Debt Recovery Tribunals (DRT) serve a pivotal function in reclaiming funds owed to banks and financial institutions by borrowers. These tribunals are empowered to address cases involving the recovery of non-performing assets (NPAs) as identified under the guidelines of the Reserve Bank of India (RBI). Essentially, DRTs wield the same authority as district courts and include a Recovery Officer responsible for implementing recovery certificates issued by the Presiding Officers. Emphasizing legal procedures, DRTs expedite case resolutions and ensure swift execution of final orders.
Applicability of the Debt Recovery Tribunals Act
The Debt Recovery Tribunals Act applies to specific entities engaged in financial transactions necessitating legal intervention for debt recovery.
Scope and Jurisdiction of DRTs
DRTs handle debt recovery claims exceeding Rs. 10 lakhs. For lesser amounts, creditors must pursue recovery through civil courts under the Civil Procedure Code (CPC).
Misuse of the SARFAESI Act by Banks
The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act of 2002 grants banks and financial institutions substantial authority as secured creditors. This act enables them to enforce securities held as loan collateral when such loans become NPAs without court interference. Under Section 13, banks can even evict tenants. However, there is a prevalent issue of banks hastily invoking SARFAESI provisions, particularly against micro, small, and medium enterprises (MSMEs), often contravening RBI guidelines.
Observations on Bank Practices
Our engagements with borrowers and banks via the State Level Inter-Institutional Sub-committee (SLIIC) reveal that banks frequently resort to coercive measures, bypassing due process. Surprisingly, advanced banking systems fail to implement measured timelines before halting MSME credit lines. According to RBI timelines, a borrower should be granted at least 17 months before facing action for default.
Willful Defaulters and SARFAESI Proceedings
A ‘willful defaulter,’ as per RBI’s Master Circular, faces immediate SARFAESI proceedings without prior notice. Banks often misclassify MSME NPAs as willful defaulters to exploit the SARFAESI mechanism. The act mandates asset valuation and notification to borrowers before public auction. Despite this, banks frequently breach these protocols. For instance, a public sector bank in Jammikunta auctioned property within 15 days of NPA declaration, setting a reserve price without borrower consultation, violating Section 13 (3) (A).
Asset Restructuring Companies (ARCs) and Bank Practices
Banks sometimes sell off NPAs to ARCs, bundling several NPAs and selling them at a discount, undisclosed to borrowers or SLIIC. While this complies with regulations, it often results in banks recovering less than they might through a one-time settlement (OTS) within RBI guidelines. Banks prefer transferring assets to ARCs rather than pursuing OTS, despite potentially higher recoveries.
Operational Dynamics of ARCs
Transactions involving securitization, reconstruction, and security interest creation must be registered with a Central Registry maintained by the Union Government. Details of securitized assets are filed within 30 days. Security Receipts (SR) are the common form of securitization, involving agreements with originators to service the assets. Despite SRs being tradable, evidence of such transactions is scant. The recovered asset value is shared between the bank and ARC in an 85:15 ratio, effectively removing the asset from the bank’s NPA ledger.
Recommendations for Optimal Recovery Practices
Banks should prioritize OTS options per RBI guidelines to maximize recovery from stressed assets. The RBI should mandate exhausting OTS avenues before resorting to securitization and asset sale. Additionally, involving the Banking Ombudsman as an arbitrator in distressed asset cases could facilitate mutually agreeable resolutions, potentially yielding better recovery outcomes than SARFAESI actions.
