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Non Performing Assets – Legal Paradigm
PART ONE

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Dr. Nandimath Omprakash V.,
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Professor in Law,
National Law School of India University,
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Bangalore-560 072
Email – ovnandimath@nls.ac.in
Contents

PART ONE
Understanding NPAs and its implication

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SICA & DRT
PART TWO
concept of ‘securitization; and

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SARFAESI – an overview
PART THREE
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SARFAESI – legal framework
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Non performing assets – what are they?

• A loan asset, which has ceased to generate any

income for a bank whether in the form of an asset or
interest

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• Master Circular of July 2010 (DBOD. No. BP. BC.
21/21.04.048/2010-11) – defines a NPA

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• An asset, including a leased asset, becomes non
performing when it ceases to generate income for the
bank

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• NPA is a loan or advance where
– Interest and/or installment of principal remain overdue for
a period of more than 90 days in respect of a term loan

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– The account remains ‘out of order’, in respect of an
OD/cash credit
– The bill remains overdue for a period of more than 90
days in case of bills purchased and discounted

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– The installment of principal or interest thereon remains
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overdue for two crop seasons for short duration crops
– The installment of principal or interest thereon remains
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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 securitization
transaction undertaken in terms of guidelines on

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securitization dated February 1, 2006
– In respect of derivative transactions, the overdue
receivables representing positive mark-to-market value

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of derivative contract, if these remain unpaid for period of
90 days from the specified due date for payment
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• Banks should, classify an account as NPA only if the
interest due and charged during any quarter is not
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serviced fully within 90 days from the end of the quarter
Categorization of NPAs
1. Substandard assets
1. The NPA which has remained so for a period of 12 months or
less

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2. Doubtful assets
1. The NPA which has remained as substandard for a period of
12 months

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3. Loss assets
1. A loss asset is one where loss has been identified by the bank
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or internal or external auditors or RBI inspection, but the
amount has not been written-off fully
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2. Such an asset is considered uncollectable and of such little
value that its continuance as a bankable asset is not
warranted although there may be some salvage or recovery
value
Mandate to account on receipt basis

• Internationally income from NPA is not recognized on

accrual basis

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• But booked as income only when it is actually received
• Therefore, banks should not charge and take to income
account interest on any NPA

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How NPA would impact

• Bound to create an adverse repercussion for the

economy of the country

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• Interest income of banks will fall
• Banks profitability is affected adversely
• Return on investment is reduced

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• The cost of capital will go up
• Asset and liability mismatch will widen
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• It limits recycling of the funds
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Remedying NPAs

• 1981 – Tiwari Committee

– Examined the means of recovering NPAs;

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– Recommended for setting up of ‘special tribunals’ to
expedite the recovery process
• 1991 – Narsimhan Committee
– Reemphasized few of recommendations of Tiwari

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Committee
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– Called for the definition of NPA
– Setting up of Debt Recovery Tribunal
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– Creation of Asset Reconstruction Fund
• 1999 – Andhiyarjuna Committee
– Submitted four reports for

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1. On Debt Recovery Tribunals
2. Amendment to Sec. 28 of the Indian Contract Act;
3. Taking possession and sale of securities without
intervention of courts by Banks and Financial

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Institutions
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4. Special law for securitization
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Development of regulatory regime

• The FIRST PHASE

• the Sick Industrial Companies (Special Provisions) Act,

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1985
– Based on the recommendations of Tiwari Committee
(basically to deal with Industrial Sickness);
– The enactment inter alia

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• Established Board for Industrial and Financial
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Reconstruction (BIFR); and
• Appellate Authority for Industrial and Financial
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Reconstruction (AAIFR).
• The SECOND PHASE
• The Recovery of Debts due to Banks & Financial

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Institutions (RDDBFI) Act, 1993
– Special Debt Recovery Tribunals were established
– Summary proceedings to help banks and FIs to realize
their debts

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– Effective and speedy recovery of bad loans
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• The THIRD PHASE
• The Securitization and Reconstruction of Financial

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Assets and Enforcement of Security Interest Act, 2002
– Stressed the need for overall change in the legal system
to address the issue of NPAs
– Empowering the banks and FIs to take possession of

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securities and sell them without the intervention of the
courts; and
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– Without allowing the borrowers to take shelter under the
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provisions of SICA/BIFR
First phase

• The Sick Industrial Companies (Special Provisions)

Act, 1985

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• “An Act to make in public interest, special provisions
with a view to securing the timely detection of sick and
potentially sick companies owning to industrial
undertakings, the speedy determination by a Board of

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experts of the preventive, ameliorative, remedial and
other measures, which need to be taken with respect to
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such companies and the expeditious enforcement of
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the measures so determined and for matters connected
therewith and incidental thereto”
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Recovery of Debts due to Banks &
Financial Institutions Act, 1993

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“An Act to provide the establishment of tribunals for
expeditious adjudication and recovery of debts due to
banks and financial institutions and for matters connected

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therewith or incidental thereto”

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Few preliminaries

• Came in to force from June 24, 1993

• Act to cope with the requirement of ‘time’

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• The Act is procedural in nature
• The jurisdiction of DRT is at present form above
Rupees Ten Lakhs

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• In UOI v Delhi High Court Bar Association (2002)4
SCC 274 – the Constitutionality of the Act was upheld
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by the Supreme Court
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• The Act is applicable for the debt to
– Any bank; or

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– Financial Institution; or
– A consortium of them

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• Expression ‘debt’ shall cover [S.2(g)]
– Any liability inclusive of interest, whether secured; or

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– Any liability inclusive of interest, whether unsecured; or
– Any liability payable under a decree or order of any Civil
Court or any arbitration award or otherwise; or
– Any liability payable under a mortgage and subsisting on

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and legally recoverable on the date of application
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The Tribunal

• The Central Government is empowered to establish –

one or more Tribunals to be known as ‘Debt Recovery
Tribunal’ (DRT)

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• Central Government to decide and specify the areas
within which the Tribunal may exercise jurisdiction

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Tribunal - composition

• Consists of only one Presiding Officer

– Qualified to be appointed as a District Judge

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• The Presiding Officer holds office for five years from
the date of which he enters upon his office; or until he
attains the age of 62 years, whichever is earlier

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• Currently each DRT has two Recovery Officers
• The work among the Recovery Officers is allocated by

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the Presiding Officer
• There is no mandate that the Recovery Officer shall be
a judicial officer

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Appellate Tribunal

• Central Government is empowered to establish one or

more Appellate Tribunals

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• The Appellate Tribunal is held by Chairperson
– Who shall be qualified to be judge of the High Court; or
– Has been member of the Indian Legal Service and has
held the post in Grade I of that service for at least three

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years; or
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– Has held office as the Presiding Officer of a Tribunal for
at least three years
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Express bar

• No court or other other authority shall have any

jurisdiction to deal with any cases pertaining to
recovery cases above Rupees 10 lakhs

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Procedure of the Tribunal
• Application of the Tribunal
– Where to apply? - The Tribunal in whose jurisdiction
• The defendant at the time of making the application

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for loan reside or carry on business or personally
work for gain; or
• Any of the defendant at the time of making application
for loan reside or carry on business or personally

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work for gain; or
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• Any of the defendant, where there are more than one
defendant, reside at the time of making application for
loan or carry on business or personally work for gain;
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or
• The cause of action, wholly or in part, arises
• Issue of summons – on receipt of application Tribunal
has to issue summons to the defendant [Sec. 19(4)]
• The defendant has to present a written statement at or

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before the first hearing or within such time as Tribunal
may permit [Sec. 19(5)]
• The Tribunal may pass such interim order against the

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defendant [Sec. 19(12)]
• At any stage of the proceeding the Tribunal – if
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satisfied by affidavit or otherwise that the defendant,
with the intent to obstruct or delay or frustrate the
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execution of any order for the recovery of debt that may
be passed against him [Sec. 19(13A & B)]
Appeal to the Appellate Tribunal

• Any aggrieved party may prefer an appeal against the

order of the Tribunal (but not in case the order made
with consent of the parties)

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– Within 45 days from the date on which the copy of the
order is received;
– 50% of the amount shown as due shall be deposited

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• After hearing both the parties the Appellate Tribunal
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shall pass such an order as it thinks fit
• Tribunal shall deal with an appeal as expeditiously as
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possible, within six months from the date of receipt of
the appeal
• The Tribunal and Appellate Tribunal are deemed to be
a Civil Court for all purposes of Section 195 and
Chapter XXVI of the Code of Criminal Procedure, 1973

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• However, for approaching the Tribunal the Limitation
Law is applicable
– Application must be filed by the bank or the financial

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institution within three years from the cause of action
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