By Dr. T. Padma
MA (Economics), MA (Lit), MA (J
& MC),
MSc (Psychology), MBA, PGDCL,
PGADR,
PGDHR, LLM, PhD (Law), (LLD)
kethepadma@gmail.com
I. BACKGROUND
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).
II.
CONSTITUTION
AND FUNCTIONING OF THE TRIBUNALS
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.
III.
RECOVERY PROCESS
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
“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.
VI.
MODES OF RECOVERY
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”
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.
V. RIGHT OF APPEAL
(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,
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,
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, 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.
VII.
NON-LEGAL REMEDIES
(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
(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
|
|
(1)
|
(2)
|
(3)
|
(4)
|
|
No. of cases
|
Aggregate Debt
|
No. of cases
|
Aggregate Debt
|
No. of cases
|
Aggregate Debt
|
No. of cases
|
Aggregate Debt
|
|
605
|
407656
|
105
|
52866
|
57
|
65492
|
443
|
289298
|
|
Cases Withdrawn
on account of package failure
|
Cases exited
successfully
|
Live cases in
CDR
|
|
(5)
|
(6)
|
(7)
|
|
No. of cases
|
Aggregate Debt
|
No. of cases
|
Aggregate Debt
|
No. of cases
|
Aggregate Debt
|
|
115
|
29038
|
69
|
52625
|
259
|
207635
|
CONCLUSION
“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, 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)
|
|
2012-13
|
|
Recovery
Channel
|
No.
of cases Referred
|
Amount
Involved
|
Amount
Recovered*
|
as
% of Amount Involved
|
|
i) Lok Adalats
|
8,40,691
|
66
|
4
|
6.1
|
|
ii)
DRTs#
|
13,408
|
310
|
44
|
14.0
|
|
iii) SARFAESI Act
|
1,90,537
|
681
|
185
|
27.1
|
|
Total
|
10,44,636
|
1,058
|
232
|
21.9
|
Note:
*:
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.
