or satisfaction, and on receipt of which, the
Central Registrar shall order that a memorandum of satisfaction shall be entered in the
Central Register.309
Section 25 also provides that If the concerned borrower inform to the Central
Registrar for not recording such payment or satisfaction, the Central Registrar shall,
on receipt of such information, send a show-cause notice to be sent to the SC or RC or
the secured creditor for giving reasons within a time not exceeding fourteen days
specified in such notice, as to why payment or satisfaction should not be recorded as
intimated to the Central Registration. 310 If no cause is shown, a memorandum of
satisfaction shall be entered in the Central Register on order of registrar. However, if
cause is shown, the central registrar shall record a note in the Central Register and
shall intimate the borrower accordingly.358
Section 26 gives right to inspect particulars of securitisation company or
reconstruction company or security interest entered in the Central Register to any
person on payment of such fee as may be prescribed. 311 Section 26 A provides that
there may be rectification by Central Government in matters of registration,
modification and satisfaction either in case of omission or misstatement to file with
the Registrar the particulars of any transaction of securitisation, asset reconstruction or
security interest or modification or satisfaction of such transaction or on just and
equitable grounds to grant relief.360

3.3.2.9 OFFENCES AND PENALTIES

Sections 27 to 30 of the SARFAESI Act, 2002 provide offences and penalties.
Penalties of five thousand rupees for every day shall be imposed on the company or
the secured creditor in case a default is made either in filing the particulars of every
transaction completed by it or in sending the particulars of the modification under
section 24 or in giving intimation under section 25.312

Section 28 provides for Penalties for non-compliance of direction of Reserve

Bank under section 12 or section 12 or section 12 A, if any securitisation and
reconstruction company fails to comply with fine which may extend to five lakh
rupees and in the case of a continuing offence, with an additional fine ten thousand
rupees for every day during which the default continues.

309
Ibid.
310
Supra note 14 at 1544. 358 Ibid.
311
Ibid
312
Id at 1546.

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 any person violating or attempting to violate the provisions of this Act or of
any rules made thereunder, shall be punishable with imprisonment for a term which
may extend to one year, or with fine or with both.313

A Metropolitan Magistrate or a Judicial Magistrate of the first class shall take

cognizance of and try any offence punishable under preceding sections or any other
provisions of the Act, except upon a complaint in writing made by tin officer of the
Central Registry or an officer of the Reserve Bank, generally or specially authorised
in writing in this behalf by the Central Registrar or, as the case may he, the Reserve
Bank.363

Section 30A empowers the adjudicating authority to impose penalty upon

failure of any asset reconstruction company or any person to comply with any
direction issued by the Reserve Bank under not exceeding one crore rupees or twice
the amount involved in such failure where such amount is quantifiable,
whichever is more, and where such failure is a continuing one, a further penalty which
may extend to one lakh rupees for even‗ day, after the first, during which such failure
continues. In case, the ARC fails to pay the penalty within the 30 days, the
adjudicating authority shall cancel its registration.

3.3.2.10 APPLICATION OF OTHER LAWS

Section 35 of the Act provides an overriding effect to provisions of the Act if

the provisions of other laws are inconsistent with it. Contrary to the section 35, section
37 states that the provisions of the Act are in addition to, and not in derogation of
other Acts such as the Companies Act, 2013, the Securities Contracts (Regulation)
Act, 1956, the Security Exchange Board of India Act, 1992 and the Recovery of Debts
and Bankruptcy Act, 1993.‖314 Both the sections create an anomalous effect on the
applicability of the provisions of the SARFAESI Act, 2002.
Legislature adopted the non-obstante clause in Section 13 of the SARFAESI
Act, 2002 and gave priority to the claim of secured creditor over claims of other
mortgages who could exercise rights under Sections 69 or 69A of the Transfer of
Property Act 1872. Public dues such as Sales tax, dues of ESIC, workmen dues in
winding up and would have first charge on the sale proceeds on the securities with the
bank. Bank and financial institution cannot claim preference over dues to public
department. The RDB Act, 1993 and the SARFAESI Act, 2002 have been enacted to
provide for expenditures adjudications and recovery of debt due to banks and financial
institutions and not to give priority of dues to banks and financial institutions.315

313
Id at 1547.
314
The SARFAESI Act 2002, Section 37
315
State of M.P. v. State bank of Indore (2002) 108 Comp. Cas. 622 (SC)

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3.3.2.11 OVERRIDING EFFECT
Special Act overrides other Acts operative in the field covered by it. The
SARFAESI Act, 2002 is a special Act and overrides the DRT Act, 1993.316 However,
there may be certain circumstances in which the SARFAESI Act or the DRT Act
operates in such manner so as to be complementary to each other. According to
section 37 of the SARFAESI Act, provisions of the Act or the rules framed thereunder
will be in addition to the provision of the RDB Act. Section 35 of the SARFAESI Act
provides that the provision of the SARFAESI Act shall have overriding effect over
any other law for the time being force. Therefore, conjoint reading of section 35 and
37 results that if there is no inconsistency in provisions of the RDB Act with that of
the SARFAESI Act, the application of both the Acts would be complementary to each
other.317

The SARFAESI Act, 2002 prevails over the provisions of Section 69 of the
Transfer of Property Act, 1882 and makes the mortgage enforceable by the creditor
without intervention of the Court. It is, therefore, no longer relevant whether the
mortgage in question is English mortgage or otherwise.318
In a case, the question before the Court was whether there is conflict between
section 13 of the SARFAESI Act and the rights of the borrower or the mortgagor to
enter into a valid lease agreement and also the right of the lease to remain in
possession of the property which has been validly leased out to him as per lease
agreement.319 It was held, ―where however the lawful possession of the secured asset
is mot with the borrower but with the lessee under a valid lease, the secured creditor
cannot take over possession of the secured asset until the lawful possession of the
lessee get determined...‖ however, ―…sub-section (13) of section 13 of the
SARFAESI Act will override the provisions of section 65A of the Transfer of the
Property Act by virtue of section 35 of section 35 of the SARFAESI Act, and a lease
of a secured asset made by the borrower after he receives the notice under subsection
(2) of section 13 from the secured creditor intending to enforce that secured asset will
not be a valid lease.‖370

316
Garlon Polyfab Industries Ltd. v. State Bank of India, (2003) 3 BC 626 (All-DB)
317
Mathew Varghese v. M. Amritha Kumar (2014) 5 SCC 610
318
Mardia Chemicals Ltd. v. Union of India, (2004) 4 SCC 311; relied in Nahar Industrial Enterprises Ltd v.
Hong Kong & Shanghai Banking Corporation, (2009) 3 BC 539 (SC)
319
Harshad Govardhan Sondagar v. International Assets Reconstruction Co. Ltd. (2014) 6 SCC 1

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 An award passed by the Lok Adalat is a decree and cannot be overridden by the
SARFAESI Act. After passing an award directing instalments, the bank cannot initiate
action under the SARFAESI Act, 2002.320

Where the bank got remedy under the Public Demands Recovery Act and the
obtained the order with finality. It would be obligatory on the parties, borrower and
the Bank. The Bank would be prohibited from instituting proceedings under the
SARFAESI Act.321

3.3.2.12 LIMITATION AND THE SARFAESI ACT

Section 36 of the SARFAESI Act, 2002 lays down the mandate to follow the
limitation law by the secured creditor to take measures under section 13(4).

The limitation period for recovery of debt secured by a mortgage or creating

charge on immovable estate is 12 years from the date when the amount falls due as
per Article 62 of the Limitation Act, 1963. The term financial assets incorporate even
a decreed debt. The 12 years limitation period for enforcing the mortgage has to be
counted from the date of decree or loan recovery certificate issued by DRT. When the
original application is rejected on the ground of limitation, the petitioner cannot avail
benefit of Section 14 of Limitation Act, 1963.

Debt must be legally recoverable. If the debt is time-barred, the notice issued
under Section 13(2) of the SARFAESI Act would be infructuous.322

3.3.2.13 PERFORMANCE OF ARCs

During the early period of 2008-13 where reconstruction business was in the
infancy stage, the conversion of NPAs was slow. According to an ASSOCHAM
report, the average recovery rate for ARCs in India is around 30% of the principal and
the average time taken is between four to five years.

During 2013-14, because of multiple positive factors, the reconstruction

business was booming as ARCs bought a large quantity of bad assets from banks.

But after 2014, the performance of ARCs in settling the NPAs became below
par. Especially in the recent periods, ARCs became underperformers in the context of

320
Rajan Kakar v. Vijaya Bank, AIR 2008 Delhi 17
321
Kanhaiya Lal v. State Bank of India, AIR 2008 Patna 153.
322
Neelu Gupta v. State Bank of India AIR 2008 Pat 73; Sat Prakash v. State of Punjab AIR 2008 (NOC) 1211
(P&H) (DB)

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the present rising tide of bad assets. This has caused a steep rise in NPAs in the
banking sector.

The declining asset reconstruction activity was started from the second half of
2014, when the RBI has raised certain norms for securitization business.
RBI released a comprehensive ‗Framework for Revitalizing Distressed Assets in the
Economy‗. It suggested a corrective action plan to fight NPAs. Later, the RBI raised
the cash payment to banks from 5% to 15%. It removed special asset classification
benefits to asset restructuring from April 1, 2015, to align with international norms.
As a result of these, the asset reconstruction business witnessed a slow-down.

At present, there are 19 ARCs in India. But collectively, their capital base is
also insufficient to tackle the country‗s nearly Rs 8 lakh crores NPAs. The main
problems in the sector are low capital base of ARCs, low funds with the ARCs,
valuation mismatch of bad assets between banks and ARCs etc.

Several steps were taken by the RBI and the government to bring life into the
asset reconstruction activities. In one such step, the Government raised FDI in the
sector to 100%. Similarly, the ARCs may get a vital role for asset restructuring under
the new Insolvency and Bankruptcy Code. In 2016, the RBI has amended the
SARFAESI Act to give make the ARCs more efficient

3.3.2.14 CHALLENGES TO THE SARFAESI ACT, 2002

1.Deficient Enforcement Mechanism

First and foremost Problem that bankers face the implementation of

enforcement mechanism provided under the SARFAESI Act. Under the SARFAESI
Act, no doubt there are clear provisions for claiming debt from the borrower.
However, practically it seems to be limited only to serving different notices at
different times by the bankers. When banks proceed to take the actual possession and
to proceed to sell the properties, it faces a lot of difficulty in executing the process of
possession and sale. Though there are provisions related to taking assistance of
District Magistrate and Chief Metropolitan Magistrate. But these authorities are
already overburdened with works of administrative and judicial nature.

Moreover, a number of SARSFAESI actions stalled at the stage of taking

possession. The reason behind it, on the one hand, is that mushrooming of section 14
petition by banks at collectorate. On the other hand, there is no fixed procedure
prescribed by the Act for the disposal of such petitions. Sometimes District
Magistrates summon the adverse party whereas they directly proceeding for the banks
considering it purely administrative action.

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 Moreover, there is an ambiguity of the jurisdiction of CJM to assist the Banks
in their SARFAESI actions. The question of whether CJM has jurisdiction to entertain
applications under section 14 of the SARFAESI Act, is still unanswered. There are
different views of different High Court on this point and the opinion of the Supreme
Court on the point is still due. Kerala High Court and Allahabad High Court, in cases
Mohd. Ashraf v. Union of India (2008) and Abhishek Mishra v. State of U.P. (2016),
have taken views that CJM in the non-metropolitan area stands on the same footing as
CMM in metropolitan area whereas Madras High Court in case K. Arockiya Raj v.
CJM, Srivilliputhur has taken opposite view.

Moreover, the statute left scope for executive authorities to manipulate the
situation according to their whims and fancies. The discretion left by the statute on the
executive authorities most often result in corrupt and illegal practices such as Bribing
by the borrower at the time of possession etc. Thus, banks find themselves helpless in
enforcing SARFAESI actions.

2. Priority to Banks as secured Creditors

It generally happens at the time of realization of money that other stakeholders
such as government department claim their right over recoveries made by the bank.
Hence it becomes an obligation for the banks to oblige the claims made by these
stakeholders and the rights of the secured creditors are often challenged before the
various forums by a number of parties. Though Section 26E of the SARFAESI Act
which grants priority to the secured creditors has been inserted but it is still to be
notified.
3. Right of Redemption
As per Section 13(8), the right of redemption available to the borrower/
mortgagor is up to the date of notice for public auction or inviting quotations or tender
from public or private treaty for lease, assignment or sale of the secured assets.
Whereas, the referred Rules require 30 days of sale notice to be issued to the
borrower/ mortgagor in first instance and 15 days notice for subsequent sale
processes. In such a case, the question whether the right of redemption is available
even after the publication of the sale auction notice or does the right of redemption
terminates on such publication is still unanswered.

Moreover, in most cases, it is found that parties hesitate to redeem mortgage as

redemption of mortgage requires payment of entire debt. The SARFAESI Act
provides for redemption of mortgage by payment of entire debt due, but there is no
provision for redemption of mortgage of any particular property mortgaged.

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4. Conflict with DRT

Section 17 of the SARFAESI Act, 2002 provides a right of appeal against the
action initiated by the Bank under the provisions of the SARFAESI Act, 2002. The
borrower or anyone aggrieved can challenge the possession notice issued under
section 13 (4) of the SARFAESI Act, 2002 and there is a time-limit prescribed for
preferring an appeal. the borrower is entitled to question all measures initiated by the
Bank pursuant to the possession notice under section 13 (4). While the rights of the
borrowers or the persons aggrieved to prefer an appeal under section 17 of the
SARFAESI Act, 2002 is almost settled, the issue of powers of Debt Recovery
Tribunal under section 17 of the Act are still debated. From the stage of maintaining
that ‗the DRT is supposed to only look into the procedural issues‗, with the
interpretation of Courts, the scope of powers of DRT under section 17 of SARFAESI
Act, 2002 is significantly expanded though certain issues still requires consideration.

5. Absence of classification as willful defaulters and unintended defaulters

Many borrowers feel that they are being harassed by the Bank officials
unreasonably and using the provisions of the SARFAESI Act, 2002. They claim that
they are not ‗wilful defaulters‗ and even if there is some kind of default, they are
willing to correct the same and honour the commitments agreed upon. While in some
cases, the Bank Officials rightly show some kind of interest in helping the borrowers
within the legal framework, in some cases, the Bank Officials act unreasonably and
invoke the provisions of the SARFAESI Act, 2002 by classifying the account as
‗Non-performing Asset‗ even if there is a possibility of regularizing the loan account.
The Act did not make any difference between the wilful defaulters and the normal
business defaulters. They felt that, due to various factors such as the economic
slowdown in the country and political interference, most of the loan of Banks and
Financial Institutions became bad for reasons beyond their control but as per the
Central Government an estimated amount of about Rs.4 lakh crore was locked into
Non-performing Assets (NPA) with different Banks and Financial Institutions.

3.3.2.15 THE ENFORCEMENT OF SECURITY INTEREST AND RECOVERY OF DEBTS

LAWS AND MISCELLANEOUS PROVISIONS (AMENDMENT) ACT,2016

Keeping in view the defects of the DRT Act, 1993 and the NPA Act, 2002 the
government brought enormous changes to overhaul the mechanisms provided under
the Acts. The Amendment Act addressed the following issues under the prevailing
laws:

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I. AMENDMENTS TO RDBACT,1993
Title of the Recovery of Debt due to Banks and Financial Institutions Act, 1993
has been changed to the Recovery of Debt and Bankruptcy Act, 1993.

The amendment made stricter provisions for borrowers in order to bring right
and definite issues before the tribunal. Now Proviso has been appended to section
19(5) requires the defendant to file an affidavit in support of his written statement. He
is also required to make a declaration of the assets. In case no such declaration is
made the defendant may be detained in civil prison for 3 months. 323 Moreover, under
section 19(4), the defendant is restraint from disposing of properties. Earlier there
were provisions only for an injunction by the tribunal however in order to impose
quick restraint on the defendant from disposing of assets or properties now the
tribunal is empowered to issue an adinterim injunction.324 The Act now provides for
civil prisons in case of noncompliance of its provision. The amendment provides for
strict timeline for preventing the defendant from causing undue delay. Now the
written statement shall be filed in 30 days that may be extended by the tribunal by 45
days on sufficient cause to be shown by the defendant.325 The whole proceedings shall
be disposed of in two hearings or maximum in one eighty days. 326 The final order
shall be passed by the tribunal in 30 days. The period of limitation for filing appeal is
30 days.327

The Amendment Act has fixed parameters for accountability to ensure the
unbiased proceedings and just decisions of the case. The Chairman of the DRAT is to
be informed from time to time about pendency of cases, disposed cases, and newly
registered cases.379 The Amendment Act has provided to review the performance of
the tribunal, recovery officers.380

With a view to bringing consistency in DRT Proceedings and satisfaction in

DRT officers, the amendment has improved their service conditions under the Act.
The Amendment Act has enhanced the service period of DRT‗s Presiding Officers
and DRAT Chairman 328 . The Presiding Officer of one DRT may discharge the
function of the Presiding Officer of another DRT.382 Originally the Act has provisions
relating to removal of the Presiding Officer and chairman. However, it has been
provided by the Amendment Act, 2013 for suspension of the said officers during the

323
Supra note 14 at 1370
324
Id at 1369
325
The Recovery of Debt and Bankruptcy Act 1993, Section 15
326
Section 19 (24)
327
Section 19 (20) 379 Section
17-A(1-A) 380 Ibid.
328
Section 6 read with Section 11. 382 Section
4(2)

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pendency of their removal proceedings upon satisfaction of the Central
Government.329 To ensure stricter compliance of the Act and quality performance of
Presiding Officers, the Amendment Act, 2016 has given power to the Chairperson to
convene meetings of the Presiding Officers of the DRTs to assess and review their
performance. 330 If in the opinion of the Chairperson, there is a requirement of
initiation of such inquiry by the Central Government under section 15, the
Chairperson may recommend the government for such action. 331 With a view to
bringing promptness in the DRT proceedings the amendment has provided for e-filing
of recovery applications written statements documents and display of interim or final
order on DRT and DRAT web-portals. 332 Though the government is hesitating in
enforcement of the provision, the amendment has put the claims of secured creditor at
upper hand than other claims and government dues.333

II. AMENDMENTS TO THE SARFAESIACT,2002

The Amendment Act, 2016 provides for the substitution of certain expressions
relating to securitization companies as well as reconstruction companies. The
amendment provides for the protection of the borrower willing to pay debts. It
provides that the borrowers who raised funds through the issue of debt security, the
secured debt need not be declared as non-performing assets. And in the situation of
default, the debenture trustee shall have the right to enforce the security interest under
section 13 in the same manner as a bank or financial institution. 334 The demand notice
under section 13(2) can now be delivered by hands also. The amendment empowers
the DRT to adjudicate claims of tenant and lessee of the secured assets. If in the
opinion of DRT such person is entitled to possession the DRT shall restore the
possession to the same.335 Such aggrieved persons are also entitled to compensation
and cost incurred in such cases.336

To facilitate the timely disposal of severalapplications under the petition, the

Amendment Act has provided strict timelines.337 Moreover, the borrower should be
apprised about the time available to him to redeem the secure asset under section
13(8). The amendment has permitted sale of movable or immovable.

329
Proviso to Section 15(2)
330
Section 17-A(1-A)
331
The Recovery of Debt and Bankruptcy Act 1993, Section 17-A(1-B)
332
Section 19-A
333
Section 31B read with 26E

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 CHAPTER-IV
CONCLUSION AND SUGGESTIONS
4.1 CONCLUSION

The incidence of non-performing assets (NPAs) is affecting the performance of

credit institutions both financially and psychologically. Nonperforming assets
commonly known as bad debts are the assets of the bank's recovery of which is almost
negligible. RBI, the apex body for the economic regulation in the country, has
acknowledged this menace in its various reports journals and circulars. The non-
performing assets have become a major cause of concern for the economic health not
only for the country but also at the global level which continues to haunt the Banking
Sector. A financial asset of a bank or an account of a borrower may be classified by a
bank or financial institution as sub-standard, doubtful or loss asset to be defined as
NPA. It is declared as NPA when Interest or instalment or the bill remains overdue for
a period of 90 days or the account remains out of order in respect of overdraft. Gross
NPA that includes the interest, claims and other provisions is a better indicator of the
economic health of the country.

The restructuring of debts under 'standard', 'sub-standard' and 'doubtful'

categories may be done by the banks on account of the debtor's financial hardship for
economic or legal causes by modification of terms of the advances or securities,
changes of repayment period or repayable amount or the amount of instalments or rate
of interest. While a restructuring proposal is pending, the bank shall continue with the
usual asset and re-classification of an asset should not be dropped merely because the
restructuring process is under consideration. Restructuring of debts could be done
before or after the initiation of commercial production or operation but before the
classification substandard or doubtful category. A restructured account would be
upgraded to the 'standard' category after satisfactory performance during the one year
from the first payment of interest or instalment.

Writing off debt is another measure used by banks to clean up their balance
sheets from bad debts. Additionally, it liberates the money accumulated by the banks
for the provisioning of any debt and such amount becomes profit for the lending bank.

According to the RBI Report on Bank Group-wise Classification of Loan

Assets of Scheduled Commercial Banks, NPA has reached up to 14.6 percent in 2018.
The IDBI Bank Indian Overseas banks UCO Bank were the banks in most vulnerable
condition among others. There may be socioeconomic causes, political causes and
legal causes of rising NPA. A person may require money for marriage, cremation,
education etc. He may take loans under various government schemes. Failure of
various legal and administrative mechanisms may also be the cause of NPA. With a
view to early identification of Non-performing Assets, RBI has issued guidelines to
classify the account as Special Mention Accounts (SMA)

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 Exit option permits creditors to carry their current level of exposure to the
debtor by selling their shares either to the current creditors or fresh creditors taking up
their share of supplementary finance.

Bank for International Settlements a body constituent of member central banks

of the world was established to bring monetary and financial stability, to promote
international cooperation globally. It is the principle setter of NPA Norms
internationally. As a result of the financial crisis of international currency a committee
known as the Basel Committee was constituted which has issued its guidelines in the
form of Basel Accords in 1988, 1999 and 2008. Basel Accords provide guidelines for
capital and structure of risk loads for banks. Basel II recommended minimum capital,
supervisory review and market discipline than the Basel I. India is signatory of Basel
II. After the financial crisis in the year 2007 Basel III recommended higher capital
standards, securitisation positions, off-balance sheet vehicles and trading book
exposures. Basel Committee on Banking Supervision (BCBS) time to time publishes
guidelines on Prudential Treatment of problem Assets (PTA). Section 2 outlines
applicable accounting standards on NPA identification and measurement and
summarizes the ongoing BCBS guidance on the prudential treatment of problem
assets. Section 3 discusses the key takeaways of the FSI survey on NPA identification
and measurement practices across sampled countries. Section 4 sets out policy options
that supervisors may consider to enhance their NPA identification and measurement
process. Section 5 provides brief concluding remarks.

Otherwise, countries do not follow similar accounting standards. There is Net

Present Value (NPV) approach to value collateral to calculate the time and costs
required to acquire and sell collateral; that is, to consider the time and costs required
to acquire and sell collateral. United States follow „US Generally Accepted
Accounting Principles‟ (US GAAP). Most countries adopted „International Financial
Reporting Standards‟ (IFRS) for accounting principles. The distinctions within IFRS
and US GAAP provisioning frameworks are highlighted by variations among
accounting and prudential frameworks. In 2018, IFRC 9 replaced the IAS-39.
According to this approach, exposure should be classified as "impaired" and prescribe
a framework to compute credit loss provisions. While the definition of "impaired" has
remained unaltered, IFRS-9 requires a more granular calculation of credit risk in
comparison to IAS-39. Under IFRS-9, applicable substances must currently place
financial instruments into three distinct stages, including "performing",
"underperforming" and "non-performing", rather than the "unimpaired" and
"impaired" categories under IAS-39. Stage three is similar to the IAS-39 definition of
impaired. The three-stage classification process is used not only to mean the credit
quality of an exposure but also to determine the approach used to calculate expected
credit losses. IFRS-9 system requires entities to compute provisions based on
supposed damage, covering all credit exposures. In this regard, as soon as credit is
generated, banks are required to recognise provisions based on 12-months supposed
damage. IFRS-9 requires jurisdictions to consider the time and costs required to
foreclose and sell the collateral (NPV concept), discounted at the loan‟s original
effective interest rate in order to determine supposed credit damage. The NPV
approach to collateral valuation becomes particularly effective in countries where

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creditors face long delays in gaining collateral possession of defaulted borrowers due
to congested legal setups. Such delays can materially affect the estimated value of

collateral, which, in turn, affects provisioning requirements. Collectively, the BCBS

NPE definition is broader than the accounting concept of ―impaired‖. First, the
BCBS NPE definition includes a qualitative ―unlikely to pay‖ approach with no
corresponding equivalent in applicable accounting frameworks. Second, there are a
number of elements specified in the BCBS NPE definition such as the NPE
designation be applied on a debtor basis, the approach to exit the NPA category and
the minimum repayment period for forborne NPEs to return to performing status, that
are not explicitly noted under relevant accounting standards.

A Comparative analysis makes it apparent that NPA is not defined uniformly;

in some countries it is collateral base asset are exempted however in some countries it
is not so exempted. In some countries, in some countries collateral-based definition is
adopted, whereas in many other, default based definition is adopted. In some countries
„Unlikely To Pay‟ (UTP) criteria are adopted to recognise the NPA whereas in some
others „past due‟ criteria is used. In Asia and the LAC region, regulatory asset
classification is based on five bucket risk whereas US asset classification is based on
nonaccrual asset system. In EU, a common definition asset classification regulation is
based on a combination of ―past due‖ (90 days) and the forward-looking ―unlikely to
pay‖ (UTP) criteria, even if the exposure is currently paying as agreed. Regardless of
whether countries use formal or informal approaches, all countries have prescribed a
combination of quantitative and qualitative criteria to recognise NPA exposures.
Several financial authorities require repayment of all past-due principal and interest
plus continued debt repayment for a period of time (ranging from two quarters to one
year). While most countries have prescribed specific criteria to restructured NPAs to
the performing category, the minimum payment performance period varies across
countries. An option of immediate exit from the NPA is permitted only in few
countries. In most of the countries including India, a minimum number of interest
payments must be made for a period of time. Some countries allow an exit from NPA
status once principal and interest payments are in arrears for less than three months
and the remaining debt is expected to be repaid. In the LAC countries, risk buckets
ranging from 5 to 16 are used for NPA identification. That shows they require greater
risk differentiation within the severe asset classification categories. Whereas India,
including other countries of Asia, only use five bucket system for NPA determination.
The regulatory frameworks used to calculate the volume of NPAs (or equivalent
proxies) generally cast a wider ground than the accounting concept of ―impaired‖. In
the case of retail exposures, the vast majority of countries rely on past-due criteria to
classify exposures in the NPA (or equivalent) category.

NPV approach is particularly important in the case of India a country where the
legal framework results in long delays for creditors to gain collateral access. India,
one of the Asian countries follows the IFRC-9 approach in the classification of bad
loans in its banks. BCBS provides guidelines to classify

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Non-performing Exposures (NPE). However, India has included the „Debt Securities‟
in the definition of NPA provided under the SARFAESI Act 2002 to bring it in
consonance of International practice. In India, Five bucket risk approach is used in
NPA identification that is according to the international practice.

On an analysis of the Indian scenario, the Constitution of India as a Grundnorm

gives sanction to the law enacted by the parliament. It not only acts as a mother
document for the Indian laws but also list down number of rights fundamental to the
lives of citizen of India. Banking is covered under the term „business‟ of Article
19(1)(g) of the constitution. The impugned law which prohibited the banks from
carrying on the banking business was protected under Article 19(6)(ii) because it
affected the right to carry on banking business which was a necessary incident of the
business assumed by the Union under that law. In R. C. Cooper v. Union of India AIR
1970 SC 564, the right guaranteed under Article 19(1)(g) to carry on any occupation
trade or business were, therefore, held to be directly invaded by the nationalization of
banks.

In its legislative competence under Article 245 read with 246, the Central
Government passed the RDB Act 1993 (originally as the RDDBFI Act 1993) and
SARFAESI Act 2002 to deal with menace of NPA in banking sector which is
enumerated under entry 45 of the List I the Union List of Seventh Schedule.
Constitutionality of these laws have been upheld in cases of Union of India v. Delhi
High Court Bar Association, (AIR 2002 SC 1479), Nahar Industrial Enterprises Ltd.
v. Hong Kong & Shanghai Banking Corporation, (2009 8 SCC 646), Mardia
Chemicals Ltd. v. Union of India (2004 4 SCC 311) and Keshavlal Khemchand and
Sons Pvt. Ltd. v. Union of India (2015 BC 511 SC). Recently, in Dharani Sugars &
Chemical Ltd v. Union of India (2019 SCC OnLine SC 460), the Supreme Court of
India struck down the Circular related to Insolvency Resolution dated 12th February
2018 issued by RBI as ultra-vires the section 35 AA of the Banking Regulation Act,
1949.

However, before these special laws, the issue of loan recovery was addressed
by general civil laws. Law related to mortgages and charge under chapter IV of the
Transfer of Property Act, 1882, law relating to bailment and pledge under chapter IX
of the Indian Contract Act 1872 and law related to Hypothecation are applicable to
bank loans for creating security interest. General procedure is provided under the
Specific Relief Act, 1963 and the Civil Procedure Code, 1908 to enforce these
security interests and to recover such loans in case of default. The procedure involved
in a suit filed for recovery of loans before a civil court is proverbially disconcerting to
the creditor. Very often, therefore, the protracted delay in recovering loan results into
a loss to the creditor in real terms, as the time spent for the procedure itself would
have substantially snatched the value of money, even if recovered fully. Not only the
delay but other complications of civil procedure keep bankers devoid of adequate
remedies.

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 Considering the gruesome problem of bad loans, in parlance with international
practice and on recommendations of various committees, the government enacted the
special laws pertaining to loan recovery.

In 1993, Debt Recovery Tribunals were established in India to provide for

speedy disposal of debt recovery cases on the recommendation of Narsimham
Committee. Though the Recovery of Debt Act, 1993 has imbibed in itself a wide
definition of debt, provide for summary procedure empowered with exclusive
jurisdiction to deal with recovery matters, primacy over other laws, these also did not
show any improvement in resultant recovery of debts. Rather they also plagued with
the same disease with which civil court was infected. The proceedings in the tribunals
are stalled for a number of years making the interest and efforts of bank official futile.
Though an attempt to bring reforms in the law has been made in 2016 but the same is
still inflicted with issues like lack of expertise, under-staffing accountability of the
officers. Present research work evident that different DRTs adopt different approaches
to proceed in recovery cases. Moreover, the defaulting parties become successful in
shelter of the legal flaws as the anomalies like jurisdictional conflict, overlapping with
other laws are not properly addressed. Most importantly, the DRT Act is a legislation
which provides remedies only of civil nature. This has removed any kind of
apprehension from the mind of defaulter. Current criminal laws such as the Indian
Penal Code, 1860, the Code of Criminal Procedure, 1973 have been in-appropriate to
tackle with defaulters. The bankers have only general remedies under section cheating
Criminal Misappropriation, Criminal Breach of Trust, and Forgery which can be
treated as general provisions for economic offences. There is no law declaring wilful
loan default as an offence and prescribing punishment for that. This requires special
penal provisions for the prosecution of the defaulters in the same Act.

Realizing the inefficaciousness of the Recovery of debt and Bankruptcy Act,

1993, the Narsimham Committee II recommended banks to be equipped with
additional power such as recovery without intervention of court. Thus, the SARFAESI
Act 2002 is enacted with provisions relating to securitisation and recovery from the
borrower directly.Analysis under the present work shows that initially, the
SARFAESI proceeding proved fruitful in realising the repayment of debts. However,
with the changing scenario of Indian economy rate of recovery of bad loans also
declined. The present work highlights the loopholes in the Act. It is proved that
despite being empowered with direct recovery from the borrowers SARFAESI action
has been limited to giving of various notices only. There are no adequate measures for
acquiring financial assets which remain in the form of security. On the one side, the
SARFAESI and DRT proceedings can be initiated simultaneously but on the other
side, this overlapping of the Acts has been started misused by the borrowers at
present. Ultimately, the SARFAESI Act needs provisions related to the protection of
the bank‟s interest as priority is required to be given against other stakeholders. The
Act is ignorant of various alternative recourses available to borrower. On the one way
the Act conferred wide power on DRT to regulate the SARFAESI proceedings but at
the same time that has been used by the borrowers as tool to evade the SARFAESI
proceedings.

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 Keeping in view the various anomalies in the two Acts, the Enforcement of
Security Interest Amendment Act, 2016 was brought into force on 4 November 2016.
Though the Amendment Act attempted to address the various issues such as
accountability of DRT officers, speedy proceedings, protection of interest of
borrowers in both the laws, nevertheless other challenges are still required to be
addressed.

The Recovery of Debt and Bankruptcy Act, 1993 provides a definition of debt
with widest amplitude, establishment of Debt Recovery and Debt Recovery Appellate
Tribunal with exclusive jurisdiction outing the regular court from dealing with
recovery of debts more than 10 lakhs. The Act provides for summary procedure to
ensure the recovery of cases as there is no application of the Civil Procedure Code.
The proceedings under the Act follow the principle of natural justice. However the
procedure under the Act cannot be arbitrary and ultra vires the constitution.

The tribunals are established by the Central Government and the presiding
officer and chairman are appointed by the central government. The DRT has been
staffed with recovery officers who have given certain powers regarding the execution
of recovery certificate issued by the presiding officer of the DRT for recovery of the
debt. Recovery of debts can be made by attachment and sale, taking possession, arrest
or detention, appointment of the receiver or by any other method prescribed by the
central government. Provisions of the DRT Act have been given penal effect by
application of the Income-Tax Act, 1961. The Tribunals for the purposes of the RDB
Act are deemed to be a Civil Court for all purposes of the Civil Procedure, Criminal
Procedure and Penal Codes. DRT is not only adjudicating body for proceeding under
the RDB Act but is an appellate forum for the SARFAESI Act, 2002.
Any person aggrieved by any of the action under section 13 may approach the DRT
appeal thereof shall be filed to DRAT.

Pushed by the Reserve Bank of India, Indianbanksare on an overdrive to

recognise and provide for stressed loans. While this will undoubtedly clean up the
books, bankers are worried about how they will recover the bad debts, fraught as the
process is with inordinate delays and hurdles.

The Indian court system is very famous for the time taken to resolve the cases.
It has been remarked that the most effective method of dispute resolution in these
courts are the out of the court settlement, withdrawals and compromises. Despite
being governed by the rules of natural justice not bound by the Civil Procedure Code
rules the proceedings in the tribunals results pendency of a number of applications,
counter applications and leaves both the parties in dilemma. In this setting, the benefit
from filing a legal suit against the defaulting borrower is very low and the cost has
been very high. In addition to this, the bankruptcy procedure for the firms is time-
consuming and the banker complains that it creates incentives for the borrowers to
mismanage the funds. 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 theDRT.

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 The case of Vijay Mallya has remained in limelight indicating towards
languishing procedure provided under the loan recovery laws. It appears that the Act
is being misused by the borrower‟s delaying tactics. Borrowers deliberately move to
the tribunal for unreasonable stays and adjournments that ultimately cost and time-
consuming for the secured creditors.

As a standard process, borrowers should give a request to the bank to allow

them 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. Whereas, practically, due to already stretched proceedings of the tribunal,
the bank officials are obliged to offer One Time Settlement Scheme to the borrowers
but on the other hand the borrowers prefer to wait to negotiate their borrowings on
their own terms at their own convenience.

In many cases, when the Bank takes steps to take possession of the property
and takes step to sell the same, the borrowers ignore the Bank notice under section
13(2) and approach the tribunal which is not right recourse for the borrowers. Thus,
the borrowers have been careful when the Bank exercises its powers under the
SARFAESI Act, 2002 and with the expert guidance and assistance; they can protect
their rights effectively. Despite being a special law, there are certain anomalies in
certain provisions within the Act itself that helps borrower to escape from the liability
to pay his debts

The question is whether borrowers must choose this remedy or whether they
are also entitled to file an independent suit in the appropriate civil court. There are two
conflicting Supreme Court decisions on this point and two others which are
ambiguous. In Indian Bank v. ABS Marine Products, (2006) 5 SCC 72, Indian Bank
asked for a suit filed by ABS Marine in the Calcutta High Court to be transferred to
the DRT. The Supreme Court held that such an independent suit filed by a borrower
could not be transferred to the DRT without his consent, since his right to approach a
civil court cannot be taken away. This decision raised fears that the jurisdiction of the
DRT could be easily evaded by a borrower filing an independent suit in civil court
asking for the exact opposite of what the Bank was asking for in the DRT. Though
DRT was brought into existence to provide for speedy procedure different from
general civil proceedings but these seem going on the same track as the general civil
courts.

Since the Act provides only for civil action by the banks, the banks do not have
options to prosecute the defaulters. Moreover, the general penal laws have been
insufficient to address the issue of the prosecution and punishment of defaulters. It is
important to note that the Act though provides for arrest but that hardly affects the
borrower as it has limited implications due to its civil nature. Due to the inadequacy of
the penal laws in this reference, the bankers hesitate to move FIR against the
defaulting borrowers.

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 The tribunal has no jurisdiction to adjudicate to entertain application for
winding up of a company, as an application for winding up is a special right or
remedy given under the Companies Act, 1956. The tribunal has also no jurisdiction
over co-operative banks. There are a total of 39 DRT, 4 DRATs currently functioning
in the country. However, with a view to rising pendency of cases, the number of
DRTs and staffs working therein are still inadequate. Only Few DRTs are having
separate benches in the same cities. Moreover, since banks have their branches even
in rural and remote areas, the Bank officials find it difficult to file and follow DRT
proceedings due to distance from their branch. Though the Amendment Act has made
provision for circuit courts but the same is not operative in most part of the countries
due to lack of proper infrastructure and arrangements.

Understaffing and lack of recovery experts in banks are other causes that create
major problems to deal with NPA accounts of the banks. What happens practically
that once due period is lapsed; banks have to declare these accounts as NPA and to
send it to their recovery cell for the treatments. Banks does not have recovery expert
in their branch. Ultimately, the same became the responsibility of the Bank Managers
and other officers who are generally already occupied with several other banking
duties. Not only banks but tribunals have also been plagued with the deficiency in
infrastructure.

With most of the Recovery Officers holding more than 1000 files, it is
humanely impossible for such Officers to undertake or complete the proceedings in a
time-bound manner. It should also be noted that the Recovery Officers are also
required to undertake inspection, physical verification of all the properties brought by
them for enforcement.

The SARFAESI Act 2002 popularly known as NPA Act provides for
securitization and reconstruction of security interest as well as recovery directly by the
banks from borrowers without interference of the court. The Act contains the
following provisions relating to registration and regulation of securitization
companies or reconstruction companies empowering them to raise funds by issue of
security receipts to qualified institutional buyers. The Act facilitates easy
transferability of financial assets by the securitization company or reconstruction
company to acquire financial assets of banks and financial institutions by issue of
debentures or bonds or any other security in the nature of a debenture. The Act
regulates the functioning of the securitization company or reconstruction company
harmonizing the growth of securitization market. The Act provides for enforcement of
security interest by issuing demand possession and sale notice under section 13.

The SARFAESI Act no doubt provides an alternative course to secured debtors

but the Act also has certain grey areas which need to be addressed. The first and
foremost challenge before the Act is deficient enforcement mechanism provided under
the Act. Bankers face the implementation of enforcement mechanism provided under
the SARFAESI Act. When banks proceed to take the actual possession and to proceed
to sell the properties, it faces a lot of difficulty in executing the process of possession

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and sale. However, practically it seems to be limited only to serving different notices
at different times by the bankers. Though there are provisions related to taking
assistance of District Magistrate and Chief Metropolitan Magistrate. But these
authorities are already overburdened with works of administrative and judicial nature.

Moreover, a number of SARSFAESI actions stalled at the stage of taking

possession. The reason behind it, on the one hand, is that mushrooming of section 14
petitions by banks at collectorate. On the other hand, there is no fixed procedure
prescribed by the Act for the disposal of such petitions. Sometimes District
Magistrates summon the adverse party whereas they directly proceeding for the banks
considering it purely administrative action.

Moreover, there is an ambiguity of the jurisdiction of CJM to assist the Banks

in their SARFAESI actions. The question of whether CJM has jurisdiction to entertain
applications u/s 14 SARFAESI Act, is still unanswered. Moreover, the statute left
scope for executive authorities to manipulate the situation according to their whims
and fancies. The discretion left by the statute on the executive authorities most often
result in corrupt and illegal practices such as bribing by the borrower at the time of
possession etc. Thus, banks find themselves helpless in enforcing SARFAESI actions.

Under SARFAESI Proceedings it generally happens at the time of realization

of money that other stakeholders such as government departments claim their right
over recoveries made by the bank. Hence it becomes an obligation for the banks to
oblige the claims made by these stakeholders and the rights of the secured creditors
are often challenged before the various forums by a number of parties. Though
Sec.26E of the SARFAESI Act which grants priority to the secured creditors has been
inserted but it is yet to be brought into force.

As per Section 13(8), the right of redemption available to the borrower/

mortgagor is up to the date of notice for public auction. Whereas, the referred rules
require 30 days of sale notice to be issued to the borrower/ mortgagor in first instance
and 15 days notice for subsequent sale processes. In such a case, the question whether
the right of redemption is available even after the publication of the sale auction
notice or does the right of redemption terminates on such publication is still
unanswered.
Moreover, in most cases, it is found that parties hesitate to redeem mortgage as
redemption of mortgage requires payment of entire debt. The SARFAESI Act
provides for redemption of mortgage by payment of entire debt due, but there is no
provision for redemption of mortgage of any particular property mortgaged.

Section 17 of the SARFAESI Act, 2002 provides that the borrower or anyone
aggrieved can challenge the possession notice issued under section 13 (4) of the
SARFAESI Act, 2002. While the rights of the borrowers or the persons aggrieved to
prefer an appeal under section 17 of SARFAESI Act, 2002 is almost settled, the issue
of powers of the Debt Recovery Tribunal under section 17 of the Act are still debated.
From the stage of maintaining that „the DRT is supposed to only look into the

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procedural issues‟, with the interpretation of Courts, the scope of powers of DRT
under section 17 of SARFAESI Act, 2002 is significantly expanded though certain
issues still requires consideration.

Many borrowers feel that they are being harassed by the Bank officials
unreasonably and using the provisions of SARFAESI Act, 2002. They claim that they
are not „wilful defaulters‟ and even if there is some kind of default, they are willing to
correct the same and honour the commitments agreed upon. While in some cases, the
Bank Officials rightly show some kind of interest in helping the borrowers within the
legal framework, in some cases, the bank official‟s act unreasonably and invoke the
provisions of SARFAESI Act, 2002 by classifying the account as „Non-performing
Asset‟ even if there is a possibility of regularizing the loan account. The Act did not
make any difference between the wilful defaulters and the normal business defaulters.
Due to various factors such as the economic slowdown in the country and political
interference, most of the loan of Banks and Financial Institutions became bad for
reasons beyond their control but as per the Central Government an estimated amount
of about Rs.4 lakh crore was locked into Non -Performing Assets (NPA) with
different Banks and Financial Institutions.

However, pursuing too many of the issues discussed above, the Amendment
Act, 2016 brought tremendous changes in both the Acts. Title of the Recovery of Debt
Due to Bank and Financial Institutions Act, 1993 changed to the Recovery of Debt
and Bankruptcy Act, 1993. Stricter provisions have been made under the RDB Act for
borrowers such as written-statement must be supported with affidavits, bound to make
declaration of assets, restrained from disposing properties, ad interim injection against
them, civil prison in case of non-compliance of provisions. The Amendment Act,
2016 provides for speedy Procedure such aswritten-statement in 30 days maximum in
45 days, the whole proceedings in 2 hearings or 180 days, final order and Appeal in
30 days. The Amendment Act also fixes accountability as it requires the chairman to
be informed about pending cases disposed cases and new registered cases. To ensure
stricter compliance of the Act and quality performance of Presiding Officers, the
Amendment Act 2016 has given power to the Chairperson to convene meetings of the
Presiding Officers of the DRTs to assess and review their performance. With a view
to bringing promptness in the DRT proceedings the amendment has provided for e-
filing of recovery applications written statements documents and display of interim or
final order on DRT and DRAT web-portals. Though the government is hesitating in
enforcement of the provision, the amendment has put the claims of secured creditor at
upper hand than other claims and government dues.

The amendment provides for the protection of the borrower willing to pay
debts. It provides that the borrowers who raised funds through the issue of debt
security, the secured debt need not be declared as non-performing assets. And in the
situation of default, the debenture trustee shall have the right to enforce the security
interest under section 13 in the same manner as a bank or financial institution. The
demand notice under section 13(2) can now be delivered by hands also. The
amendment empowers the DRT to adjudicate claims of tenant and lessee of the

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secured assets. If in the opinion of DRT such person is entitled to possession the DRT
shall restore the possession to the same. Such aggrieved persons are also entitled to
compensation and cost incurred in such cases.

To facilitate the timely disposal of severalapplications under the petition, the

Amendment Act has provided strict timelines. Moreover, the borrower should be
apprised about the time available to him to redeem the secure asset under section
13(8). The amendment has permitted sale of movable or immovable assets through
private treaties, by obtaining quotation and even through e-auctions.

Two Acts namely, the RDB Act and the SARFAESI Act were enacted with the
aim of Speedy recovery of loans but both the Act could improve the scenario in a
limited sense. However, the result of amendments in both Acts is yet to come. But the
data published by the RBI does not show any significant improvement in the
increasing ration of NPA. In the year 2010-11 GNPA of all the banks was 2.3 percent.
GNPA of Public sector Banks in 2016 rose up to 9.3 percent. It reached up to 11.7
percent in 2017 crossed the alarming limit of 14% in 2018 with Rs. 8956013 billion
gross NPA. Whereas only 13.8 % recovery from all channels the DRT as well as the
SARFAESI, in which maximum 18.3 % recovery is done by SARFAESI actions in
comparison to 10.2 % recovery done by DRT proceedings till 2016.

In such a situation an alternative course of recovery was the need of hour. In

the backdrop of the financial sector scenario, the Government undertook a plan to
enact an alternative law which could be another measure for the speedy recovery of
bad loans. Hence, the Insolvency and Bankruptcy
Code received the President‟s assent on 28th May, 2016. The code of 2016 not only
provided measures for the recovery of NPA but also consolidated the earlier
insolvency laws and facilitated easy and time-bound resolution or liquidation of
business entities in distress.

The code provide for insolvency resolution of corporate persons as well as

partnership firms and individual initiated by the creditor or corporate debtor or
individual himself as the case may be. The code has demarcated a difference between
financial and operational creditor for the insolvency purpose since the purposes of
both the loans are different. The code has provided separate adjudicating authority for
corporate loans individual loans that are National Company Law Tribunal (NCLT)
and Debt Recovery Tribunal (DRT) respectively. When an insolvency process is
initiated by the creditor, the Moratorium period starts with the admission of the
application for initiation of the process. During Moratorium all other legal
proceedings shall remain stayed and no new legal proceedings shall start except
proceedings under the Code, 2016. After the resolution commencement, interim
resolution professional is appointed, who has the authority to access the electronic
records, the books of accounts, records and other relevant documents of corporate
debtor available with government authorities, statutory auditors, accountants. He also
takes control and custody of any tangible assets as well as intangible assets of the
debtor in India. After collating claims pursuant to public announcement and

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determination of the financial position of the corporate debtor, interim resolution
professional shall constitute the committee of creditors (COC) comprising of all
financial creditors of the corporate debtor. At first meeting, the COC shall either
resolve to appoint the interim resolution professional as a resolution professional. It is
the duty of the resolution professional to preserve and protect the assets of the
corporate debtor, including the continued business operations of the corporate debtor.
The resolution plan is prepared by the resolution applicant on the basis of information
memorandum. The resolution professional shall conduct the entire corporate IRP and
manage the operations of the corporate debtor during the corporate IRP period.
Resolution Professional conducts all meetings of the COC, gives notice of each
meeting to concerned persons. Resolution application submits a resolution plan to the
resolution professional who shall forward such plan to COC for approval. In case of
non-reception or rejection or contravention of a resolution plan, or when COC decides
to liquidate, liquidation process starts. A liquidator is appointed for conducting the
liquidation process. The liquidator holds the liquidation estate in fiduciary capacity for
the benefit of all the creditors. After consolidation, determination, valuation of claims
secured creditormay either relinquish its security interest to the liquidation estate and
receive on first priority, the proceeds of the sale by the liquidator; or realize its
security interest himself after informing the liquidator and by identifying the assets to
be realized. Upon information the liquidator shall verify such assets and permit the
realization of assets has proved to be in existence. Realization of such security interest
may be done by enforcing, realizing, settling, compromising or dealing with the
secured asset in accordance with such law as applicable to the secured interest. After
completion of the liquidation process, The NCLT shall on an application filed by the
liquidator, order that the corporate debtor be dissolved. A corporate person who
intends to liquidate himself voluntarily and has not committed any default may also
get voluntary liquidation. Procedure relating to corporate insolvency is applied to
voluntary liquidation. The process of insolvency and bankruptcy also involves a
similar procedure except they have option of fresh start proceedings. By fresh start
proceedings, debtor may discharge is debt by summary procedure in DRT. The
provisions are made for small scale debtors. Proceedings of insolvency and
bankruptcy against individual in DRT are similar to that of NCLT. However, the code
provides for bankruptcy trustee instead of resolution professional. The repayment plan
is prepared by the debtor. On the basis of the repayment plan, the resolution
professional shall move an application to the DRT for a discharge order in relation to
the debts mentioned m the repayment plan and the DRT may pass such discharge
order.
Bankruptcy is a statutory procedure usually commenced after insolvency by
which a person is relieved of most debts and undergoes judicially supervision for the
benefit of that person‟s creditor. Under the Code, a creditor individually or jointly
with other creditors or a debtor may file an application for bankruptcy of a debtor to
the DRT. The bankruptcy trustee is appointed by the DRT when nominated by the
board on the direction of the DRT on a proposal of creditor. The bankruptcy trustee
like resolution professional is the person vested with rights and powers of debtor, to
preserve and protect the value of the assets of the debtor until a formal order of
bankruptcy is passed. The Bankruptcy Trustee shall file an application to the DRT for
a discharge order on the expiry of one year from the bankruptcy commencement date

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and the DRT shall pronounce a discharge order on such application. The code
provides for penalty for the contravention of the code.

The Insolvency and Bankruptcy Code has made significant improvement in the
recovery of bad loans and containing the increasing rate of Nonperforming Assets.
Recovery rate which was downward by 36.6 percent, 31.4 percent, 23.6 percent, 18.4
percent, 10.3 percent in the financial years 2008, 2010, 2011, 2013, and 2015
respectively. In the year 2016, when the Insolvency and Bankruptcy Code came into
force the average recovery was 12.4 percent. However, after the Code came into
force, there was tremendous improvement in NPA recovery with 41.3 percent 49.6
percent in the years 2017 and 2018 respectively.

On the analysis of the various reports of RBI and the opinion of experts, it can
be concluded that IBC which was enacted as a resolution law by the government has
proved a boon for the banking sector in case of recovery of their bad loans. The code
has filled that vacuum of enactment between enforcement which was earlier
developed in the DRT and SARFAESI Laws.
The enactment and application of this Code are expected to give a big boost to
ease of doing business in India. The Code has been drafted in such a way that it would
permit market forces to freely determine economic effects. The Code with the primary
goal to promote entrepreneurship provides easy entry of prospective projects as well
as smooth exit from non-viable ventures. The code has provided a time-bound
resolution process to maximize the value of assets of the debtor. The code can be put
at upper hand than the RDB Act as the pecuniary limit under the Code is lower than
the later one. The Code provides for unbiased procedure balancing the interest of all
the parties is another advantage of the Code. The code gives an opportunity to the
debtor himself for improving over his default by giving him an option to look for
revival by resolution plan. It has facilitated a ground for collective negotiation to
reasonably assess the viability of the loan. Multiple scrutiny of the resolution plan
maximizes the chances of success of the plan. The Code discourages delaying tactics
of the defaulting parties. The inability of debtor to defeat the provisions of the code,
owing to the guidance of the insolvency professionals, also helps reduce the incentive
to have a slow lingering death of corporate bodies. The reforms embodied in the Code
yield higher recovery rates for banks and financial institutions and remove a barrier
that restricts the development of the financial market, though this is not the only
barrier that holds back the financial market.

In the light of above discussion, the hypothesis (H1) in the present research
work is proved that the Recovery of debt and Bankruptcy Act 1993 and SARFAESI
Act 2002 are unable to halt the increasing ratio of GNPA and requires considerable
amendment to address to the existing anomalies. The present research work also
proves the hypothesis (H2) that Insolvency and Bankruptcy Code 2016 has made
enough improvement in recovery of Bad Loans.

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4.2 SUGGESTIONS

On the analysis done in the present work following suggestions may be given
for better enforcement of recovery proceedings under the RDB Act 1993.

 The procedure should be adopted by the DRT and DRAT to be standardized for all
DRTs. Presently the same varies from DRT to DRT and even at times from
Presiding Officer to Presiding Officer. This causes unnecessary delay in following
the procedures before the Debt Recovery Tribunal and scope for avoidable
interpretation. Powers may be exercised under section 22A of the DRT Act by the
appropriate authority for the said purposes.
 Up to the stage of filing written statement and proof of affidavit, the filings should
be strictly done only before the Registry. The valuable and expensive time of the
court should not be utilized only for filing purposes.
 The working hours of DRT should be standardized. Most DRT hearings are not
conducted after lunch hours. Pendency of a huge number of cases warrant the
conduct of DRT at least up to the stipulated timings.
 Especially, in matters of SARFAESI Appeal, very strict timelines should be
adhered, as the same not only affects recovery but it also sends a wrong message,
that enforcement proceedings for recovery of NPA can be stalled for a minimum
of 2 years, if an appeal is filed under SARFAESI Act. The prolonged proceedings
also affect the interests of third party purchasers. In a number of cases, sale
conducted and confirmed under the SARFAESI Act and Registered, is set aside
after a period of 3 years. Such Orders dissuades the purchasers from purchasing
properties sold under the SARFAESI Act. Moreover, DRTs grant adjournments
even on the weakest of reasons. Adjournments should be granted only on payment
of costs.
 In most of the SARFAESI Appeals, the DRTs venture to arbitrate and mediate
instead of adjudication. Though the same may be with the laudable purpose of
ensuring recovery, it ultimately ends up in cancellation or reversing the stipulated
procedures under law for enforcement of securities.
 The DRT Act should specifically provide for challenging any SARFAESI Action
only from and after the stage of issuance of possession notices. SARFAESI
Appeals are entertained where the challenge is made against the Demand Notices
itself.
 Provision should also be made to address the issue of acute staff shortage in Debt
Recovery Tribunals.
 The Recovery Officers should be provided with adequate support staff, to enable
them to undertake issuance of notices and other required enforcement processes.
With most of the Recovery Officers holding more than 1000 files per person, it is
humanely impossible for such Officers to undertake or complete the proceedings
in a time-bound manner. It should also be noted that the Recovery Officers are
also required to undertake inspection, physical verification of all the properties
brought by them for enforcement.

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 DRTs should be constituted not only in State capitals but in also major centers.
The same would avoid unnecessary delays in travelling, enforcement etc of all the
people concerned. For example in Karnataka, DRT has been established only at
Bengaluru. Whereas, one bench of DRT at Bengaluru deals with matters relating
to the rest of Bengaluru Urban.
 In the majority of the DRTs, advocates are permitted to appear before the
Recovery Officer, which eases the recovery proceedings and follow-up. Whereas
in certain DRTs, only the concerned parties are permitted to appear before the
Recovery Officer. In such cases, where most of the Banks having branches far and
wide in the State & Districts find it extremely difficult to follow up the Recovery
Proceedings. More importantly, in highly contested and complicated cases, the
Banks find it extremely difficult to prepare and file affidavits and counters before
the Recovery Officer. In short, the procedure should be standardized.
 The powers of the Recovery Officers are to be defined and enlarged. The success
of the DRT rests basically on effective enforcement of the Debt Recovery
Certificate in a time-bound manner. Moreover, the procedures to be adopted by
the Recovery Officers for the recovery proceedings are to be statutorised.
Presently, the recovery officers are following the Income Tax Certificate
Proceedings Rules, which is found to be not sufficient for enforcement of Debt
Recovery Certificates.
 In spite of the priority granted to secured creditors under Section 31 B of the DRT
Act, certain agencies like Income Tax, Official Liquidators, Service Tax and the
Enforcement Directorate claim priority over the recovery made. Specific statutory
provisions should be included to ensure the priority of the secured creditors.
 The recovery proceedings provided under the DRT Act is purely civil in nature
and therefore lack of criminal prosecution does not deter the willful defaulters
from evading the proceedings. The inability of normal criminal laws to specifically
deal with recovery proceedings under these Acts adds another problem to the
issue. Therefore, it is suggested that any willful disregard to recovery proceedings
under these Acts should be given criminal overtones in order to make the Act more
meaningful.
 Suggestions for the SARFAESI Act, 2002 may be as follows,
 Keeping in view the practical difficulty, it is suggested that the government must
lay down certain standard norms and procedures so that apathy and callousness
created by the irregular exercise of discretionary powers by the executive
authorities may be curtailed and time-bound enforcement of the SARFAESI
Action may be ensured.
 First and foremost Sec.26E of the SARFAESI Act which grants priority to the
secured creditors is required to be notified. Without notification of the said
provision, the rights of the secured creditors are often challenged before the
various forums by a number of parties including government agencies.
 The anomaly between Section 13 (8) and Rule 8(6) and Rule 9 of the Security
Interest Enforcement Rules requires to be addressed. As per
Sec.13(8), the right of redemption available to the borrower/ mortgagor is

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 up to the date of notice for public auction or inviting quotations or tender from
public or private treaty for lease, assignment or sale of the secured assets.
Whereas, the referred Rules require 30 days of sale notice to be issued to the
borrower/ mortgagor in first instance and 15 days notice for subsequent sale
processes. In such case, whether the right of redemption is available even after the
publication of the sale auction notice or does the right of redemption terminates on
such publication. If it terminates on publication, the need for 30 days/ 15 days
waiting period is to be addressed.
 While the SARFAESI Act provides for redemption of mortgage by payment of the
entire debt due, provision should also be made for redemption of mortgage of any
particular property mortgaged by payment of market value of the property at the
time of mortgage. This would enthuse, the owners of the property to make
payment of debt to the extent of the market value of the property. In most cases, it
is found that parties hesitate to redeem mortgage as redemption of mortgage
requires payment of entire debt. When the principle of severability can be applied
for enforcement of security interest to the extent of debt owed, the same principle
should be available for redemption of property as well.
 The word ―such price‖ in 2nd proviso to Rule 9 (2) should be amended to read as
―reserve price‖. The same would address the issue as to whether the consent of the
borrower is required to be obtained for sale of price ―at reserve price‖.
 The term ―agricultural land‖ should be defined for better appreciation of the land
and enforcement thereof.
 In Section 13(9) reference to Section 529A of the Companies Act, 1956 should be
amended to refer to Section 326 of Companies Act 2013.
 In Section 14, the reference to Chief Metropolitan Magistrate/ District Magistrate
should also provide for reference to Chief Judicial Magistrate or a Judicial
Authority of equivalent cadre. The same would address the issue of huge pendency
of Section 14 petitions before the District Magistrates in non-metropolitan areas.
Moreover, the Act should prescribe the specific procedure to be followed by the
District Magistrates or CMM or CJM so that petitions under section 14 of the Act
could not be jammed for its disposal.
 Section 17 provides for appeal against any of the measures taken under Section
13(4). Whereas appeals are entertained against the processes invoked subsequent
to the measures contemplated under Section 13(4), by drawing limitation of 45
days from the last action.
 The term ―date of notice‖ to be amended as ―date of service of notice‖ under
Section 13(2) so that further delay could be prevented.
 While Section 31(b) exempts pledge from application of the SARFAESI Act,
Section 13(11) empowers the secured creditor to proceed against the assets
pledged by the guarantors. The anomaly has to be addressed.

Page | 118
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JOURNALS REFERRED DURING FIRSTSIX MONTHS:
1. American Journal of Comparative Law.
2. Journal of Banking Regulation3.Journal
of Indian Law Institute.
4. Columbia Law Review.
5. Journal of Legal Studies.
6. Orient Journal of law and social Sciences.
7. LQR
8. Journal of Banking Regulations.
9. Journal of Finance and Management
10. Jindal Global Law Review.
11. Journal of Indian Law Institute.
12. Columbia Law Review.
13. Journal of Legal Studies.
14. Orient Journal of law and social Sciences.
15. Journal of Humanities and Culture.
16. IILM Management Review.
WEBSITES REFERRED DURING SIX MONTHS:

1. www.jstor.org
2. www.imf.org
3. www.worldbank.org
4. www.ecb.europa.eu
5. www.springeropen.com/journals
6. http://www.manupatra.com
7. http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=9009&Mode=0
8. http://rbidocs.rbi.org.in/rdocs/Speeches/PDFs/SPACF01102014.pdf
9. http://capitalmind.in/2014/08/bank-wise-npas-bad-loans-in-india-rise-to-
2-28-lakh-cr-4-6-of-what-theyve-lent/
10. http://finmin.nic.in/reports/MYR201415English.pdf
11. www.ssbfnet.com/ojs/index.php/ijfbs/article/download/52/39
12. http://www.crisil.com/youngthoughtleader/winners/topic3-PrashanthReddy-IIM-
AHM.PDF
13. http://drtsarfaesi.blogspot.in/2012/04/critical-issues-under-sarfaesi-act2002.html

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14. http://www.vitt.in/banks.html
15. http://currentaffairsbankpo.blogspot.in/2010/03/types-of-banks-in-
india2010.html
16. http://www.preservearticles.com/2012033129405/15-main-functions-
ofcommercial-banks.html
17. http://www.enfor.nic.in
18. http://www.supremecourtonline.com
19. http:// www.indianlegal service.com
20. http://www.indiakanoon.com
21. http://www.practicallawyer.com
22. http://www.lawrence.edu
23. http:// www.findarticles.com
Reports

1. The Basel Committee on Banking Supervision, The BCBS Guidelines Prudential

Treatment of Problem Assets 2016, Para 3.1, available at:
https://www.bis.org/bcbs/publ/d403.pdf, Accessed on 31 March 2019
2. The Internation Monetory Fund, The Financial Soundness Indicators (FSI):
Compilation Guide 2006, Para 25, available at: https://
www.imf.org/external/pubs/ft/fsi/guide/2006/pdf/fsiFT.pdf Accessed on 2nd
February 2019

3. The World Bank, Principles for Effective Insolvency and Creditor or Debtor
Regimes, 2016 available at: http://pubdocs.worldbank.org/
en/919511468425523509/ICR-Principles-Insolvency-Creditor-DebtorRegimes-
2016.pdf Accessed on 3 April 2019

4. UNCITRAL, Legislative Guide on Insolvency Law, 2005 available at:

https://www.uncitral.org/pdf/english/texts/insolven/05-80722_Ebook.pdf
Accessed on 1 April 2019

5. ―An Overview of Global Insolvency Regimes‖, available at: The Reserve Bank
of India, The Master Circular- Prudential norms on Income Recognition, Asset
Classification and Provisioning pertaining to Advances 2015-16, Para 2, July
2015, available at:
https://www.rbi.org.in/Scripts/BS_ViewMasCirculardetails.aspx?id=9908
, Accessed on 20 March 2017

6. The Reserve Bank of India, The Financial Stability Report, June 2019 available
at:

Page | 122
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https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/07FSRCHAPTER
3B142A43E376E4C5C96B2AF234BA88491.PDF Accessed on 15 June
2019
7. The Reserve Bank of India, Report on Trends and Progress of Banking in
India 2017-18, available at:
https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/0RTP2018_FE9E97E7
AF7024A4B94321734CD76DD4F.PDF, (Accessed on 4 April 2019)

8. The Reserve Bank of India, Guidelines on preventing slippage of NPA accounts,

(The Department of Banking Supervision 2012), available at:
https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=899&Mode=0 Accessed
on 12 January 2017

9. The Financial Stability Institute BIS, FSI Insights on Policy Implementation No

7 The Identification and Measurement of Nonperforming Assets: A cross-
country comparison 2 2018 available at:
https://www.bis.org/fsi/publ/insights7.pdf Accessed on 31 March 2019

10. The Reserve Bank of India, Framework for Revitalising Distressed Assets in the
Economy - Guidelines on
Joint Lenders‟ Forum (JLF) and Corrective Action Plan (CAP), February
2014, available at:
https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=8754&Mode=0
Accessed on 12 January 2017

11. The European Central Bank ―The European Central Bank Report 2017‖
available at:
https://www.bankingsupervision.europa.eu/ecb/pub/pdf/guidanceonnpl.en
.pdf Accessed on 31 March 2019

12. http://www.europarl.europa.eu/RegData/docs_autres_institutions/commis
sion_europeenne/com/2017/0591/COM_COM(2017)0591_EN.pdf

13. ―Report from the Commission to the European Parliament and the Council
2013‖ available at: https://www.bankingsupervision.europa.eu/
ecb/pub/pdf/guidance_on_npl.en.pdf Accessed on 31March 2019
14. The Reserve Bank of India ―Narasimham Committee II‖ available at:
https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?ID=251 Accesssed
on 14 August 2017

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15. Government of India, Monthly Economic Report, (Department of Economic
Affairs, Ministry of Finance, January 2019)

Online Articles

1. ―India‟s NPA and the global scenario‖, available at:

https://www.thehindubusinessline.com/opinion/indias-npas-and-theglobal-
scenario/article24145872.ece, (Accessed on 13 June 2018)

2. ―Finance Ministry moves to declutter DRTs to ease debt recovery‖, available at:
https://economictimes.indiatimes.com/news/economy/finance /doubling-limit-for-
filing-drt-cases-will-expedite-bad-loan-recoveryfinance-
ministry/articleshow/65771430.cms, (Accessed on 21 December 2018)

3. ―View: Falling, not rising, cronyism is the main cause of NPAs‖ available at:
https://economictimes.indiatimes.com/ news/economy/policy/viewfalling-not-
rising-cronyism-is-the-main-cause-ofnpas/articleshow/65955859.cms?from=mdr,
Accessed on 14 January 2019

4. The Government of India ―Examining the Rise of Nonperforming Assets in

India‖, available at: http://www.prsindia.org/content/ examining- rise-
nonperforming-assets-india Accessed on 19 January 2019

5. ―History of the Basel Committee and its Membership‖, available at:

https://www.bis.org/publ/bcbsc101.pdf , Accessed on 31 March 2019.

6. Andrew Filardo, Jason George et. al., The International Financial Crisis:
Timeline, Impact and Policy responses in Asia and the Pacific, 52 BIS
Papers 27, 2010 available at: www.jstor.com
7. ―History of Basel Committee‖ available at:https://www.bis.org/bcbs/ history. htm
Accesssed on 31 March 2019

8. ―IFRC 9 and IFRC 15 are now effective‖ available at: https://www.ifrs.org/news-

and-events/2018/01/ifrs-9-and-ifrs-15-effectivethis-year Accessed on 31 March
2019

9. ―IFRC 9 Financial Instrument‖ available at: https://www.ifrs.org/

issuedstandards/ list-of-standards/ifrs-9-financial-instruments Accessed on 31
March 2019

10. ―CECL: Are US banks ready?‖ available at: https://www.sas.com/en_us

/insights/articles/risk-fraud/cecl-are-us-banks-ready.html Available at 31 march
2019

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Articles

1. N. Chipalkatti,M. Rishi„Do Indian Banks Understate Their Bad Loans?‟ 40/2

The Journal of Developing Areas, 75, 2007

2. Vivekanand Mukherjee, „Bank Specific Determinants of Non Performing Assets

of Indian Banks‟, 13 International Economics and Economic Policy, 483, 2016

3. Araujo, Aloisio, „How much debtor should be punished in case of default‟ 47

Journal of Financial Research Services, 229, 2015

4. Sylvia Maxfield „The Effectiveness of Bank Governance Reforms in the

Wake of the Financial Crisis: A Stakeholder Approach‖, 2 Journal Of Business
Ethics, 1, 2016

5. Rajaraman, S. Bhaumik et. al., „NPA Variations Across Indian Commercial

Banks Some Findings‟ 34 3/4 EPW 161 (1999)

6. Das, „Risk and Productivity change of Public Sector Banks‟ 37 EPW 437 (2002)

7. Dr. A. P. Pati, „Non-performance Assets- Causes, Consequences and Cures‟ 1

The Management Accountant 853 1999

8. D. Narayana, ―Directed Credit Programmes: A Critique of Narasimham

Committee Report‖, 27 EPW 255 (1992)

9. N P Kurup, ―Banking Sector Reforms and Transparency‖, 31 EPW 745 (1996)

10. M. G. Bhide, A. Prasad et. al., ―Banking Sector Reforms: A Critical Overview‖
37 EPW 399 (2002)

11. W. W. Bratton and L. A. Cunningham, Treatment Differences and Political

Realities in the GAAP-IFRS Debate, 95/4 Virginia Law Review
990 June, 2009
12. L. J. Phillips, The Implications of IFRS on the Functioning of the Securities
Antifraud Regime in the United States, 108/4 Michigan Law Review 605 Feb.,
2010

13. S. H. Deming, ―International Accounting Standards‖, 40/2 The International

Lawyer 365, 1999

14. Christopher Kobrak, Michael Troege, From Basel to Bailouts: Forty Years of
International Attempts to Bolster Bank Safety, 22/2 Cambridge University
Press 133-156, 2015

Page | 125
 Bibliography
Statutes

 The Indian Contract Act, 1872

 The Specific Relief Act, 1963

 The Transfer of Property Act, 1882

 The Banking Regulation Act, 1949

 The Securitisation and Reconstruction of Financial Assets and

Enforcement of Securities Interest Act, 2002,

 The Insolvency and Bankruptcy Code, 2016

 The Recovery of Debt and Bankruptcy Act, 1993

 The Recovery of Debts Due to Banks and Financial Institutions, 1993

 The Code of Civil Procedure 1908
 The Indian Penal Code 1962
 The Security Interest Enforcement Rules, 2002 Income Tax Act 1961.

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