Friday, October 03, 2014


By Dr. T. Padma
MA (Economics), MA (Lit), MA (J & MC),
MSc (Psychology), MBA, PGDCL, PGADR,
PGDHR, LLM, PhD (Law), (LLD)


The 1990s witnessed several financial and economic crises worldwide, crippling the economies of the affected countries. In most cases, crises in the financial sector culminate into non-performing Loans (NPL)). A high level of NPAs in the banking system can severely affect the economy in many ways: Management and financial resources of the banking system are diverted to resolution of NPA problems causing an opportunity loss for more productive use of resources. The banks tend to become risk averse in making new loans, particularly to small and medium sized companies. Thus, large scale NPAs when left unattended cause continued economic and financial degradation in the country. This results in a credit crunch and generally signals adverse investment climate. This explains why most countries in the grip of systemic financial and economic crisis have attempted system-wide clean up of NPAs as a part of restructuring of their banking system. ARCs have been used worldwide, particularly in Asia, to resolve bad-loan problems, and have had a varying degree of success.

The problem of recovery from NPA’s, in the Indian banking system, was recognized by the Government of India (GOI) as far back as in 1997. The Narasimhan Committee Report mentioned that an important aspect of the continuing reform process was to reduce the high level of NPA’s as a means of banking sector reform. It was expected that with a combination of policy and institutional development, new NPAs in future could be lower. However, the problem of a huge backlog of existing NPAs remained. This impinged severely on banks performance and their profitability. The Report envisaged the creation of an "Asset Reconstitution Fund" to take the NPAs off the lender's books at a discount. Unlike in some countries where ARCs have been set up post financial crises and for the purpose of bailout, in India, the GOI proactively initiated certain measures to control NPAs. In order to regulate and control the NPAs and quicken recovery, the GOI set up Debt Recovery Tribunals and Debt Appellate Tribunals under the "Recovery of Debts Due to Banks and Financial Institutions Act, 1993". As a corollary to this and to speed up the process of recovery from NPAs, the SARFAESI Act (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002) was enacted for regulation of securitization and reconstruction of financial assets and enforcement of security interest by secured creditors, including Securitization or Reconstruction Companies (SC/RC).


The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (hence forth the “Act”) was passed by the Parliament of India to provide for the Speedy Adjudication of matters relating to recovery of debts due to banks and  Financial Institutions.  The Act provides a procedure that is distinct from the existing code of Civil Procedure in order to ensure a Speedy Adjudication.  The Act also provides for the setting up of a separate set of tribunals to hear such matters and these tribunals are termed as Debt Recovery Tribunals (DRTs).  The provisions of the Act do not apply where the amount of debt due to any bank or financial institution or to a consortium of banks or  financial institution is less than ten lakh rupees or such other amount, being not less than one lakh rupees, as the Central Government may, by notification, specify.

With a view to help financial institutions recover their bad debts quickly and efficiently, the Government of India has constituted thirty three Debts Recovery Tribunals and five Debt Recovery Appellate Tribunals all over the country at Allahabad, Chennai, Delhi, Kolkata and Mumbai.

An Appellate Tribunal shall consist of one person to be called as the Presiding Officer of the Appellate Tribunal.  Any person, who is, or has been, or is qualified to be, a Judge of a High Court; or has been a member of the Indian Legal Service and has held a post in Grade I of that Service for at least three years; or has held office as the Presiding Officer of a Tribunal for at least three years, shall be qualified for appointment as the Presiding Officer of an Appellate Tribunal.

The Presiding Officer of an Appellate Tribunal shall hold office for a term of five years from the date on which he enters his office or until he attains the age of sixty five years, whichever is earlier.

Each Debts Recovery Tribunal is presided over by a Presiding Officer.  The Presiding Officer is generally a judge of the rank of District and Sessions Judge.  A Presiding Officer of a Debts Recovery Tribunal is assisted by a number of officers of other ranks, but none of them need necessarily have a judicial background.  Therefore, the presiding officer of a Debt Recovery Tribunal is the sole judicial authority to hear and pass any judicial order.

Each Debts Recovery Tribunal has two Recovery Officers.  The work amongst the Recovery Officers is allocated by the presiding officer.  Though a recovery officer need not be a judicial Officers, but the order passed by a Recovery Officer are judicial in nature, and are appealable before the Presiding Officer of the Tribunal.

After the enactment of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests Act (SARFAESI Act) borrowers could become first applicants before the Debt Recovery Tribunal.  Earlier only lenders could be applicants.

The Debts Recovery Tribunals are fully empowered to pass comprehensive orders like in Civil Courts.  The Tribunals can hear cross suits, counter claims and allow set offs.  However, they cannot hear claims of damages or deficiency of services or breach of contract or criminal negligence on the part of the lenders.

The Debts Recovery Tribunals can appoint Receivers, Commissioners, pass exparte orders, ad-interim orders, interim orders apart from powers to review its own decision and hear appeals against orders passed by the Recovery Officers of the Tribunals. The recording of evidence by Debts Recovery Tribunals is somewhat unique.  All evidences are taken by way of an affidavit.  Cross examination is allowed only on request by the defense and that too if the Tribunal feels that such a cross examination is in the interest of justice.  Frivolous cross examination may be denied.  There are a number of other unique features in the proceedings before the Debts Recovery Tribunals all aimed at expediting the proceedings.

As per Section 2(g) of the Act, “Debt” means any liability (inclusive of interest) which is claimed alleged 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 or under a mortgagee and subsisting on, and legally recoverable on, the date of the application.

Under Section 2(h) “Financial Institution” means:
             i)      A public financial institution within the meaning of Section 4A of the Companies Act, 1956;
          ii)      Such other institution as the Central Government may, having regard to its business activity and the area of its operation in India, by notification, specify.


Section 19 of the Act provides that where a Bank or a Financial Institution has to recover any debt from any person, it may make an application to the Tribunal within the local limits of whose jurisdiction the defendant, or each of the defendants where there are more than one, at the time of making the application, actually and voluntarily resides, or carries on business or personally works for gain; or any of the defendants, where there are more than one, at the time of making the application, actually and voluntarily resides, or carries on business, or personally works for gain; or the cause of action, wholly or in part, arises.

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

Every application has to be made in such form and be accompanied by such documents or other evidence and by such fee has may be prescribed.

On receipt of application, the Tribunal shall issue summons requiring the defendant to show cause within 30 days of the service of summons as to why the relief prayed for should not be granted.  The defendant shall, at or before the first hearing or within such time as the Tribunal may permit, present a written statement of his defence.  Where the defendant claims to set off against the applicant’s demand any ascertained sum of money legally recoverable by him from such applicant the defendant may, at the first hearing of the application, but not afterwards unless permitted by the Tribunal, present a written statement containing the particulars of the debt sought to be set- off.  The written statement shall have the same effect as a plaint in a cross suit so as to enable the Tribunal to pass a final order in respect of both the original claim and of the set off.  The defendant in an application may, in addition to his right of pleading a set off, set up, by way of counter-claim against claim of the applicant, any right or claim in respect of a cause of action accruing to the defendant against applicant either before or after the filling of the application but before the defendant has delivered his defense or before the time limit for delivering his defence has expired, whether such counter-claim is in the nature of a claim for damages or not.

Tribunal may, after giving the applicant and the defendant an opportunity of being heard, pass such orders on the application as it deems fit to meet the ends of justice.  A counter claim shall have the same effect as a cross suit so as to enable the Tribunal to pass a final order on the same application, both on the original claim and on the counter-claim. The applicant shall be at liberty to file a written statement in answer to the counterclaim of the defendant within such period as may be fixed by the Tribunal.

Where a defendant sets up a counterclaim and the applicant contents that the claim thereby raised ought not be disposed of by way of a counter-claim but in an independent action, the applicant may, at any time before issues are settled in relation to the counterclaim, apply to the Tribunal for an order that such counter-claim may be excluded, and the Tribunal may, on hearing of such application, make such order has it thinks fit.

The Tribunal may make an interim order (whether by way of injunction or stay or attachment) against the defendant  to debar him from transferring, alienating or otherwise dealing with, or disposing of, any property and assets belonging to him without the prior permission of the Tribunal.

The objective behind empowering the Tribunals for issuing such a wide verity of interim orders is to prevent unscrupulous persons from stripping the properties and/or encumbering them in such a manner so as to defeat the lenders attempt at recovering the amounts advanced by them.  The Tribunals can get the property vacated, attach rents, and appoint Commissioner to take inventory of the property and the stocks.  The Tribunals can go ahead and attach Bank Accounts, seal lockers and much more.

However, there are a number of judgments of the Supreme Court and the High Court which have laid down conditions which must be followed by the Tribunals before passing orders which have pernicious effects on current and running business establishments.  Therefore, even though the Tribunals can pass orders of wide variety, they are slow and cautious while passing such orders.  Generally, they would first listen to the defendants before the orders are passed.

Where at any stage of the proceedings, the Tribunal is satisfied by affidavit or otherwise, that the defendant, with intent to obstruct or delay or frustrate the execution of any order for recovery of the debt that may be passed against him,

                i)   is about to dispose of the whole or any part of his property, or
             ii)   is about to remove the whole or any part of his property from the local limits of the jurisdiction of the Tribunal; or
           iii)   is likely to cause any damage or mischief to the property or effect its value by misuse or creating third party interest.

The Tribunal may direct the defendant, within a time fixed by the Tribunal, either to furnish security, in such sum as may be specified in the order, or to appear and show-cause why he should not furnish security.

Where the defendant fails to show cause why he should not furnish security, or fails to  furnish the security required, within the time fixed by the Tribunal, the Tribunal may order the attachment of the whole or such portion of the properties claimed by the applicant as the properties secured is his favour or otherwise owned by the defendant as appears sufficient to satisfy any certificate for the recovery of debt. The applicant shall, unless the Tribunal otherwise directs, specify the property required to be attached and estimate the value thereof.

The Tribunal may also in the order direct the conditional attachment of the whole or any portion of the property.  In case of disobedience of an order made by the Tribunal or breach of any of the terms on which the order was made, the Tribunal may order the properties of the person to be attached and may also order such person guilty of such disobedience or breach be detained in the civil prison for a term not exceeding three months, unless in the meantime the Tribunal directs his release.

Where it appears to the Tribunal to be just and convenient, it may, by order-

(a)  Appoint a receiver of any property, whether before or after the grant of certificate for recovery of debt;
(b)  Remove any person from the possession or custody of the property.
(c)  Commit the same property to the possession, custody or management of the receiver;
(d)  Confer upon the receiver all such powers, as to bringing and defending suits in the courts, or filing and defending applications before the Tribunal and for the realization, management, protection, preservation and improvement of the property, the collection of rents and profits thereof, the application and disposal of such rents and profits, and the execution of documents as the owner himself has, or such of those powers as the Tribunal thinks fir; and
(e)  Appoint a Commissioner for preparation of an inventory of the properties of the defendant or for the sale thereof.

Embargo on High Courts not to interfere with Debt recovery proceedings

In order to give relief to the Banks and Financial Institutions, the Supreme Court has asked the high courts not to interfere with the debt recovery proceedings initiated against defaulters, upholding the right of lenders to recover their dues in the case of  United Bank of India Vs. Satyawati Tondon[1]

“All alternatives available to the borrowers should be exercised before the high courts exercise their discretion to interfere with recovery proceedings”, said a bench comprising justices GS Singhvi and AK Ganguly, setting aside an Allahabad High Court order.

The high court had, in its interim order, stayed the recovery proceedings initiated by the United Bank of India on the plea of the guarantor of a loan.

 “It is a matter of serious concern that despite repeated pronouncement of this court (the Supreme Court), the high courts continue to ignore the availability of statutory remedies under the DRT Act (Recovery of Debts Due to Banks and Financial Institutions Act, 1993) and SARFAESI Act (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002) and exercise jurisdiction under Article 226 for passing orders, which have serious adverse impact on the right of banks and other financial institutions to recover their dues,” the court said.

“We hope and trust that in future the high courts will exercise their discretion in such matters with greater caution, care and circumspection,” it said.

“In cases relating to recovery of the dues of banks, financial institutions and secured creditors, stay granted by the high court would have serious adverse impact on the financial health of such bodies/institutions, which ultimately prove detrimental to the economy of the nation. Therefore, the high court should be extremely careful and circumspect in exercising its discretion to grant stay in such matters,” the court further said.

Stay of an action initiated by the state and its agencies for recovery of taxes, seriously impedes execution of projects of public importance and disables them from discharging their constitutional and legal obligations towards the citizens, the order said.

“We are conscious that the powers conferred upon the high court under Article 226 of the Constitution to issue to any person or authority, including in appropriate cases, any government, directions, orders or writs including the five prerogative writs for the enforcement of any of the rights conferred by Part III or for any other purpose are very wide and there is no express limitation on exercise of that power but, at the same time, we cannot be oblivious of the rules of self-imposed restraint evolved by apex court which every High Court is bound to keep in view while exercising power under article 226 of the constitution,” the judges said.

In this case, the Union Bank had extended a term loan of ` 22,50,000 to Pawan Color Lab in November 2004. Satyawati Tondon had furnished a guarantee for repayment of the loan and mortgaged her property situated in Allahabad in UP by deposit of title deeds.

After one year and six months, the bank sent a letter to the company and the guarantor pointing out that repayment of loan was highly irregular. It issued notices to both the borrower and the guarantor under section 13(4) of the SARFAESI Act.
Faced with the imminent threat of losing her mortgaged property, Ms Tondon challenged the decision of the bank. Turning down the plea of the bank that the alternative remedy was available to the petitioner under section 17 of the SARFAESI Act, the high court passed the order restraining the lender from taking action. The order was challenged by the bank in the Supreme Court.

Ruling in favour of the bank’s plea, the apex court said the high court order had the effect of defeating the very object of the legislation enacted by Parliament for ensuring that there are no unwarranted impediments in the recovery of the debts due to banks, financial institutions and secured creditors.


As per the provisions of section 25, the Recovery Officer shall, on receipt of the copy of the certificate under sub-section (7) of Section 19, proceed to recover the amount of debt specified in the certificate by one or more of the following modes, namely.

(a)  Attachment and sale of the movable or immovable property of the defendant;
(b)  Arrest of the defendant and his detention in prison;
(c)  Appointing a receiver for the management of the movable or immovable properties of the defendant.

Where the certificate of recovery is issued against a company registered under the Companies Act, 1956, the Tribunal may order the sale proceeds of the company to be distributed among its secured creditors in accordance with the provisions of Section 529A of the Companies Act, 1956 and to pay the surplus, if any to the company.

The defendant cannot dispute before the Recovery Officer the correctness of the amount specified in the certificate, and no objection to the certificate on any other ground, shall also be entertained by the Recovery Officer.  However, the Presiding Officer shall have power to withdraw the certificate or correct any clerical or arithmetical mistake in the certificate by sending an intimation to the Recovery Officer.  The Presiding Officer shall intimate to the Recovery Officer any order withdrawing or cancelling a certificate or any correction made by him.

The Tribunal may, after giving the applicant and the defendant an opportunity of being heard, pass such interim or final order, including the order for payment of interest from date on or before which payment of the amount is found due upto the date of realization or actual payment, on the application as it thinks fit to meet the ends of justice.

The Tribunal shall send a copy of every order passed by it to the applicant and the defendant.  The presiding Officer shall issue a certificate under his signature on the basis of the order of the Tribunal, to the Recovery Officer for recovery of the amount of debt specified in the certificate.  Where the Tribunal, which has issued a certificate of recovery, is satisfied that the property is situated within the local limits of the jurisdiction two or more Tribunals, it may send the copies of the certificate of recovery for execution to such other Tribunals where the property is situated.  Provided that in case where the Tribunal to which the certificate of recovery is sent for execution finds that it has no jurisdiction to comply with the certificate of recovery, it shall return the same to the Tribunal which has issued it.

The application made to the Tribunal shall be dealt with by it as expeditiously as possible and Endeavour shall be made by it to dispose of the application finally within one hundred and eighty days from the date or receipt of the application.  The Tribunal may make such orders and give such direction as may be necessary or expedient to give effect to its orders or to prevent abuse of its process or to secure the ends of justice.

“Banks can't use cops to evict defaulters- use of police force can only be authorized by a magistrate”[2]

In a landmark ruling that will prevent banks from forcefully dispossessing a flat owner who has mortgaged the property, the Bombay high court (a bench of Justices D Y Chandrachud and Anoop Mohta) has ruled that "secured" creditors, like banks, cannot unilaterally use police machinery to evict the defaulting borrower.

In a case where State Bank of India had, taken possession of residential premises in Suneeta Apartments on Ridge Road, Malabar Hill, the bench said: "No secured creditor can, by seeking assistance of police machinery, unilaterally carry out the eviction of the borrower and take over forcible possession of the secured asset." The high court did not hold that the SBI had acted unlawfully, but remanded the matter to a tribunal which would decide this point based on evidence.

"Our legal system is governed by the rule of law," reminded the court tersely in the judgment dictated by Justice Chandrachud. The law governing the interests of creditors and borrowers has several checks in place. One provision states that the bank may request the chief metropolitan magistrate in writing to take possession. Section 14 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, stipulates that the magistrate takes or "authorizes the use of police force if, in his opinion, it is necessary". The HC said that "though Section 14 is an enabling provision, it will be wholly impermissible for a secured creditor to take the law into his own hands...". "If the borrower does not hand over possession voluntarily after a notice to recover possession has been served on him, the only remedy open to the bank is to seek an appropriate order from the chief metropolitan magistrate or the district magistrate," observed the judges.
Facts of the Case
A privately held company Clarity Gold was the borrower. Its director, Ganga Gupta, was the guarantor of her Malabar Hill flat. The SBI had in July 2010, served a possession notice to the company which was received by its accounts manager. Gupta said 20 policemen had barged in, along with bank officers, to take forcible possession of the flat without court orders and after an "invalid" notice.
But SBI denied the possession was forcibly taken. It argued that "the mere fact that the bank had addressed letters to the police authorities and sought police assistance does not give rise to the conclusion that possession was forcibly taken".
The debt recovery tribunal, before which the dispute first landed, held the bank had used unlawful force to take possession of the flat. It directed the bank to return the flat, but only after holding that the bank notice was "improperly issued". When the bank went in appeal, the appellate tribunal held that the bank's notice was valid. The high court agreed with the appellate tribunal.
However, the appellate tribunal had given no finding on whether the possession was taken forcefully. The HC has now remanded the matter to the appellate tribunal to verify, after hearing both the sides again, if the bank had used police force unlawfully. The bank, which made an inventory of all the objects in the flat, said it was open for the Guptas to collect them any time.


(1)  Power of the Tribunal / Appellate Tribunal under code of civil procedure, 1908:

The Tribunal and the Appellate Tribunal shall not be bound by the procedure laid down by the code of Civil Procedure, 1908, but shall be guided by the principles of nature justice. The proceedings before the Debt Recovery Appellate Tribunal Is governed by Debt Recovery Appellate Tribunal (procedure) Rules, 1993.  In addition, Section 22 of the Act permits the Tribunal and the Appellate Tribunal to regulate their own procedure including the places at which they shall have their sittings.

The Tribunal and Appellate Tribunal shall have, for the purposes of discharging their functions under this Act, the same powers as are vested in a civil court under the code of Civil Procedure, 1908, while trying a suit, in respect of the following matters, namely:

a)     Summoning and enforcing the attendance of any person and examining him on oath.
b)     Requiring the discovery and production of documents;
c)     Receiving evidence on affidavits;
d)     Issuing commissions for the examination of witnesses of documents,
e)     Reviewing its decisions;
f)      Dismissing an application for default or deciding it ex parte;
g)     Setting aside any order of dismissal of any application for default or any order passed by it ex parte;
h)     Any other matter which may be prescribed.

Any proceeding before the Tribunal or the Appellate Tribunal shall be deemed to be a judicial proceeding within the meaning of sections 193 and 228, and for the purposes of Section 196, of the India Penal Code, 1860 and the Tribunal or the Appellate Tribunal shall be deemed to be a civil court for all the purposes of section 195 and Chapter XXVI of the Code of Criminal Procedure, 1973.
The expression authority is often synonymous with power. It is the right to command or act. While discharging the duties, the Tribunal can exercise its implied authority to meet the ends of justice. The tribunal can exercise the inherent power to make such orders and give such directions as may be necessary to give effects to the orders or to prevent the abuse of its process. In the case of Rama Lakshman Glass Pvt. Ltd v/s State of Bihar[3], it was held that having submitted to the jurisdiction of the tribunal and having taken the chance of judgment later on the jurisdiction of the tribunal can not be challenged in the writ petition. The High Court of Andhra Pradesh held in the case of Singareni Collieries Ltd. v/s State of Hyderabad and Others[4], that the tribunal can pass any appropriate order including garnishee order though it is specifically not provided in the Act. And in the same way the Supreme Court in ICICI Ltd. v/s Grapco Industries[5], held that depending on the circumstances of each case the tribunal can grant an interim ex parte order of injunction or a stay for a short duration but such order can not be granted as a matter of routine.
(2)  Who can Approach the DRAT 

Section 20 of the Act provides that any person aggrieved by an order made, or deemed to have been made, by a Tribunal under this Act, may prefer an appeal to an Appellate Tribunal having jurisdiction in the matter. Every appeal shall be filed within a period of forty-five days from the date on which a copy of the order made, or deemed to have been made, by the Tribunal is received by him and it shall be in such form and accompanied by such fee as may be prescribed.  Provided that the Appellate Tribunal may entertain an appeal after the expiry if the side period of forty-five days if it satisfied that there was sufficient cause for not filling it within that period.

On receipt of an appeal, the Appellate Tribunal may, after giving the parties to the appeal, an opportunity of being heard, pass such orders thereon as it think fit, confirming, modifying or setting aside the order appealed against.

 The Appellate Tribunal shall send a copy of every order, made by it to the parties to the appeal and to the concerned Tribunal.  The appeal filed before the Appellate Tribunal shall be dealt with by it as expeditiously as possible and Endeavour shall be made by it to dispose of the appeal finally within six months from the date of receipt of the appeal.

Where an appeal is preferred by any person from whom the amount of debt is due to a Bank or a Financial Institution or a consortium of Banks or Financial Institution, such appeal shall not be entertained by the Appellate Tribunal unless such person has deposited with the Appellate Tribunal seventy-five percent of the amount of debt so due from him as determined by the Tribunal.  Provided that the Appellate Tribunal may, for reasons to be recorded in writing, waive or reduce the amount to be deposited.


(1)  Compromise through Negotiations

Reduction of non-performing assets in banks can be achieved through a compromise strategy where the objective of the genuine borrower is to optimise his gain having suffered a loss in the Unit’s working, and that of the banker to minimise his loss.  The ultimate strike-point is possible only through negotiation. Compromise, has a bad-debt reduction strategy needs to be wielded deftly. When a compromise is arrived at, certain amount of sacrifice in the form of write off and/or waiver of uncharged interest would be inevitable.  Some feel that in a compromise, if one can  recover the book outstanding, it would be adequate because it would not entail a write-off but would only involve waiver of the uncharged interest component, which is after all notional.  This is one extreme.  While others feel that sacrificing a claim is more akin to sin and therefore, one has to stay hard and fast in negotiations.  This is the other extreme.  While others feel that sacrificing a claim is more akin to sin and therefore, one has to stay hard and fast in negotiations.  This is the other extreme.

Compromise should be wielded as a strategy and not sold as a product.  However, compromise can be marketed as a product prudently in cases where the asset back-up is questionable and prospects for recovery out of the borrower’s own means are remote.

Thus, it is necessary to determine the approach in the light of analysis of factors connected to each case.  There are only two approaches relevant:

(a)  Recovering as much as possible by negotiation (or in other words recovery      optimization) – this is possible when the banker can negotiate from a position of strength, and
(b)  Clearing the problem loan in order to cleanse the portfolio – this is essential when the banker does not negotiate from a position of strength.

(2)  Compromise through Lok Adalats

The Reserve Bank has advised all scheduled commercial banks and all India financial institutions that they can take up the matter where out standings are `.10 lakhs and above with Lok Adalats organized by the Debt Recovery Tribunal/Debt Recovery Appellate Tribunals.  The advice was issued to clarify the doubt raised by banks whether, in view of the limitation of ceiling of ` 5 lakhs for disposal by Lok Adalats, they should participate in the Lok Adalats convened by various DRTs/DRTs for resolving cases involving `10 lakhs and above. 

(3)  Corporate Debt Restructuring (CDR)

Based on the experience in countries like the UK, Thailand, Korea, Malaysia, etc. of putting in place an institutional mechanism for restructuring of corporate debt and need for a similar mechanism in India, a Corporate Debt Restructuring (CDR) System was evolved and detailed guidelines were issued by Reserve bank of India (RBI) on August 23, 2001 for implementation by financial institutions and banks. The objectives of the CDR mechanism as enunciated in the scheme evolved by RBI, the Central Bank of the Country, are given below:

(a)  To ensure timely and transparent mechanism for restructuring corporate debts viable entities facing problems, for the benefit of all concerned.
(b)  To aim at preserving viable corporates that are affected by certain internal and external factors; and
(c)  To minimise the losses to the creditors and other stake holders through an orderly and co-ordinated restructuring programme.

The Corporate Debt Restructuring (CDR) Mechanism is a voluntary non-statutory system based on Debtor-Creditor Agreement (DCA) and Inter-Creditor Agreement (ICA) and the principle of approvals by super-majority of 75% creditors (by value) which makes it binding on the remaining 25% to fall in line with the majority decision. The CDR Mechanism covers only multiple banking accounts, syndication/consortium accounts, where all banks and institutions together have an outstanding aggregate exposure of Rs.100 million and above. It covers all categories of assets in the books of member-creditors classified in terms of RBI's prudential asset classification standards. Even cases filed in Debt Recovery Tribunals/Bureau of Industrial and Financial Reconstruction/and other suit-filed cases are eligible for restructuring under CDR. The cases of restructuring of standard and sub-standard class of assets are covered in Category-I, while cases of doubtful assets are covered under Category-II.

Reference to CDR Mechanism may be triggered by:

(a)  Any or more of the creditors having minimum 20% share in either working capital or term finance, or
(b)  By the concerned corporate, if supported by a bank/FI having minimum 20% share as above.
It may be emphasized here that, in no case, the requests of any corporate indulging in fraud or misfeasance, even in a single bank, can be considered for restructuring under CDR System. However, Core Group, after reviewing the reasons for classification of the borrower as wilful defaulter, may consider admission of exceptional cases for restructuring after satisfying itself that the borrower would be in a position to rectify the wilful default provided he is granted an opportunity under CDR mechanism.
Status of Corporate Debt Restructuring as on December 31, 2013[6]
(Overall Status since inception)
 (` crore)
Total References Received by CDR Cell
Cases Rejected before Admission or Approval
Cases under consideration of CDR EG
Total Cases Approved
No. of cases

Aggregate Debt
No. of cases

Aggregate Debt
No. of cases

Aggregate Debt
No. of cases

Aggregate Debt

Cases Withdrawn on account of package failure
Cases exited successfully

Live cases in CDR
No. of cases
Aggregate Debt
No. of cases
Aggregate Debt
No. of cases
Aggregate Debt


“The Recovery of Debts due to Banks and Financial Institutions Act, 1993” not only helps the banks on fast track debt recovery but also contributes to improve the quality of their assets. Similarly, the Act also helps the non banking finance companies to improve the quality of their assets as well as loans. As per the RBI’s Report on Trend and Progress of Banking in India, 2012-13[7], the latest available information as to the recovery of NPA’s is tabled below: 

Table showing the Recovery of NPAs during 2012-13
(Amount in ` crores)

Recovery Channel
No. of cases Referred
Amount Involved
Amount Recovered*
as % of  Amount Involved
i) Lok Adalats


ii) DRTs#







*: Refers to amount recovered during the given year, which could be with reference to cases referred during the given year as well as during the earlier years.
#: DRTs- Debt Recovery Tribunals.

From the above table, it can be seen that the Banks have been able to recover over 14.0 % of the bad debts for which proceedings were initiated under the Act by 2012-13. The Act has been responsible for the bulk of the bad loan recovery, and contributed significantly in helping the banks to improve their non-performing assets (NPAs) ratio to total assets.

The Act also enabled the creation of asset reconstruction companies, which helped the banks to clean up their balance sheets. Asset reconstruction companies buy NPAs from banks and specialize in recovery of bad loans either through resolution or selling assets. While the Act helped lift the deadweight of large corporate bad loans from their books, banks have been able to get rid of lakhs of small default cases through Lok Adalats, people's courts established by the government for settlement of disputes through conciliation and compromise. Among the various channels of recovery available to banks for dealing with bad loans, the SARFAESI Act and the Debt Recovery Tribunals (DRTs) have been the most effective in terms of amount recovered. The amount recovered as percentage of amount involved was the highest under the DRTs, followed by SARFAESI Act.

[1] United Bank of India Vs. Satyawati Tondon ; 2010 STPL(Web) 546 SC
[2] M/S.Clarity Gold Pvt.Ltd vs State Bank of India on 20 January, 2011 decided by Bombay High Court in W  P NO. 8893 of 2010 reported in
[3]  AIR 2000, Pat. 210
[4]  1998(2) ALD 440: 1998(1) APLJ 369.
[5]  1999(4) SCC. 710
[6] As per the Corporate Debt Restructuring (CDR) Cell Progress Report (As On December 31, 2013)
[7]  RBI’s Report on Trend and Progress of Banking in India, 2012-13  (Table IV.17:: NPAs of SCBs recovered through various Channels )

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