Debt is one of the most important financial instruments which can be availed by both the production and household sector. Banks and Financial Institutes are the major source for providing credit. Debt involves a two fold delivery system whereby it is essential for the banks to recover the credit that they have extended to the borrowers. The debt recovery mechanism is very important for a Financial Institute to maintain a positive cash flow. This article details the debt recovery process in India by referring to the Legislations enacted on that behalf.
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An Introduction to debt and debt recovery
Debt refers to any liability (inclusive of interest) which is claimed as due from any person by a bank or a financial institution or by a consortium of banks or financial institutions during the course of any business activity undertaken by the bank or the financial institution or the consortium under any law for the time being in force, in cash or otherwise, whether secured or unsecured, or assigned, or whether payable under a decree or order of any civil court or any arbitration award or otherwise. 
Debt is the major source of revenue generation for a bank. The banks charge a rate of interest on the debt issued which must be paid by the debt availee in installments or in any other mode prescribed by the bank. But there are numerous circumstances wherein the debtors default in repaying the debt back to the banks and this leads to a situation of bad debts. Bad debts reduce the credibility of the Financial Institute and reduce its revenues.
In order to avoid this situation of bad debts, the Financial Institutes adopt a debt recovery mechanism which leads to legal proceedings or sovereign decisions ensuring repayment of the default.
Debt Recovery Process in India
Prior to 1993, there were no well defined laws with regards to debt recovery and other guidelines pertaining to debt recovery. During the Financial Crisis of 1990-1991, there was a threefold increase in the number of bad debts. At the time, the Banking and Finance Sector in India was in an emerging state and the bad debts raised concerning questions about the banking sector and its delivery mechanism. To enhance the debt recovery process, the Parliament enacted the Recovery of Debts Due to Banks and Financial Institutions (RDDBFI) Act, 1993. This legislation established Debt Recovery Tribunals (DRTs) and Debt Recovery Appellate Tribunals (DRATs), which provided speedy remedy in cases pertaining to debt recovery without the need for going to a civil court. To facilitate out of court remedies and facilitate debt recovery by using the available security as leverage, the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act, 2002 was enacted by the Parliament.
We shall now individually look upon the basics of the RDDBFI Act and the SARFAESI Act and how it lays the framework for debt recovery.
The Recovery of Debt Due to Banks and Financial Institutions (RDDBFI) Act, 1993
This Act has been enacted by the parliament for the expeditious adjudication and recovery of debts due to banks and financial institutions. The main aim of this Act is to establish quasi-judicial authorities via Debt Recovery Tribunals (DRTs) and Debt Recovery Appellate Tribunals (DRATs) for the faster adjudication of legal proceedings with respect to debt recovery.
Establishment and Jurisdiction of DRTs and DRATs:
Under the mandate of section 3 and section 8 of the RDDBFI Act, the DRTs and DRATs have been established by the Central Government in various locations. The DRTs shall from the day of appointment exercise jurisdiction, powers and authority to entertain applications from banks and financial institutions for recovery of debris due to such banks and financial institutions.  The DRATs shall from the day of appointment exercise jurisdiction, powers and authority to entertain appeals made against an order of the DRT. 
No other court or authority shall have the power to exercise their jurisdiction over the matters specified under section 17 except the Supreme Court and High Court. 
Debt Recovery Process:
The procedure for filing application, choice of DRT, completion of case, etc., has been specified under section 19 of the RDDBFI Act, 1993. Here is a synopsis of the debt recovery process:
- A bank or financial institute can make an application to a DRT which falls in the jurisdiction of a region which is the place of residence or business facility of one or more of the defendants or can make the application in a place where the bank or financial institution believes to be wholly the cause of action in that regard.
- The time limit for completion of proceedings must be 180 days from the date of receiving the application. 
- Once the application has been accepted by the DRT, a summons is issued to the defendant(s) requiring him to give in a written statement as to why the prayer seeked by the applicant must not be provided.
- The defendant at the first hearing before the DRT may claim a set-off against securities legally recoverable to him against the applicant and not anytime afterwards, unless permitted by the DRT.
- The applicant can make a counter claim against this set-off before posing his defense.
- Based on the order of the DRT, the Presiding Officer will issue a certificate of recovery to the Recovery officer seeking the recovery of the debt amount. The Recovery Officer can recover the due by attaching, selling or appointing a manager for the defendant’s property.
- The DRTs can also obtain police warrants to arrest the defendant.
The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002
This Act was enacted in the year 2002 to promote a quick debt recovery process for secured creditors by granting them power to deal with the assets of the debtors as per the provisions of this act. The Act allows banks and financial institutes to mortgage the property which they withheld with them while extending the credit to the debtors once such debt becomes a non-performing asset (NPA).
- Asset Reconstruction refers to the conversion of NPAs into performing assets as per the guidelines of RBI and the SARFAESI Act.
- Specific Asset Reconstruction Companies are set up, which purchase these NPAs and finance them and convert them into bonds, securities and cash. Through this the Asset Reconstruction Company changes the management of the business of the debtor, which may prove to be beneficial.
Enforcement of Security:
- The enforcement process is initiated and a 60 days statutory period is given for the borrower to repay the dues via a notice which states that the asset has become an NPA and states the default amount.
- If the dues are not repaid within the said time limit, the Banks or Financial Institutes can initiate their Security Interest on the asset.
- The Banks can take over possession of the said secured property and can deal with such property either by sale or a lease or assign the right over the said security.
- The Act however provides a fair opportunity for the defaulter to make an appeal against the reallocation of his assets to the bank, but the defaulter cannot approach any court.
Application to DRT:
One unique provision under the SARFAESI Act is that it allows an approach to the DRT via an application. After the Security Interest has been initiated and the securities have been disposed of and turned into liquid assets and is found that the asset is not enough to cover the dues of the defaulter, the secured creditor can approach the DRT for recovery of the remaining portion of the due amount. Upon this, the defaulter can also approach the DRT against the findings of the secured creditor.
It is upon the Banks and Financial Institutes to decide how they recover the dues depending upon the type of defaulter. Defaulters maybe classified into 4 types:
- Willing and Able to pay: These defaulters are the ones who have enough resources to pay the default and will pay the default over a period of time.
- Willing and unable to pay: These defaulters are willing to pay the default but lack the resources to pay them.
- Unwilling and Able to pay: These defaulters possess the resources to pay back the default amount but are unwilling to pay them back. The Banks and Financial Institutes take stern action against such defaulters.
- Unwilling and Unable to pay: These defaulters lack the resources to pay the default and are unwilling to put in efforts to pay back the loans. These types of defaulters are the most difficult to handle.
These legislations focus entirely on recovery of debts, but do not take into consideration the situation of defaulters in case of insolvency upon them. In order to understand this situation, it is essential to look upon the Insolvency and Bankruptcy Code, 2016.
A brief overview of the Insolvency and Bankruptcy Code, 2016 (IBC)
- The Code was established to consolidate the laws regarding individuals and corporations’ insolvency into a single unified code for the entire territory and establish a common procedure for the Insolvency process.
- The main process under the IBC is the Corporate Insolvency Resolution Process which is the process of recovery of dues from corporate entities once they have been declared insolvent.
- It focuses on an institutional framework, consisting of regulators, insolvency professionals and adjudicating officers which provides for a time bound remedy to both the creditors and defaulters.
- It also provides for negotiations between the insolvents and the creditors so as to arrive at a fruitful decision, helpful for both the parties.
Even though there are a number of legislations in play, none of them seem to satisfy the needs of both the Defaulters and the Creditors and puts them in jeopardy. The IBC seems to be a formidable legislation coupled with the SARFAESI and DDBFI Acts, but lacks applicability and feasibility. The debt recovery is focused primarily within the territory of India and there are no standard legislations providing for the debt recovery process for Foreign debtors and creditors. The current legislations need to be modernized and accumulated with International Laws such as the UNCITRAL Model Law which incorporate detailed procedures for debt proceedings with respect to international debtors and creditors in matters of cross-border insolvencies. As a model law, the UNCITRAL Law could be implemented by accommodating adequate changes to best fit the Indian Legislators. This would in turn regularise the debt recovery process with respect to International creditors and debtors.
 The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (Act 51 of 1993), s. 2(g).
 The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (Act 51 of 1993), s. 17(1).
 The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (Act 51 of 1993), s. 17(2).
 The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (Act 51 of 1993), s. 18.
 The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (Act 51 of 1993), s. 19(4).
 Debt Recovery in India – At a Glance, available at: https://www.legistify.com/blogs/view_detail/84-debt-recovery-in-india-at-a-glance/ (last visited on December 18, 2020).
BY NAGANATHAN RAMASWAMY IYER | SASTRA DEEMED TO BE UNIVERSITY