Assignment 2 Submitted To: Mr.

Purushottam Kumar
Subject: Banking Law Submitted By: Stuti Baradia
Sem VIII (4th year)
B.B.A LL.B
Que: Mr. A has taken a secured loan from the bank, and after sometimes his loan
account has been declared NPA. You being a lawyer of the bank, what will you
do? Kindly mention the important sections and explain the procedure for
recovery of the loan.

The assets of the banks which dont perform (that is dont bring any return) are called Non
Performing Assets (NPA) or bad loans. Banks assets are the loans and advances given to
customers. If customers dont pay either interest or part of principal or both, the loan turns
into bad loan. According to RBI, terms loans on which interest or installment of principal
remain overdue for a period of more than 90 days from the end of a particular quarter is
called a Non-performing Asset.

RBIs timelines are as follows:

If the account does not reflect credits into the account, 90 days preceding the date of
balance sheet of the firm. Temporary deficiencies like late/ non-submission of stock
statements or balance outstanding exceeding the drawing power, non-renewal of limits
should not get categorised as NPA.
If the borrower does not pay three instalments continuously after 90 days but up to 12
months the account becomes sub-standard and NPA. Section 13 (2) empowers the Bank/
FI to serve a notice to the borrower for taking possession of the assets held as security
for the money lent by it. But there is precursor to this action: the Bank/FI shall serve
notice to the borrower to discharge his full liabilities within 60 days from the date of
notice that should also detail out the legal consequences and penal provisions.

Important Sections & Procedure for Recovery of the Loan

Once the Account is classified as NPA, then, in accordance with the procedure prescribed,
the Bank will proceed to make a demand under Section13 (2) informing the borrower about
the outstanding amount in the loan account and also the consequences. There is a general
format to give a notice to the borrower under section 13 (2). The notice under section 13 (2)
should substantially comply with the requirements and if the borrower raises a technical
objection, those are not appreciated normally going by the precedents so far. Normally,
borrowers may choose to remain silent after receiving a demand notice under section 13 (2),
though, they can send their objections to the Bank/Secured Creditor. If the borrower sends
any objections to the notice under section 13 (2) of the Act, then, the Bank should carefully
consider those objections and should be fair in looking and replying to the objections. There
should be a reply to the objections raised by the borrower under section 13 (3A). If the Bank
chooses to ignore section 13 (3A), then, the entire action of the Bank under section 13 of the
Act gets vitiated. If the Bank failed to reply to the objections raised by the borrower, then, the
borrower can raise the same before the Debt Recovery Tribunal in an appeal under section 17
of the Act. This is the adjudication part and the Bank is supposed to act fairly at this stage
considering the object of the special legislation SARFAESI Act, 2002.

After the adjudication part is over, then, the Bank proceeds to issue a possession notice under
section 13 (4) of the Act informing the borrower that they have taken symbolic possession of
the property. This is not actual possession of the secured asset or property of the borrower.
The borrower gets a right to question the notice under section 13 (4) and all subsequent
measures initiated by the Bank under section 17 of SARFAESI Act, 2002. In view of the
clear provision in the Act about the time limit to file an appeal under section 17, the borrower
is normally advised to file an appeal under section 13 (4) within the prescribed period.
However, the subsequent and many judgments make it clear that all measures of the Bank
under section 13 (4) of the Act can be questioned under Section 17 of the Act and as such, the
cause of action to file an appeal under section 17 of the Act starts with the notice under
section 13 (4) and it continues. That is why, even a challenge to the Sale Notice is entertained
though the borrower is silent after receiving the notice under section 13 (4). As the object of
the legislation is to help the Banks to recover the outstanding dues speedily, the Tribunals
should be liberal when it comes to entertaining Appeals from the borrower under section 17
and substance can be appreciated at any stage.

After the possession notice under section 13 (4) and if there is no stay of further proceedings,
the Bank will proceed to take physical possession of the property under Section 14 of the Act
through District Magistrate or Chief Metropolitan Magistrate etc. Before the Magistrate under
Section 14 of the Act, there will not be any kind of adjudication and notice need not be given
to the borrower at this stage. The Magistrate is required to look at the statutory compliance of
Section 13 and if the is satisfied, he will assist the Bank in taking physical possession of the
property. Normally, the Magistrate Court appoints an Advocate Commissioner to take
physical possession of the property and the Bank officials too accompany
him. The Magistrate Court can even grant police assistance to take physical possession of the
property. If the property is under lock and key, then, the Magistrate Court permits to break-
open the lock and thus, physical possession of the property is taken. If the borrower intends to
question the order of the Magistrate under section 14 of the Act, he can approach the Debt
Recovery Tribunal. Though it is very often seen where the borrower approaches the High
Court challenging the action under section 14, the High Court may ask the borrower to
approach Debt Recovery Tribunal. There are two conflicting views in this regard. On view
supports that only High Court can look into the challenge to an order of the Magistrate under
section 14 in view of the specific bar on other courts. Another view is that, as all measures
under section 13 can be questioned under section 17 before the Tribunal, the borrower can
certainly question the order of the Magistrate or the action under section 14 before the Debt
Recovery Tribunal itself. It is to be noted that if there is a clear case, then the Debt Recovery
Tribunal can restore the possession back to the borrowers even after taking physical
possession.

After taking physical possession of the property under section 14, if there is no impediment to
proceed further through an order from the Tribunal or the High Court, the Bank will proceed
to sell the property/secured interest and the Bank is supposed strictly comply with the
provisions of the Act and the SARFAESI Rules in this regard. If the Bank violates the
SARFAESI Rules while proceeding to auction the property, then, the entire auction can be
set-aside on that ground alone. Even after the confirmation of sale in a public auction
conducted by the Bank, the auction can be set-aside if the Debt Recovery Tribunal decides
infavour of the borrower in his appeal under section 17 of the Act. From and out of the sale
proceedings, the residue is to be returned to the borrower.

Though the procedure and process under SARFAESI Act, 2002 is clear and unambiguous,
there is a general feeling among borrowers that the Debt Recovery Tribunal is not fair in
many cases and the borrowers feel that the remedy before the Debt Recovery Tribunal is not
speedy and effective. Despite the stringent provisions under SARFAESI Act, 2002, no one
can undermine the rights of the borrower and his right to property.

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