Overview

Income Recognition, Asset Classification and Provisioning Norms

The concept of Non Performing Assets (NPA) was introduced for the first
time by Reserve Bank of India in the year 1991 as per recommnedations of
Narsimhan Committee. Based on these recommendations, RBI laid down
Prudential norms for improving the financial health of commercial Banks and
the quality of Loan portfolio as well for Income Recognition and Provisioning
to fall in line with International Standard. Latest in this series, they have
issued Master Circular No. DBOD.No.BP.BC.12/21.04.048/2007-08 dated
July 2, 2007, (the transcript of the same is available at Intranet under RBI
circulars).

We give hereunder brief description of the same.

Non-Performing Assets

An asset, including a leased asset, becomes non-perfroming when it ceases to

generate income for the Bank. A ‘Non-Performing Asset’ NPA was defined as
a credit facility in respect of which the interest and/or insallment of
principal has remained ‘ past due’ for 90 days ”. The main criteria are as
under

1. Interest and/or instalments of principal remain overdue for a period

of more than 90 days in a term loan.
2. The account remains ‘out of order’ for a period of more than 90 days,
in respect of Cash-credit / Overdraft facility.
3. The bill remains overdue for a period of more than 90 days in case of
bill purchased/discounted from the date of the bill become due for
payment.
4. Interest and /or installment of principal remains overdue for two
harvest seasons in case of short term loans and one crop season in
case of long/medium term agricultural loans including crop loans.
5. Any amount to be received remains over due for a period more than
90 days in respect of other accounts. (Note – This means any amount
of temporary overdrawing permitted in Current Account / Savings

Page | 1
 Account or any other customer account remaining overdue for 90 days
will have to be treated as “Non Performing Asset”.)

There are various categories of classification based on age of NPA and also
there are provisioning requirements as prescribed by RBI. We give
hereunder the same as of 31.03.2008 hereunder:
Asset Classification Total Period in Provision Required
NPA (%)
Category
Sub Standard * 12 months 10%
Doubtful upto 1 year (D1) ** 24 months 20%
Doubtful 1 to 3 years (D2) ** 48 months 30%
More than 3 years (D3) ** More than 100%
48 months

* The ‘unsecured exposures’ which are identified as ‘substandard’ would

attract additional provision of 10 per cent, i.e., a total of 20 per cent on the
outstanding balance. Unsecured exposure is defined as an exposure where
the realisable value of the security, as assessed by the bank / approved
valuers / Reserve Bank’s inspecting officers, is not more than 10 percent,
ab-initio, of the outstanding exposure.

** In case of Doubtful Assets (D1 to D3), 100% provision is required to be

made for unsecured portion of the advance.

It should be ensured that the outstanding exposure under Doubtful

category is properly classified as “secured” and “unsecured” as it may result
in unnecessary provisioning. It should also be ensured that the documents in
support of valuation of the securities in respect of all NPA Accounts are
available with the branch and confirms to the following :

• Valuation of immovable property from approved valuer is not more

than 3 years old.
• Stock(s)/Book Debt(s) Statements are not more than 3 months old or
in case of consortium finance a letter from the Lead Bank indicating
our Bank’s share in the Drawing Power .
• Copy of Provisional / Audited Financial Statement/Balance Sheet of
the borrower for latest Financial Year.

Page | 2
Branches should discuss the matter for accelerating provisioning in case of
realisability of the security is in doubt.

Important to NOTE and Follow: At times, Bank takes a decision to

accelerate the provisioning of NPA so as to improve the Balance Sheet and
for other reasons, and write off the NPA from the books. Branches should
follow up all such written off account similar to the followup being made for
recovery of NPAs.

Income recognition on NPAs

As per RBI guidelines interest income should not be recognized on the

borrowal accounts identified as NPAs. In case of all NPA whether existing or
New NPAs in any quarter, the interest income by way of interest accrual
should be reversed on monthly basis by crediting the accrued interest amount
to ‘Interest Unrealised account (810001-356) of the respective branch.

In case of newly identified NPAs, it will be necessary for the branches to

reverse the interest, which has not been realized.

The following accounting entries should be passed in Equation for interest

reversal in NPA accounts:

DR Interest on advances (A/c No. xxxx-970200-xxx OR/xxxx-970600-xxx /

xxxx-970800-xxx etc.) {for CC/OD, Term Loan/Bills Discounted/purchased
as the case may be}

CR Interest Unrealized (Account No. xxxx - 810001-356)

(xxxx denotes 4 digit branch numeric Code such as 0001 for Opera House etc.)

Branches should maintain borrower-wise monthly interest reversal record in

an EXCEL file or a manual register and the outstanding balance in 810001
account of the branch should exactly match with the total balance in excel
sheet.

Process to Handle the NPA:

Page | 3
Once the account is classified as NPA, it has to be analyzed as to why the
borrower could not service the interest or principal. Still there could be
other reason for account becoming NPA.

Based on these reasons, we need to take a decision, if it is intentional

default or industrial cycle or business failure etc.

It is to be studied / analyzed whether the account can get

revived/restructured without any strong measures for recovery.

It is also to be cared at this stage that all the documents obtained by the
bank to secure the loans / advances sanctioned to any borrower are legally
enforceable and valid so as to take legal recourse against all concerned /
securities. Please note that Limitation Act provides validity of any document
in court of law for a period not exceeding 3 years from the date of
execution except mortgage documents which has limitation of 12 years.
However for execution of mortgage, we have to file suit at Civil Court and
not in DRT, which is very time consuming and hence should be avoided.

Based on this an opinion is to be formed either to exit from the relationship

or to support the account for revival/restructuring. If this is a case for
revival, Branches should take up with FRRG for rehabilitation. Alternatively
where it is felt that exit from the account is only option, we need to invoke
the recovery measures based on individual account.

There are various measures prescribed in law for recovery of Non

Performing Loans / Advances. We give hereunder the same alongwith
suggestions for applicability in the relevant cases:

Action Relevant Cases

Securitization Act If there is immovable property mortgaged to the

2002 Bank, this is best remedy. It can only be invoked, if
the amount in default is more than Rs. 1 Lac and
satisfies the other criteria’s mentioned in the ACT..
RDBF Act 1993 Government of India has enacted special tribunal to
handle the recovery of NPA of Bank’s and Financial
Institutions through Debt Recovery Tribunal. An
Original Application (OA) can be filed for recovery

Page | 4
 if the amount in default is more than Rs. 10 Lacs
Criminal Complaint u/s For dishonour of cheques given by the customer for
138 of Negotiable repayment of the loan by way of PDC.
Instrument Act
Other Criminal Filing of complaints under Cr. Pr. Code of India for
Complaints any attempt of cheating , fraud, diversion of funds,
selling of securities without permission of the Bank,
any other such action.
Civil Suit Recovery suit before civil court in case the amount
of claim is less than Rs. 10 Lacs.

Note: In case of initiating legal action against any borrower under

Securitization or RDBF Act, limitation of the documents should be
considered. If we have proceeded with Securitization Action, we should not
miss to file a suit at DRT or Civil Court, if the documents are getting time
barred and the recovery process is not completed.

Even at times it is observed that branches do not take suit for recovery in
cases where they have initiated action u/s 138 of NI Act. Please note that it
is mandatory to keep our recourse to the borrower and the guarantors and
also to enforce their personal assets to take remedy of civil suit at DRT or
Civil Court.

As a first step to invoke the recovery process, we need to do the following:

a) The notice is to be issued to the borrower / guarantor for

regularization of the account and if no response is received the advance
is to be called back terminating the credit arrangements.
b) If the borrower does not respond to our follow up for regularization
and recall notice, we need to finalize our strategy of recovery from the
borrower and take appropriate action as per the procedure laid down in
this Hand Book.
c) It is important to note that approval for initiation of legal action is
delegated by Board to authorized officials at Corporate Office and/or
committees constituted for the same. Hence before proceeding with any
legal action, permission of appropriate authority is to be obtained.
d) It may be noted that legal action should not be treated as last resort
for recovery and the branch should continue to keep dialogue with the

Page | 5
 borrower so as to explore possibilities of settlement outside court by
way of OTS etc.

Page | 6
 Silent features of the Securitization Act-2002.

The Securitisation and Reconstruction of Financial Assets and Enforcement

of Security Interest Act 2002 came into existence. The Act empowers the
secured creditors (Banks and Financial Institutions) to take over the
secured assets or the management of the securities charged to the Bank
with a power to sell the same for realization of its dues.

The Act deals with three parts; one part deals with the transfer of the
Non-performing Assets to Asset Reconstruction Company; Second part
deals with codifying the Law relating to Securitization of Assets and Third
part deals with enforcement of security interest by Banks and Financial
Institutions without intervention of Court. Here we shall discuss the third
part of the Act which relates to Enforcement of security interest by Banks,
Financial Institutions, Securitization Company and Asset Reconstruction
Company and more relevant for day to day activity at branches.

Important Proviso and Definition:

Section 1.3 – Authorised Officer – The Authorised Officer shall not be less
that the Chief Manager of a Public Sector Bank or equivalent or any other
person / authority exercising powers of superintendence, directions and
control of the business / affairs of the secured creditors as the case may
be and as specified by Board of Directors of the secured creditors.

Important – As per approval of our Board of Directors - All executives in

the cadre of Assistant Vice President (Branch Head or otherwise) and
above are authorized to act as “Authorized Officer” under SRFAESI
Act. All Regional Cluster Heads of Retails Branches are also vested with
similar powers.

Section 2(1)(f) - “borrower” means any person who has been granted
financial assistance by any Bank or financial institution or who has given any
guarantee or created any mortgage or pledge as security for the financial
assistance granted by any Bank or financial institution and includes a person
who becomes borrower of a securitisation company or reconstruction
company consequent upon acquisition by it of any rights or interest of any
Bank or financial institution in relation to such assistance;

Page | 7
Section 2(1)(j) - “default” means non-payment of any principal debt or
interest thereon or any other amount payable by a borrower to any secured
creditor consequent upon which the account of such borrower is classified as
Non-Performing Asset in the books of the secured creditor in accordance
with the directions or guidelines issued by the Reserve Bank of India;

Section 2(1)(o) - “Non-Performing Asset” means an asset or account of a

borrower, which has been classified by a Bank or financial institution as sub-
standard, doubtful or loss asset, in accordance with the directions or under
guidelines relating to asset classifications issued by the Reserve Bank;

Section 2(1)(t) - “property” means –

(i) Immovable property;

(ii) Movable property;

(iii) Any debt or any right to receive payment of money, whether secured
or unsecured;

(iv) Receivables, whether existing or future;

(v) Intangible assets, being know-how, patent, copyright, trademark,

license, franchise or any other business or commercial right of similar
nature;

Section 2(1)(zd) - “secured creditor” means any bank or financial institution

or any consortium group of banks or financial institutions and includes –

(i) Debenture trustee appointed by any bank or financial institution;

or

(ii) Securitisation company or reconstruction company; or

(iii) Any other trustee holding securities on behalf of a Bank or financial

institution,

In whose favour security interest is created for due repayment by any

borrower of any financial assistance;

Page | 8
Section 2(1)(ze) - “secured debt” means a debt, which is secured by any
security interest;

Section 2(1)(zf) - “security interest” means right, title and interest of any
kind whatsoever upon property, created in favour of any secured creditor
and includes any mortgage, charge, hypothecation, assignment other than
those specified in section 31;

Section 13 – Empowers the secured creditors to enforce the security

interest without intervention of court or Tribunal in case of default by the
borrowers after expiry of 60 days notice period.

Section 14 – It cast a duty on the Chief Metropolitan Magistrate (CMM) /

District Magistrates (DM) to assist secured creditor in taking possession of
secured asset.

Section 15 – Take over of Management

Section 16 – No compensation to directors for loss of office.

Section 17 – Right to appeal – provides the remedy to borrower for appeal

before DRT. No other court has any jurisdiction.

Section 18 – Appeal to Appellate Tribunal i.e. DRAT.

Section 19 – Right of borrower to receive compensation and cost in certain

cases – In case the act of the secured creditor is found to be incorrect.

Section 31: The provisions of this Act shall not apply to –

(a) a lien on any goods, money or security given by or under the Indian
Contract Act, 1872 (9 of 1872) or the Sale of Goods Act, 1930 (3 of
1930) or any other law for the time being in force;

(b) A pledge of movables within the meaning of section 172 of the Indian
Contract Act, 1872 (9 of 1872);

(c) Creation of any security in any aircraft as defined in clause (1) of

section 2 of the Aircraft Act, 1934 (24 of 1934);

Page | 9
(d) creation of security interest in any vessel as defined in clause (55) of
section 3 of the Merchant Shipping Act, 1958 (44 of 1958);

(e) Any conditional sale, hire-purchase or lease or any other contract in

which no security interest has been created;

(f) Any rights of unpaid seller under section 47 of the Sale of Goods Act,
1930 (3 of 1930);

(g) Any properties not liable to attachment or sale under the 1st proviso to
sub-section (1) of section 60 of the Code of Civil Procedure, 1908 (5
of 1908);

(h) Any security interest for securing repayment of any financial asset not
exceeding one lakh rupees (Rs. 1 Lac);

(i) Any security interest created in agricultural land;

(j) Any case in which the amount due is less than twenty percent (20%) of
the principal amount and interest thereon.

Section 32 – Protection of action taken in good faith – It is important to

follow the procedure meticulously to avail the advantage of this section in
case of any dispute by the borrower.

Section 34 – Civil courts not have jurisdiction – No Civil court has

jurisdiction to entertain any suit or proceeding in respect of any action
taken under this Act and only DRT and DRAT are empowered under this Act.

Section 35 – The provisions of this Act to override other laws.

Section 36 – Limitation – The secured creditor can take action against the
defaulting borrowers under section 13(4) of the Act within the limitation
period prescribed under the Limitation Act 1963.

Section 37 – Application of other laws not barred. This Act is in addition to

and not in derogation of Companies Act, Securities Contract Regulation Act,
SEBI Act, DRT ACT and any other law for the time being in force.

Page | 10
All other sections of the Act are being discussed along with the procedure
at relevant place.

Procedure for initiating action under the ACT:

1. Issuance of Demand Notice:

a. As per section 13 (2) of the Act, Where any borrower, who is under a
liability to a secured creditor under a security agreement, makes any default
in repayment of secured debt or any installment thereof, and his account in
respect of such debt is classified by the secured creditor as Non-
Performing Asset, then, the secured creditor may require the borrower by
notice in writing to discharge in-full his liabilities to the secured creditor
within sixty days from the date of notice failing which the secured creditor
shall be entitled to exercise all or any of the rights under sub-section (4).

b. The service of demand notice as referred to in Sub-section (2) of Section

13 of the Act shall be made by delivering or transmitting at the place where
the Borrower or his agent, empowered to accept the notice or documents on
behalf of the borrower, actually and voluntarily resides or carries on
business or personally works for gain, by registered post with
acknowledgement due, addressed to the borrower or his agent empowered to
accept the service or by Speed Post or by courier or by any other means of
transmission of documents like fax message or electronic mail service:

c. It is contemplated under this section that the details of outstanding

under each facility is separately mentioned in the notice u/s 13(2) of the
Act. It is not necessary that bifurcation of dues under different heads like
Principal, interest, penal interest, cost & other charges debited under each
facility is required to be given. However, copy of Statement of account can
be furnished to the Borrower especially to guarantor if demanded by any
particular Borrower. It is to be considered that in view of the decision in the
case of Central Bank of India V/s Ravindran decided by the Supreme
Court of India, the penal interest cannot be compounded and it is to be
ensured that penal interest is charged only for the period when interest is
overdue or there is irregularity in the account. It is likelihood that the
Borrower may challenge the dues mentioned in the notice on this count
before Debt Recovery Tribunal u/s 17 of the Act.

Page | 11
d. Provided that where authorised officer has reason to believe that the
borrower or his agent is avoiding the service of the notice or that for any
other reason, the service cannot be made as aforesaid, the service shall be
effected by affixing a copy of the demand notice on the outer door or some
other conspicuous part of the house or building in which the borrower or his
agent ordinarily resides or carries on business or personally works for gain
and also by publishing the contents of the demand notice in two leading
newspapers, one in vernacular language, having sufficient circulation in that
locality.

e. Where the borrower is a body corporate, the demand notice shall be

served on the registered office or any of the branches of such body
corporate as specified under sub-rule(1).

f. Any other notice in writing to be served on the borrower or his agent by

authorised officer, shall be served in the same manner as provided in this
rule

g. Where there is more than one borrower, the demand notice shall be
served on each Borrower

Important – Approved procedure of our Bank:

Though notification mentions various modes of services of the statutory

notice as a matter of policy we should issue notices either by “registered
post acknowledgement due” OR by “speed post acknowledgement due”. In
addition, one copy of the notice should also be sent “Under Certificate of
Posting” OR by fax OR by e-mail wherever possible.

h. The notice referred to in sub-section (2) of section 13 shall give details of

the amount payable by the borrower and the secured assets intended to be
enforced by the secured creditor in the event of non-payment of secured
debts by the borrower.

2. If Borrower gives reply and raises any objection, or seeks time on some
grounds or challenges creation of charge or challenges balances outstanding
in the account or challenges any entries in the account (especially penal
interest, cost, insurance premium etc.), the reply of the Borrower has to be
considered and it has to be replied prior to taking any further action as

Page | 12
decided by Supreme Court of India in the case of Mardia Chemicals Ltd. In
terms of sub Section 3 of Section 13 of the Act, it is mandatory to the
secured creditors to communicate with reasons for non acceptance of
the representation or objection within one week of receipt from the
borrower on the notice issued by the Authorised Officer u/s 13(2).

Appeal cannot lie before DRT against the notice issued, or reply given by the
Bank. But the averments made in notice and reply given by the Bank can be
one of the grounds for appeal for challenging the action taken by Bank after
possession is taken by the Bank. Hence, reply needs to be cautiously drafted
giving detailed explanation for not accepting the objections of the borrower.

3. After replying to the objections, if any, raised by the borrower and

completion of 60 days notice period, the secured creditor may proceed for
taking possession of the secured asset as per powers vested u/s 13 (4) of
the Act.

a. Even though not statutorily required under the Act, we suggest that
branches send a further notice (under the head “for taking possession of
secured assets”) to the borrower/guarantor whose secured asset is to be
taken into possession at the end of 60th day of the statutory demand notice
u/s 13(2). Herein we need to advise the time and date when we will visit the
site of secured asset for taking possession,

b. A copy of this notice u/s 13(4) be also endorsed to the respective

Metropolitan Magistrate/District Magistrate in whose jurisdiction the
assets are located/situated with an intimation that necessary assistance
may be sought for taking possession of the assets.

c. It should be ensured to send a copy of this notice to any other secured

creditor (Bank or Financial Institution) who have any charge, lien or other
interest in the secured asset. In case of multiple banking arrangements
where security interest is on pari-passu basis, it is must to obtain the
consent of minimum 75% of the secured creditors (IN Value Terms) before
taking possession of the same.

d. If the borrower/owner or their representatives refuse/evade to

handover the possession to the Bank either by refusal or by locking the
premises or not cooperating in handing over peaceful possession, a report

Page | 13
 (Panchnama) to that effect be prepared and be signed by Authorised
Officer before two or more independent witnesses. In any case it should be
ensured that the Authorised Officer is not taking forcible possession of the
assets without the assistance of District Magistrate / Metropolitan
Magistrate as the case may be. For convenience of the branches, e. Under
the provisions of 13(13) the Borrower is prohibited from transferring assets
or creating lien after receipt of statutory notice u/s. 13(2). However
subsequent sale is not treated as void. Purchaser is only made liable to pay
the sale price, if any remained to be paid / due to the Borrower.

f. Taking over Possession - Movable Properties / Assets

If the borrower, however do not obstruct the process , the Authorised

Officer shall take the possession in the following way:

(i) In case of movable properties , the authorised officer shall take

possession of such movable property in the presence of two independent
witnesses after a Panchnama is drawn and duly signed by all present

(ii) At the time of taking possession, the authorised officer shall make or
cause to be made an inventory of the property as nearly as possible and
deliver or cause to be delivered, a copy of such inventory to the borrower or
to any person entitled to receive on behalf of borrower.

(iii) After taking over the possession of immovable assets possession

notice has to be issued
(iv) At times borrower/guarantor/mortgagor may give undertaking to
handover possession in future and allows the Bank to take symbolic
possession. The authorised officer shall keep the property under
possession under sub-rule (1) either in his own custody or in the custody of
any person authorised or appointed by him, who shall take as much care of
the property in his custody as an owner of ordinary prudence would, under
the similar circumstances, take of such property:

Provided that if such property is subject to speedy or natural decay, or the

expense of keeping such property in custody is likely to exceed its value, the
authorised officer may sell it at once.

Page | 14
(iv) The authorised officer shall take steps for preservation and
protection of secured assets and insure them, if necessary, till they are sold
or otherwise disposed of.

(v) In case any secured asset is:--

(a) a debt not secured by negotiable instrument; or

(b) a share in a body corporate;

(c) other movable property not in-the possession of the borrower

except the property deposited in or in the custody of any court or any like
authority, the authorised officer shall obtain possession or recover the debt
by service of notice as under :--

(i) in the case of a debt, prohibiting the borrower from recovering the debt
or any interest thereon and the debtor from making direct payment thereof
and directing the debtor to make such payment to the authorised officer

(ii) in the case of the shares in a body corporate, directing the borrower to
transfer the same to the secured creditor and also the body corporate
from not transferring such shares in favour of any person other than the
secured creditor. A copy of the notice so sent may be endorsed to the
Registrar to the issue or share transfer agents of concerned body
corporate (iii) in the case of other movable property (except as aforesaid),
calling upon the borrowers and the person in possession to hand over the
same to the authorised officer and the authorised officer shall take custody
of such movable property in the same manner as provided in Sub-rule (1) to
(3) above;

(iv) movable secured assets other than those covered in this rule shall be
taken possession of by the authorised officer by taking possession of the
documents evidencing title to such secured assets.

Procedure for Sale of movable secured assets.—

(1) The authorised officer may sell the moveable secured assets taken
possession in one or more lots by adopting any of the following methods to
secure maximum sale price for the assets, to be so sold--

Page | 15
(a) obtaining quotations from parties dealing in the secured assets or
otherwise interested in buying such assets; or

(b) inviting tenders from the public; or

(c) holding public auction; or

(d) by private treaty.

(2) The authorised officer shall serve to the borrower a notice of thirty
days for sale of the movable secured assets, under sub-rule (1):

Provided that if the sale of such secured assets is being, effected by either
inviting tenders from the public or by holding public auction, the secured
creditor shall cause a public notice in two leading newspapers, one in
vernacular language, having sufficient circulation in that locality by setting
out the terms of sale, which may include,--

(a) details about the borrower and the secured creditor;

(b) Description of movable secured assets to be sold with identification

marks or numbers, if any, on them;

(c) Minimum Reserve Price, if any, and the time and manner of payment;

(d) Date, Time and Place of public auction or the time after which sale by
any other mode shall be completed;

(e) Depositing earnest money as may be stipulated by the secured

creditor;

(f) ANY other item which the authorised officer considers material for a
purchaser to know in order to judge the nature and value of movable secured
assets.

(3) Sale by any methods other than public auction or public tender, shall be
on such terms as may be settled between the parties in writing.

Issuance of certificate of sale.—

Page | 16
Sale of movable secured assets

(1) Where movable secured assets is sold, sale price of each lot shall be paid
as per the terms of the public notice or on the terms as may be settled
between the parties, as the case may be, and in the event of default of
payment, the movable secured assets shall be liable be sold again.

(2) On payment of sale price, the authorised officer shall issue a certificate
of sale specifying the movable secured assets sold, price paid and the name
of the prescribe form and thereafter the sale shall become absolute. The
certificate of sale so issued shall be prima facie evidence of title of the
purchaser.

Sale of immovable secured assets.—

(1) Where the secured asset is an immovable property, the authorised

officer shall take or cause to be taken possession, by delivering a possession
notice prepared as nearly as possible in to the borrower and / or to the
owner of the property (in case of mortgage by 3 rd party) and by affixing the
possession notice on the outer door or at such conspicuous place of the
property.

(2) The possession notice shall also be published in two leading newspaper,
one in vernacular language having sufficient circulation in that locality, by
the authorised officer within a period not exceeding 7 days from the date
of taking possession

(3) In the event of possession of immovable property is actually taken by the

authorised officer, such property shall be kept in his own custody or in the
custody of any person authorised or appointed by him, who shall take as
much care of the property in his custody as a owner of ordinary prudence
would, under the similar circumstances, take of such property.

In case the possession is not handed over by the owner of the property
peacefully, we should prepare panchnama to that effect. Thereafter we
should file an application before the respective Metropolitan
Magistrate/District Magistrate in whose jurisdiction the assets are

Page | 17
situated/located, thereby requesting to take the possession of the assets
and hand it over to the Bank in terms of Sec. 14 of the Act.

IMPORTANT – At the time of going in for taking possession of any

property / asset, you may be required to carry the following items which may
facilitate the process

- White Paper, Pen, Marker, Scale, Locks, Sealing Wax, Match Box, Candle,
Calculator, 2 independent witness, Valuer, and Bank’s seal.

(4) The authorised officer shall take steps for preservation and protection
of secured assets and insure them, if necessary, till they are sold or
otherwise disposed off.

(5) Before effecting sale of the immovable property, the authorised officer
shall obtain valuation of the property from an approved valuer. Approved
valuer” means a person registered as a valuer under section 34 AB of the
Wealth-tax Act-1957, and approved by the Board of Directors or Board of
trustee of the secured creditor, as the case may be. Now in consultation
with the secured creditor, fix the reserve price of the property and may sell
the whole or any part of such immovable secured asset by any of the
following methods :--

Important – Fixing of Reserve Price of any property to be put for auction,

Managing Director / Joint Managing Director have been authorized by the
Board to do so on the recommendations of a committee consisting of Head
FRRG jointly with any 2 executives of VP and above from Credit Department.

(a) by obtaining quotations from the persons dealing with similar secured
assets or otherwise interested in buying the such assets; or

(b) by inviting tenders from the public;

(c) by holding public auction; or

(d) by private treaty.

Page | 18
(6) In any case, the authorised officer shall serve to the borrower a notice
of thirty days for sale of the immovable secured assets, under sub-rule (5):

Provided that if the sale of such secured asset is being effected by either
inviting tenders from the public or by holding public auction, the secured
creditor shall cause a public notice in two leading newspapers one in
vernacular language having sufficient circulation in the locality by setting out
the terms of sale, which shall include, -

(a) The description of the immovable property such as Identity No,(such as

House No, / Survey No. / Plot No. etc.), Area of Land / Building etc.,
Complete Address of the property to be sold, including the details of the
encumbrances / statutory dues known to the secured creditor;

(b) The secured debt for recovery of which the property is to be sold;

(c) Minimum Reserve Price, below which the property will not be sold;

(d) Date, Time and Place of public auction or the time after which sale by
any other mode shall be completed;

(e) Details about depositing Earnest Money as may stipulated by the secured
creditor;

(f) Details about the mode of payment and time schedule for the successful
buyer.

(g) any other detail which the authorised officer considers it material for a
purchaser to know in order to judge the nature and value of the property.

(7) Every notice of sale shall be affixed on a conspicuous part of the

immovable property and may, if the authorised officer deems it fit, put on
the web-site of the secured creditor on the Internet.

(8) Sale by any methods other than public auction or public tender, shall he
on such terms as may be settled between the parties in writing.

Time of sale, Issue of sale certificate and delivery of possession, etc.—

Page | 19
(1) No sale of immovable property under these rules shall take place before
the expiry of thirty days from the date on which the public notice of sale is
published in newspapers or notice of sale has been served to the borrower.

(2) The sale shall be confirmed in favour of the purchaser who has offered
the highest sale price in his bid or tender or quotation or offer to the
authorised officer and shall be subject to confirmation by the secured
creditor:

Provided that no sale under this rule shall be confirmed, if the amount
offered by sale price is less than the Minimum Reserve Price fixed and
published in Public Notice.

Provided further that if the authorised officer fails to obtain a price higher
than the reserve price, he may, with the consent of the borrower and the
secured creditor effect the sale at such price.

Note: The Authorised officer should consult Financial Reconstruction and

Restructuring Group (C. O.) before finalization of any sale.

(3) On every sale of immovable property, the purchaser shall immediately

pay a deposit of twenty five per cent of the amount of the sale price, to the
authorised officer conducting the sale and in default of such deposit, the
property shall forthwith be sold again.

(4) The balance amount of purchase price shall be paid by the purchaser to
the authorised officer on or before the fifteenth day of confirmation of
sale of the immovable property or such extended period as may be agreed
upon in writing between the parties.

Note:-

Please note that as per our extant guidelines, Authorised Officer can not
extend this period without approval from Financial Reconstruction and
Restructuring Group at Corporate Office..

(5) In default of payment within the period mentioned above, the deposit
shall be forfeited and the property shall be resold and the defaulting
purchaser shall forfeit all claims to the property or to any part of the sum
for which it may be subsequently sold.

Page | 20
(6) On confirmation of sale by the secured creditor and if the terms of
payment have been complied with, the Authorised Officer exercising the
power of sale shall issue a certificate of sale of the immovable property in
favour of the purchaser 7) Where the immovable property sold is subject to
any encumbrances, the authorised officer may, if he thinks fit, allow the
purchaser to deposit with him the money required to discharge the
encumbrances and any interest due thereon together with such additional
amount that may be sufficient to meet the contingencies or further cost,
expenses and interest as may be determined by him.

(8) On such deposit of money for discharge of the encumbrances, the

authorised officer may issue or cause the purchaser to issue notices to the
persons interested in or entitled to the money deposited with him and take
steps to make, the payment accordingly.

(9) The authorised officer shall deliver the property to the purchaser free
from encumbrances known to the secured creditor on deposit of money as
specified above.

(10) The certificate of sale issued shall specifically mention that whether
the purchaser has purchased the immovable secured asset free from any
encumbrances known to the secured creditor or not. It should also indicate
clearly that the sale is “as is what is where is basis”. It is advisable to get
the draft Sale Certificate approved from Financial Reconstruction and
Restructuring Group (FRRG) / Legal Department.

(11) In cases where the Bank has already initiated legal action and suit is
pending before DRT and Bank has simultaneously taken action under
SRFAESI, on completion of sale process of secured assets, Authorised
Officer should file an application before DRT informing about the sale of
secured assets under SRFAESI in the format Comments:

Under Section 13(4) (a), the Secured Creditor can take over the possession
of Assets of the Borrower by following the procedures laid down in the Act
While exercising powers conferred under this section, secured creditor may
face some difficulties, which are enumerated below.

The Secured Creditor will find it difficult to take over possession of

Secured Assets of the Borrower where only some of the Assets are charged

Page | 21
to the Secured Creditor i.e. when only immovable assets are charged to the
Secured Creditor, but movable assets are not charged to the secured
creditor. The question of handing over of possession of movable assets
(which are not secured) to the Borrower will arise. If the Borrower and/or
his representative are not present or even present refuses to take delivery
of Assets, which are not secured, to secured creditor, then the question of
delivery and custody of those movable assets will arise. In that case the
secured creditor will have to take the custody of those assets as Trustee of
the Borrower. The Secured creditor will have to exercise the powers
conferred under section 176 of Contract Act 1872.

When possession of only Plant & Machinery (which is fastened to the earth)
is to be taken but the premises (either owned or hired by Borrower) are not
Secured Assets in favour of Secured Creditor, then secured creditor will
find it difficult to take actual possession of the said Plant & Machinery as
removal of Plant & Machinery may be difficult and the Borrower/owner of
the premises may object for keeping the said Secured Assets in the said
premises, by the Secured Creditor. In this eventuality, the Secured
Creditor will require to take only symbolic possession of the Secured Assets.

If the Borrower request the Secured Creditor for taking symbolic

possession of the Assets and allow him to continue the possession of Assets,
on behalf of Secured Creditor, till the disposal of Assets, then the secured
creditor can accede to the request of Borrower and after taking symbolic
possession of the Asset the Borrower himself can be appointed as Manager
under Section 13(4)(c) of the Act and Royalty can be fixed. If Borrower, as
Manager of Assets, fails to pay Royalty to the Secured Creditor or commits
any breach of terms and conditions of his office as ‘Manager’, then the
Secured Creditor can terminate his services as Manager and can appoint any
other person as Manager.

As per Section 13(4)(a) of the Act, Secured Creditor can after taking
possession of Secured Assets can sale, lease or transfer of Secured Assets
irrespective of any of terms and conditions in the Security Agreement,
whereby Secured Creditor can sell the Secured Assets by private treaty.
Under these Rules, Secured Assets may be sold by public auction to have
transparency in the actions taken by Secured Creditor.

Page | 22
As per section 13(4) & 13(6) of the Act, the secured creditor while taking
possession of the secured assets does not get absolute right over the
property free from encumbrances. The secured creditor acquires same
rights as those of the Borrower. As a consequence thereof, auction
purchaser will acquire the same right, title and interest over the property,
which the Borrower has. As such, if there are any other charges other than
that of Secured Creditor, like Income Tax, Sales Tax, Municipal taxes,
electricity charges etc who have priority and claim over the immovable
property, then such charge will continue over the said property and auction
purchaser will require to satisfy those charges to get the property free
from encumbrances. This may result into reduction in distress value of the
secured property.

The Act is silent over the powers of Secured Creditor to decide the
objections, if any, raised by any person claiming any right, title or interest
over the property. Such person will have to move Debt Recovery Tribunal
and bring orders/directions to secured creditor. Unless such orders are
received, secured creditor can proceed further in the matter by overlooking
the objections of that person.

If the immovable property is in possession of tenants, then it may

substantially reduce the distress value of the property as under most of the
State Act, tenants are protected. Tenants cannot be evicted from the
premises. The immovable property will be required to be sold by protecting
tenancy rights of the tenants. The Auction purchaser will not get vacant
possession of the premises. This may result in a situation that there may not
be Bidders to such immovable properties or the properties will fetch very
low bid.

Moreover, when the property is sold, the Certificate of Sale is required to

be registered with Sub-Registrar of Assurances in whose jurisdiction
immovable property is situated. On the Certificate of Sale, the stamp duty
is required to be paid on the market value (as notified by Government) of
property irrespective of the Auction Price. The stamp duty and other
Registration costs are to be borne by the successful purchaser only.

If there are no Bidders or Bids are less than the reserved price, then it will
be difficult for secured creditor to sell the properties. In that case, at
present, the secured creditor will be left with no alternative but to file

Page | 23
recovery proceedings before Debt Recovery Tribunal or competent Civil
Court to recover the dues by presuming that there is no recovery from the
Borrower, unless borrower consents to sell property below reserved price.

As per section 13(4)(b) it is stipulated that, the secured creditor can take
over of the Management of Secured Assets but it is not stipulated of taking
over of Management of business or concern of the Borrower. However,
Section 15 & 16 of the Act deals with the provisions after taking over of
management of business of Borrower by Secured Creditor. The substantial
provisions in Section 13(4)(b) is silent over taking over of business of
Borrower, secured creditor may find it difficult to take over of Management
of business or concern of the Borrower. There is possibility of two
interpretations of provisions of section 13(4)(b) of the Act. If strict
interpretation of this provision is made then it may be argued that secured
creditor can only take over of Management of Secured Asset and secured
creditor is not entitled to take over of Management of business concern of
Borrower.

Though theoretically these two interpretations are possible, once the

Management of Secured Assets is taken over by the Secured Creditor, it
will be practically result into taking over of management of the business of
Borrower by the Secured Creditor as in most of the cases all movable and
immovable properties of the concern of the Borrower are given as security.
Section 15 & 16 contemplates empowering Secured Creditor to take over
Management of business of the Borrower. At present the provisions of
section 13(4) (a) and 13(4)(b) are synonyms to each other.

Page | 24
 Recovery of Debts Due to Banks and Financial Institutions Act 1993

Introduction:

The Recovery of Debts Due to Banks and Financial Institutions Act

1993(The Act) has been enacted for speedy and expeditious adjudication
and recovery of debts due to Banks and Financial Institutions and to deal
with other incidental matters through Debt Recovery Tribunals.

The Act has come into force on the 24 th June 1993. The Act extends to
whole of India except the state of Jammu and Kashmir

The provisions of this Act shall not apply where the amount of debt due to
any Bank or Financial Institution or to a consortium of Banks / Financial
Institutions is less than Rs. Ten Lacs.

“Debt” under Section 2(g) of the Act means 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 secure 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 mortgage and subsisting on, and legally recoverable
on, the date of application.

The Act indicates that its provisions are in favour of Banks and Financial
Institutions as if the debt to be recovered is a Tax. Provisions of Income
Tax Act 1961 and Income Tax (Certificate Proceedings) Rules 1962 for
recovery have been made applicable.

A Bank can file an application for the recovery of debt, due from the
defaulting borrower. However in such application the borrower can set up
counter claim against the Bank. Such counter claim may be in the nature of a
claim for damages or otherwise. Such counter claim has to be filed before
the borrower has delivered his defense or before the time limited for
delivering his defense has expired.

Important Provisions of the Act:

Page | 25
Section 17 Jurisdiction, Powers and Authority of the Tribunal – Under the
provision of this Act, the Tribunal is to exercise the jurisdiction and
authority to entertain and decide application from Bank’s and Financial
Institutions for recovery of debt due. The clause 2 provides for jurisdiction
power and authority of Appellate Tribunal to entertain appeals against the
orders of the Tribunal.

Section 18 Bar of Jurisdiction – On and from the appointed day, no court or

other authority shall have, or be entitled to exercise, any jurisdiction,
powers or authority (except Supreme Court and a High Court exercising
jurisdiction under Articles 226 and 227 of the Constitution) in relation to
the matters specified in Section 17.

Section 20 Appeal to the Appellate Tribunal against the orders of the

Tribunal – Any person aggrieved by an order of the Tribunal may within 45
days from the date on which a copy of the order is issued to him, prefer an
appeal to the Tribunal.

Section 27 Stay of Proceedings under Certificate and amendment or

withdrawal thereof – The Presiding Officer has been empowered to grant
time for payment of amount notwithstanding that a certificate has been
issued to the Recovery Officer. However it is the duty of the Presiding
Officer to inform to the Recovery Officer about the amount paid as well as
time granted for payment of such amount.

Section 30 Appeal against the order of the Recovery Officer – Any person
aggrieved by an order of the Recovery Officer may within 30 days from the
date on which a copy of the order is issued to him, prefer an appeal to the
Presiding Officer of the Tribunal.

Section 34 Act to have overriding effect – The provisions of this Act shall
have effect notwithstanding anything inconsistent therewith contained in
any other law for the time being in force or in any instrument having effect
by virtue of any law other than this Act. The Provisions of this Act or the
rules made there under shall be in addition to and not in derogation of the
IFCI Act 1948, SFC Act 1951, UTI Act 1963, IRBI Act 1984 and Sick
Industrial Companies (Special Provisions) Act 1985 and SIDBI Act 1989.

Important;

Page | 26
1. Before preparing filing of suit, it is mandatory for branches to seek
approval from competent authority at Corporate Office for filing of suit
at DRT. At present, the authority for approval lies with the authority,
one level higher, to the authority in whose powers, the sanction of the
facilities falls. In any case, the matter is to be referred to Financial
Reconstruction and Restructuring Group of the bank for approval..
2. Ensure that the Account has been classified as Non Performing Asset.
However this is not necessary, the account may have been recalled on
other deficiencies also.
3. Ensure that Branch has identified an advocate for handling the case at
DRT and that the advocate is on the approved panel of the bank and that
appointment of the advocate is approved by Financial Reconstruction and
Restructuring Group / Legal Department.
4. The due diligence on documents/securities is to be carried out to ensure
that the documents are not time barred and that advocate approval to
the loan documents is available to that effect.

Procedure for issuing legal notice:

1. Branch to verify once again that the documents are signed by the
Borrower / Guarantors as the case may be and are filled in all
respects and no column is left blank. Prepare a photocopy set of all the
documents and a brief history of the account and hand it over to the
advocate for issuing legal notice. Identify the parties to the suit. In
general, the borrower, all the personal guarantors in individual capacity,
Corporate Guarantor in Corporate capacity, Partnership firm in its
capacity as firm and all partners in their individual capacity, Any
Mortgagor of the property, Any other party such as Joint Charge Holder
banks etc. should be made party. It should be ensured that wherever we
have guarantee from partnership firm ,all the partners are individually
made party to the suit in addition to the firm. In case of bills of
exchange, both the drawer and drawee and other parties to the Bill of
Exchange will have to be made parties.
2. Before finalizing the figure for legal notice, branch should ensure that all
interest, compound interest, penal interest and charges as applicable
have been debited. Since Compounding of Penal Interest is not permitted
as per the decision of the Hon’ble Supreme Court, branch should identify
the impact of compounding of the interest from the date of

Page | 27
 classification as NPA and intimate to advocate so as to reduce the claim
amount by such impact..
3. The future interest rate should be determined on the basis of sanction
terms approved by Corporate Office and as per acceptance letter from
the borrower at the time of availing the facilities..
4. Branch should obtain the draft copy of the legal notice and shall review
the same and ensure that all the details pertaining to the parties to the
suit, outstanding amounts and our claims including future interest, details
of securities including mortgaged properties have been correctly
mentioned. If need be, the same may be referred to Financial
Reconstruction and Restructuring Group (FRRG) / Legal Department for
opinion.
5. Legal notice should be issued to all the parties to the suit by the
advocate returnable in 15 -–21 days and should be sent by Registered
Post A. D. to all the parties. (In case of a Notice for winding up of the
company , it is mandatory to give e 21 days time in terms of section 434
of the Companies Act, 1956).
6. Branch should obtain the acknowledgement of the mail from advocate and
put them in file.

Procedure for preparing Original Application:

1. The main suit application to be filed at DRT is called Original Application

(OA). During the notice period, Branch should keep in touch with the
advocate and ensure that the Original Application is ready.
2. Original Application is basically a very simple application before the
Presiding Officer, Debt Recovery Tribunal which states the details of
related parties with their addresses, the facts of the case beginning
from our Sanctioning the Credit Limits, enhancements, review and any
amendments etc., Details of terms and conditions of the sanction,
Statement of Accounts of each account with up-to date interest, details
of claims by the bank from various parties and details of relief sought by
the bank from the Tribunal.
3. Please note that for the purpose of OA, Branch should compute liability
of each account with all interest, compound interest, penal interest and
other charges till the date of filing of suit. Branch may tentatively fix
the date and prepare on that basis. Please indicate separately that penal
interest has not been compounded and if compounded indicate the amount
of impact of the same in the amount claimed so that ti could be adjusted.
Page | 28
4. As per our Bank’s extant guidelines, apply the interest calculated in each
account and print the up to date statement. Branches should note to
amend the interest rate to “Zero %” from the date of filing suit in the
Equation from the date of filing of OA at DRT.
5. Branch to obtain the draft of OA from the advocate and again scrutinize
the facts and figures in detail. This is the most crucial stage and nothing
should left out.
6. Branch should also discuss with advocate about interim relief’s/
injunction as per Section 19(12) of the Act, to be sought for in this
matter.
7. Interim Relief are orders from DRT, pending final disposal of the matter,
which helps the bank to protect its security deterioration, prohibit the
borrower to diverse the money, prohibits on creation of any further
charge or alienate or transfer the assets in the name of the borrower
and also in the name of guarantors and appointment of receiver on
properties which are given on rentals, controlling the day to day affairs,
directing the borrower to exclusively deal with the applicant bank etc.
Interim Relief may be requested based on each case. Please note that in
case of running units, most of the times, there is compromise at the
stage of interim relief. (Please refer Code of Civil Procedure, Order 39
Rule 1 and

In each case, we have to identify the interim relief’s relevant and seek
such relief’s from DRT.

8. Branch should get ready the Original Application wherein Certified Copies
of all the Loan Documents (Not Original as Original are filed at Later
Stage of Proceedings), Certified Copy of the Statement of each Account
as explained above, Demand Draft in favour of Registrar DRT for the
Court Fee Amount etc. The attestation as contemplated in sub-clause 2
of Rule 9 of the Procedure Rules 1993 shall be made at the end of the
document in the form given below:

“This annexure-is the true copy of the original document”

(Signature)

Page | 29
 Name and designation of the authorized person with date

This attestation shall also be necessary in respect of Xerox copies of

documents, which should be clear and legible.

9. Branch should also prepare certificate as required by Debt Recovery

Tribunal for maintaining computerized accounts and the procedure of
maintaining and assessing Bank’s database etc. The certificate should be
prepared in prescribed format from DRT but incorporating details of our
Bank’s IT systems. IT Department at Corporate Office may be consulted
for the same.
10. Please note that each page of the Original set of the OA is containing
Bank’s round seal at the bottom of the page.
11. Branch to get ready copy of the OA for each counter party ( and
Defendant), Advocate and for Bank’s records. Please note that copy of
the OA needs to be served to all the defendants but only after lodging
and interim relief as per directions of DRT..
12. Branch should ask the advocate to prepare an application seeking interim
relief and also an affidavit in support of the same. Generally the
Presiding Officer wants to know why interim relief should be given,
Hence we need to file affidavit explaining the circumstances and
especially highlighting the threats to the securities and assets. Branch
should identify certain events which can be quoted in support of our
arguments for the same.

As per Section 19(13)(A) of The Act, if the Tribunal is satisfied by

affidavit or otherwise that the defendant intended to obstruct, delay or
frustrate, the execution of any order for Recovery of Debt, Defendant is
about to dispose of the whole or part of the property, Defendant was
about to remove the whole or any part of property from local limits of
the Tribunal and / or the defendant was likely to cause any damage or
mischief to the property or affect the value of such property by misuse
like creation of third party interest etc., The Tribunal may issue
injunction order against the Defendants.

In this case the Tribunal can direct the defendant either to furnish the
security within such time as may be specified and in such sum as may be
specified for the purpose of producing and placing at the disposal of the
Tribunal, such property of the same value.

Page | 30
 As per Section 19(13) (B) of The Act, if the defendants fails to show
cause as to why he should not be directed to furnish security or fails to
furnish security as directed within such time as prescribed, the Tribunal
may order attachment of whole or any part of such property claimed by
bank and owned by defendant and which may appear sufficient to satisfy
the decree.

13. The Branch Head or the officer of the Branch holding Power of
Attorney from the Bank to go to DRT along with the advocate and tender
the OA before the Registrar as per the time frame of each Debt
Recovery Tribunal. Registrar will review the contents and issue Lodging
No. of the case. Then the Registrar will inform the objections
(irregularities in application) if any, the same need to be rectified /
removed by the branch. On removal of all the objections, OA No. of the
case will be given. Branch should remove the objections and / or comply
with the directions given by DRT within 7 days from the date of display
on the notice board, which may be extended by the Registrar for reasons
to be recorded up to 30 days. If the Branch fails to remove objections
or comply with the directions within the prescribed time limit, the
Registrar may for reasons to be recorded in writing, decline to register
the Application.

The DD/PO paid towards the fees will not be encashed by the DRT till
the application is registered and in case where registration is declined,
the DD / PO shall be returned to the applicant after the appeal period is
over. Branches should ensure that OA is never rejected at this stage.

14. Now the OA is ready for placing before the Presiding Officer. First the
interim relief application needs to be decided. The Registrar will forward
the case file to the Presiding Officer wherein branch officials may call
along with the advocate and present the matter for granting of interim
relief. (This process is done before serving of the summons to all other
parties.)
15. The Presiding Officer will allow the interim relief and the order will be
passed. The order along with other case documents need to be served to
all the defendants and is generally returnable within 15 days when the
interim relief sanctioned may be confirmed.
16. Now the OA will proceed in its usual course. In case branch is not able to
serve the summons or any other order of the Tribunal in person / fax or

Page | 31
 otherwise, the same can be done by Publication in Local News Paper after
obtaining order from the Tribunal to that effect.
17. One very important point for inclusion in OA is asking for Partial
Recovery Certificate on the basis of Admitted Liability. This helps in fast
disposal of the matter. Branch may discuss with the advocate and among
others, ask for relief by way of admitted liability as per Audited Balance
Sheet of the borrower or admission of liability made in the written
statement filed by the Defendants. (This is not available on the basis of
Acknowledgement of Debt, as AOD is one of the loan documents.)

Flow of Original Application at DRT

1. After serving of the summons to all the defendants, Branch should file an
affidavit with the Registrar for service.
2. Now the case is marked for reply from the defendants on the application
of interim relief and the counter say as to why this relief should not be
confirmed.
3. Further the case is also for appearance of all the defendants. Generally
after service, the Registrar will give 2-3 dates and if no one appears then
the matter will be listed on regular board of the Presiding Officer for
Ex-Party Orders.
4. In case of appearance of all the defendants, the matter will remain with
the registrar for filing say on application of interim relief. Once the
reply is filed, the matter will be listed on regular board of the Presiding
Officer for further progress.
5. The Presiding Officer will hear the matter and necessary orders on
interim relief will be passed.
6. The DRT will now call written statement by all the defendants. This is
reply of all the defendants including their objections on any fact /
document / terms and conditions and their own reply in this matter.
Generally 3-4 week period is given to all the defendants for filing of WS.
In case WS is not filed, the case may be adjourned for 2-3 hearings and
then proceed for Ex-Party Judgment.
7. The defendants desirous of seeking inspection of original documents in
the custody of the Bank shall make an application within 10 days from the
date of his appearance in the proceeding.
8. In case the WS is filed, the branch is required to file their Claim
Affidavit with Original Documents. This is the stage of filing all original
documents. After the written statement is filed, the Applicant Bank has
Page | 32
 to file the Claim Application and Original Documents (CAOD). Then time
is given to the defendants to file their say and Objections on the
Applicant Bank’s CAOD.
9. After filing of the CAOD, the Presiding Officer will hear the arguments
of both the sides and then the matter will be decided and the Presiding
Officer will give the order. We presume that the decision is in favour of
the bank and hence this Order will be called the “Decree”. In case of any
adverse order against the bank, branch should immediately prepare for
filing of Appeal at Debt Recovery Appellate Tribunal against the orders.
Please note that the time limit for filing the appeal is 45 days from the
date of order passed at DRT as per Section 20 of RDBF Act.
10. At times it is observed that the defendants apply for Cross Examination
just with the intention of delaying the matter. Rule 12(7) provides that
if a defendant denies his liability to pay the claim made by the
applicant, the Tribunal may act upon the affidavit of the applicant who
is acquainted with the facts of the case. In this Rule, which deals with
the consideration of the applicant's bank application, there is no
reference to the examination of witnesses. This sub-rule refers only
to the affidavit of the applicant. Rule 12(6), on the other hand,
provides that the Tribunal may, at any time, for sufficient reason order
a fact to be proved by affidavit or may pass an order that the affidavit
of any witness may be read at the hearing. It is in the proviso to this
sub-rule that a reference is made to the cross - examination of
witnesses. It is common knowledge that hardly any transaction with the
Bank would be oral and without proper documentation, whether in the
form of letters or formal agreements. In such an event the bona fide
need for the oral examination of a witness should rarely arise. There has
to be a very good reason to hold that affidavits, in such a case, would not
be sufficient. (Refer CASE NO.: Appeal (civil) 4679 of 1995 UNION OF
INDIA & ANR. Vs. RESPONDENT: DELHI HIGH COURT BAR
ASSOCIATION & ORS. DATE OF JUDGMENT: 14/03/2002 BENCH: B.N.
Kirpal, Y.K. Sabharwal & K.G. Balakrishnan)
11. In case of decree, the Presiding Officer will order for issuance of
“Recovery Certificate”. Section 19(22) of The Act requires that the
Presiding Officer of the Tribunal shall issue a Recovery Certificate under
his signature on the basis of Order of the Tribunal in favour of the
Recovery Officer for recovery of the amount in question. Branch should
visit the typing clerk and check that the recovery certificate is drawn

Page | 33
 correctly as per the orders and includes the costs incurred by the Bank
for the legal action.

Recovery Proceedings

1. With the issuance of the Recovery Certificate, the recovery process

will start by the recovery officer.
2. Branch should coordinate preparation of the “Demand Notice” in the
prescribed format (given in DRT manual) in favour of all the defendants
and get the same signed by the Recovery Officer and serve the same to
all the defendants in person / registered post / fax etc. whatever means
possible. Please note that the details in Demand Notice should be strictly
as per Recovery Certificate.
3. After serving of the demand notice, branch should file a service
affidavit to the Recovery Officer. In case the defendants deposit the
amount demanded in the demand notice and satisfies the recovery
certificate, the process comes to an end. Else branch need to proceed
further for recovery.
4. The various ways of recovery and processes involved are discussed
hereunder point wise:

Declaration of Assets:

1. The Recovery Officer as per Section 28(4A) of The Act may order at
any stage of the execution of the certificate of recovery, to any person
or company and to its officers, against whom the certificate of recovery
is issued, to disclose and declare on affidavit the particulars of his or its
assets.
2. Branch should use this tool and approach the Recovery Officer
immediately on the beginning of execution of recovery process to obtain
these details, as it will help in getting information on other assets of the
judgment debtors that are not to the knowledge of the bank.

Attachment and Sale of Movable or Immovable Property

(Hypothecated / Mortgaged):

1. Generally Bank’s Charge on the mortgaged properties is declared in the

Recovery Certificate. However branch should file an application for
attachment of mortgaged property accompanied with an affidavit. As per

Page | 34
 Section 19(14), the application for attachment should clearly indicate the
specific details and value of the property to be attached.
2. The Recovery Officer will issue the Attachment Order. Section 19(15)
empowers the Tribunal to direct conditional attachment of whole or any
part of the property. Branch needs to serve this order and proceed for
attachment of the property.

- First branch officials along with the advocate and the Recovery
Inspector (In case the Recovery Inspector does not accompany,
branch should get an order from the Recovery Officer to execute the
attachment order) may visit to the attached property and ask the
Judgment Debtors to acknowledge the attachment order.
- At the same time, branch officials may affix a copy of the attachment
order on the conspicuous part of the property. A Black Board duly
painted may be used depending on the size of the property and also
depending on the kind of the property. If borrowers are reputed, this
exercise helps to bring them to negotiating table and settle the dues.
- After affixing the copy of order or putting the board, a panchnama
needs to be prepared detailing the entire process and should be got
signed by some independent witness.
- If Recovery Inspector has not accompanied the branch officials,
branch may file an affidavit confirming the execution of attachment
order.
- Some times the borrowers create lots of problem in execution of
these processes, in such case branch through the Recovery Officer
should approach the Police and ask for Police Protection to perform
the execution of the orders.
- A copy of the attachment order should also be served to the Sub
Registrar for recording of attachment on the Property Card. It will
help to protect from any 3rd party charge to be created by the
owners.

3. After filing of the affidavit, the Recovery Officer will issue notice to all
the defendants for settling terms and conditions of the proclamation of
sale. Branch should obtain this notice and serve the same to all the
defendants in person / registered post / fax etc. whatever means
possible.
4. During the notice period, branch should get the valuation of the property
through some approved valuer on the DRT panel. The copy of the report
Page | 35
 should be submitted to the Recovery Officer that will help to fix the
minimum reserve price.
5. On the date decided for settling the terms and conditions for
proclamation of sale (if no objection is raised from the defendants and
matter is not stayed), the Recovery Officer will issue the Proclamation of
Sale and Public Notice. The Proclamation of Sale will detail the Minimum
Reserve Price, Bid Deposit Amount, Date, Time and Venue of auction and
other terms and conditions of the auction / sale.
6. Branch should obtain the proclamation of sale and public notice and
arrange publication of public notice in leading local Newspapers. However
branch may opt for National Papers also depending upon the kind and
value of property and availability of expected bidders. It should be
ensured that the public notice is published in the paper 30 days prior to
the date of auction.
7. Now Branch to explore local buyers of the property and show them the
property, In case the property is not in possession of the bank, the
Recovery Officer will fix a date for inspection of the property after
serving a notice to the defendants.
8. On the auction date, branch officials should be present in DRT. Branch
should ensure that the expected bids are tendered with the recovery
officer before the cut off time.
9. At the time of opening of bids, the Recovery Officer will prepare a Bid
Sheet for Ist Bid and announce the bid amounts and name of the parties.
Then opportunity will be given for improving the bids. Branch officials
should use their relations with bidders and explore to get the bids
improved to the best possible. Again the 3rd and Final Bid will be called
and all the bidders would be asked to improve. If the Maximum Bid
Amount (if other wise in order) is greater than the Minimum Reserve
Price, the bidder will be declared successful bidder. The Recovery
Officer will issue a written order for the same. The successful bidder
will be required to deposit the remaining amount as per terms and
conditions of the proclamation.
10. The bid amount is to be deposited by the bidder with in 15 days and sale
confirmation will be done at the end of 30 days. Branch to keep in touch
with the bidder and ensure that the bid amount is deposited on time.
Immediately on completion of 30 days, the bidder and the branch should
call on the Recovery Officer and obtain an order for Confirmation of

Page | 36
 Sale. With the issuance of Confirmation of Sale, the sale becomes
absolute.
11. Now the bidder can take possession of the property, if the defendants
who have possession of the property create any obstacles, the buyer may
approach the Recovery Officer and may take possession of the property
with his help and police protection. However there is no role or
responsibility of the bank in this process and it does not affect the
branch claim on the amount of sale received by DRT.
12. Branch should file an application with the Recovery Officer for
disbursement of the amount of auction to part / full satisfaction of the
claim amount and shall obtain the proceeds as soon as possible to avoid
any complication at a later date. AS per Section 19(19) of The Act in case
of priority of other creditors, Adjudicating Officer (Presiding Officer in
DRT) has powers to distribute the sale proceeds in accordance with
inter-se agreement / arrangement between them and to the other
persons entitled thereto in accordance with the priorities in the law.
13. The bidder is required to deposit the poundage fee and get the Sale
Certificate issued in his name from DRT. This sale Certificate is basically
Title Deed of the property and needs to be registered with the Sub
Registrar Office immediately but not later than 120 days. Please note
that in case of delay beyond 30 days, the penalty is imposed by the
Registrar and hence should be taken care properly. However there is no
role or responsibility of the bank in this process.
14. As per Section 19(23), in case that a property is situated in jurisdiction
of another Tribunal, the copy of the Recovery Certificate may be sent to
that Tribunal for execution.

Attachment and Sale of Movable or Immovable Property of Guarantors:

1. In case the claim amount can not be settled by the mortgaged

property or auction / sale of the mortgage property has failed or
prime facie, it appears that the recovery from other than mortgaged
property is necessary, branch may obtain the details of the properties
owned by the guarantors. It is not necessary to wait for exploiting
the mortgaged property before proceeding against the guarantors
personal assets. Hence branches should file application for
attachment of identified personal assets immediately after serving
of demand notice.

Page | 37
 2. After ascertaining the details of the property from the Net Worth
Statement filed at the time of applying for the credit facilities or
from market sources or personal contacts, branch should obtain the
Property Card of this property from the office of Sub Registrar. This
Property Card will act as a proof of ownership for the Recovery
Officer as well disclose any other charges on this property.
3. Branch should now file an application before the Recovery Officer
duly accompanied with an affidavit and the original property card for
attachment and auction / sale of the property of the guarantors
(defendants).
4. Now the procedure as explained above under “Attachment and Sale of
Mortgaged Property” point 2 to 13 needs to be followed.

Appointment of Receiver for management of the movable or

immovable properties of the defendant:

1. For the purpose of attachment / auction / sale of the current assets

i.e. Stocks in the form of Raw Material, Work in Progress, Finished
Goods, Other Materials etc. and for collection of rentals etc. for the
tenanted area, if any belonging to any of defendants, it is advisable
to get appointment of Receiver for this purpose. The Tribunal has
powers to appoint receiver as per Section 19(18) of The Act.
2. After ascertaining the details of the assets / rentals, an application
along with affidavit may be filed with the Recovery Officer for
appointment of Receiver for performing certain specified acts. “The
Receiver being the officer of the Court from whom he derives his
appointment, his possession is exclusively the possession of Court,
the property being regarded as in the custody of law, in gramio legis
for the benefit of whoever may be ultimately determined to be
entitled thereto.”
3. The Recovery Officer after hearing the defendants may appoint any
outside agency on his panel, any officer of the branch or any agency
as prescribed by the branch as Receiver and will issue an appointment
letter to the receiver.
4. For the purpose of suggesting the name of the Receiver, branch
should consult and obtain concurrence of the Corporate Office.
5. On issuance of the appointment letter, the Receiver may do all such
acts as taking possession of current assets, arranging its valuation

Page | 38
 and finally auction / sale. The receiver may also call the tenants to
deposit the rent and keep the same in a designated account.
6. Branch may periodically review the balance outstanding and approach
the Recovery Officer for release of funds to the bank for part / full
settlement of bank’s dues.

Arrest of the defendants and Detention in Prison:

1. The Recovery Officer has got powers to arrest / detain for

imprisonment in civil prison up to 6 months, any judgment debtor .
2. This kind of order is however available under extreme
circumstances where the borrower despite having substantial means
of repayment / enough cash generation and living lavish life is not
coming forward for making any payment. Further the recovery is not
forthcoming by any other means such as auction / sale of mortgaged
assets or hypothecated assets etc.
3. Branch should in consultation with the advocate has to prepare a
detailed application duly furnishing the details of assets owned,
business enterprises run etc. so as to emphasize that the defendants
have means to pay and it is only intentional that they are avoiding the
payment to bank.
4. The Recovery Officer will give notice to the defendants and the
matter should be got argued through our advocate / branch officials.
May be the defendants come out with some OTS offer; branch
officials may intimate to DRT that the same will be forwarded to CO
for approval. However branch should insist on some down payment to
prove credentials and seriousness to the issue.
5. In case the Recovery Officer is convinced, he will pass order for
arrest and 6 month imprisonment. After such order, the Recovery
Officer will direct the bank to deposit the subsistence allowance of
the “Jail” in the Treasury. For this purpose, branch may approach Jail
Authorities on the basis of order and obtain the Challan that will be
used for such deposit.
6. Once these formalities are over, the Recovery Officer will issue a
Warrant to the Commissioner of Police for arrest of the named
persons and present before him immediately. Branch should
coordinate with the local police station and inform them whereabouts
of the defendant and get him arrested. (In Mumbai DRT, since the
arrest is under Income Tax Act, the Police are agreeable to give only
Page | 39
 protection and they have advised that only the Recovery Officer
should make arrangements for the arrest like he should send the
Recovery Inspector for arresting the person)
7. The Recovery Officer may again give an opportunity to the
Judgment Debtor and may agree to defer or cancel the arrest, if they
offer some down payment. Else the Judgment Debtor could be sent
for a maximum of 6-month civil imprisonment. The Recovery Officer
may also cancel the arrest warrant in view of serious illness of the
Judgment Debtor and / or if the Judgment Debtor is a Minor or a
Lady.

“This however should be used as a last tool because in this process

branch may loose relationship / eye contact with the customer which is
the most important factor for recovery. Branch Official should always be
courteous to the defendants and express that such an act is against their
wish and persuade them to pay book the amount and seek time for
further payment or come for settlement etc.”

8. Powers to Impound Passport:

1. If a borrower is frequently visiting outside India and not cooperating

in the recovery process and also not coming forward to settle the
bank’s dues, Branch may file an application accompanied by affidavit
and request the Recovery Officer to restrain the defendant from
visiting outside India without express consent of the tribunal.
2. If branch is able to get the Passport Number of the defendants
through Travel Agents / Air Lines etc., then prayer to the Recovery
Officer may be made for impounding of Passport of the defendants.
3. The order of the Recovery Officer passed in this case may be served
to the Immigration Department so that they will impound the passport
whenever the defendant proceeds outside India.

Other Modes of Recovery:

1. As per Section 28 of RDBFI Act, the Recovery Officer has ample

powers to recover the amount of the Recovery Certificate by other
means such as recovery of any amount recoverable from any other
person. This generally covers – receivables, inter-corporate deposits,

Page | 40
 security deposits with vendors / Govt. Dept. and with any court and
any claim respecting any property etc.
2. To exercise this option, on exploiting all opportunities available, by
way of mortgage / hypothecation etc., branch may file an application
before the Recovery Officer, on the strength of Book Debt
Statement or Audited Balance Sheet or any other information which
the branch have in its custody and can satisfy the Recovery Officer
that there is an amount due and payable by other party to the
judgment debtor, for recalling that amount towards satisfaction of
decreed dues of the bank.
3. The Recovery Officer may direct such person / company / firm etc.
whom so ever to directly pay / deposit the amount due and payable to
the judgment debtor.
4. On receipt of the same, branch may obtain the amount from DRT.

Filing of Caveat –

Caveat is an application filed in a Court that protects any ex-party order

against the Caveator as the matter will be heard only after servicing of
summons to the Caveator. When we expect that any aggrieved party may file
an appeal against any of the orders passed by DRT / DRAT / High Court and
depending upon the gravity of matter, if we want to avoid any ex-party
order, Branch may after obtaining permission from Corporate Office file a
Caveat in Appellate Court (DRAT against DRT orders; High Court against
DRAT Orders and Supreme Court against High Court orders).

Condonation of Delay in filing Appeal - In case branch has to file an appeal

against any adverse order of DRT, the process has to be completed within
45 positively. Similarly the appeal should be filed within 30 days against the
orders of the Recovery Officer. However under extreme circumstances,
there is provision for Condonation of delay in filing the Appeal and that
opportunity can be availed. The Appellate Tribunal may entertain an appeal
after the expiry of said period if it is satisfied that there was sufficient
cause for not filing it within that period.

Unintentional Violation of Court Orders and Contempt – Branches should

invariably strictly adhere to and comply with the orders of every competent
authority and there is no discretion available to branches to violate the
orders of Court. This will also help the branches and officials working to

Page | 41
avoid any contempt proceeding. In case of any un-intentional violation due to
lack of communication or other wise, the matter should be referred to
Corporate Office immediately.

Page | 42
Criminal complaint by filing of application under section 138 of
Negotiable instruments act, 1881 for dishonour of Cheques:

In case of dishonour of cheque for insufficiency of funds Bank can file

criminal complaint with the Magistrate under Section 138 of the Negotiable
Instruments Act, 1881. One of the requirements of the Section is that the
payee/holder in due course has given notice in writing to the drawer of the
cheque demanding payment of the cheque amount and that the drawer has
failed to make payment within 15 days of the receipt of the notice.

In the above context we have come across a judgment of the Supreme Court
in K. Bhaskaran vs. Sankaran Viadhyan Balan and another as reported in
Bankers' Journal issue of March 2000 at page no. 200. In this case the
Supreme Court has held that after the conditions of Section 138 of
Negotiable Instruments Act, 1881 are completed cause of action accrues and
even in case of unclaimed notice service will be presumed. We reproduce
below the relevant paras of the judgment.

"20. If a strict interpretation is given that the drawer should have actually
received the notice for the period of 15 days to start running no matter
that the payee sent the notice in the correct address, a trickster cheque
drawer would get the premium to avoid receiving the notice by different
strategies and he could escape from the legal consequences of section 138
of the Act. It must be borne in mind that Court should not adopt an
interpretation, which helps a dishonest evader and clips an honest payee as
that would defeat the very legislative measure.

21. Section 138 of the Act invites a liberal interpretation for the person who
has the statutory obligation to give notice because he is presumed to be the
loser in the transaction and it is for his interest the very provision is made
by the legislature. The words in Clause (b) of the proviso to section 138 of
the Act show that payee has the statutory obligation to "make a demand" by
giving the notice. The thrust in the clause is on the need to "make a
demand". It is only the mode for making such demand which the legislature
has prescribed. A payee can send the notice for doing his part for giving the
notice. Once it is dispatched his part is over and the next depends on what
the sender does."

Page | 43
The Negotiable Instruments Act, 1881 (the Act) contains provisions for
penalties in case of dishonour of cheques due to insufficiency of funds in the
account of the drawer of the cheque. As the Government found the existing
provisions contained in Sections 138 to 142 of the Act deficient in dealing
with such cases, the Act has been amended by the Negotiable Instruments
(Amendment and Miscellaneous Provisions) Act, 2002 to provide for such
reliefs.

The Central Government vide notification no. SO140(E) dated February 6,

2003, has appointed February 6, 2003 as the date on which the provisions of
the amendment Act shall come into force.

The important amendments of the Act are as under: -

Definition of Cheque: -

The definition of cheque as contained in Section 6 of the Act has been

widened to cover cheque in the electronic form as under: -

" A cheque in the electronic form means a cheque which contains the exact
mirror image of a paper cheque, and is generated, returned and signed in a
secure system ensuring the minimum safety standards with the use of
digital signature (with or without biometrics signature) and asymmetric
crypto system"

The amendment further provides for dealing with such electronic cheques
and to make the Information Technology Act, 2000 applicable to the
Negotiable Instruments Act in relation to such cheques.

Punishment for dishonour of cheque:

The punishment of imprisonment for dishonour of cheque is now increased

to 2 yrs. from 1 yr.

Period of notice:

Section 138 (1) (b) of the Act requires the payee or holder in due course to
give notice in case of dishonour of cheque within 15 days from the receipt
of information regarding dishonour of cheque. This period of 15 days has
been increased to 30 days.

Page | 44
Nominee directors excluded:

In terms of Section 141 of the Act, if the person committing an offence is a

company, every person who at the time of offence was committed was the in
charge of and was responsible to the company for the conduct of the
business of the company shall be deemed to be guilty of the offence and
therefore complaint can be filed against all the directors of the company.

However, by amendment, persons nominated as director of company by

virtue of holding any office or employment in the Central Government or
State Government or a financial corporation owned or controlled by the
Central Government or the State Government shall not be liable for
prosecution.

Discretion of the Court to entertain complaint after one month:

At present complaint under Section 138 of the Act is to be filed within one
month from the expiry of 15 days from the date of the receipt of the notice
by the drawer of the dishonored cheque. Now the amendment has allowed
discretion to the Court to entertain the complaint after expiry of one month
if the complainant satisfies the Court that he had sufficient cause for
not making a complaint within such period.

Summary trial:

The Magistrate has been empowered to try the Section 138 cases as
summary trial as provided under Sections 262 to 265 of the Code of
Criminal Procedure, 1973. The amendment also provides for trial of the case
on day-to-day basis until conclusion and to conclude the same expeditiously
within 6 months from the date of filing of the complaint.

Service of summons:

The amendment now provides for servicing of summons to the accused or

witness by the Court through speed post or by courier service approved by
a Court of Session. It is further provided that in case the accused or the
witness refused to take delivery of the summons and endorsement to that
effect from the postal department or the courier service is received, the
Court issuing the summons may declare that the summons has been duly
served.
Page | 45
Offences made compoundable:

The amendment provides that the offence punishable under the Act shall be
compoundable (means settlement for payment of money).

It may be observed that the amendments are aimed at early disposal of

cases relating to dishonour of cheques and for enhancing punishment to
drawer of the cheque. All branches are requested to take note of the above
amendments, which are effective from February 6, 2003 while issuing
notices under Section 138 of the Act and while dealing with cases filed
thereunder.

The following drafts of notices are enclosed for the use of branches and
departments at Corporate Office, to be issued on dishonour of cheque.

1. in case of cheque by a borrower as a limited company – Appendix

-XIX….
2. in case of cheque by individual borrower – Appendix XX ………
3. in case of third party cheque by limited company – Appendix-XXI……..
4. in case of third party cheque by individual – Appendix-XXII………

The above drafts may be altered to suit particular transaction. It is not

necessary to issue notice u/s 138 of NI Act through an Advocate and
therefore, the same can be issued at the Branch level. In some cases Third
party may venture into the arrangement for payment of dues and issues Post
Dated Cheques for meeting the liability, in such case we have to issue notice
in different format (See attached formats).

If the drawer of the cheque fails to pay within 15 days of the receipt of the
notice, a complaint has to be filed with the Judicial Magistrate of the first
class or Metropolitan Magistrate, as the case may be, within 1 month
thereafter. In case of any doubt or difficulty, Legal Department at
Corporate Office may be contacted.

Basic Steps of the case.

1. Notice for dishonour.

2. Filing of Complaint within limitation.
3. Issue of summons.
4. Appearance.
Page | 46
 5. Leading of evidence.
6. Cross-examination
7. Arguments
8. Judgement.

Page | 47
Declaration of the borrower as willful Defaulters

Procedure to be adopted –

On identification of any account exceeding Rs. 25 Lacs as Non Performing

Asset, branch should identify the reasons for default in repayment. If the
default has occurred due to deliberate action of the borrower and the
nature of default related to any one of the reasons prescribed by RBI (given
below for ready reference), branches are required to report the matter to
Corporate office for declaration of the name of the borrower and
guarantors in the willful defaulter’s list. The following steps need to be
taken:

a. Analyse the grounds of willful default and collect the related data and
documents.
b. Prepare a memorandum to Corporate Office committee through
Financial Reconstruction and Restructuring Group who is delegated
powers by Board to take such decision. Presently the committee
headed by Managing Director consists of any two SVPs / VPs from
Credit or Financial Reconstruction and Restructuring Group.
c. On receipt of approval from Corporate Office, a notice be sent to all
the parties i.e. the borrower and guarantors and directors as the case
may be in the prescribed format at appendix XXIII
d. In case there is no response from the borrower or other parties, the
branch may confirm the same to Financial Reconstruction and
Restructuring Group and report the name in willful defaulters list of
next quarter.
e. However there is provision to provide hearing before Grievance
Redressal Committee constituted by the bank in case the borrower
makes representation to the Branch and raises objections for such
declaration and seeks a personal hearing before Grievance Redressal
Committee. Branch should fix up an appointment through Financial
Reconstruction and Restructuring Group. The Grievance Redressal
Committee consists of Managing Director, any one of EVPs and any one
SVPs at present.

Page | 48
f. On hearing the decision of the committee, further action is to be
taken to either to report the name in willful defaulter list of next
quarter or other wise. Branch is also required to communicate the
decision to the borrower in writing.

Gist of RBI Circular on willful defaulters

Purpose

The Reserve Bank of India decided in April 1999 to introduce a scheme

under which the banks and notified All India Financial Institutions were
required to submit to RBI the details of the wilful defaulters with
outstanding of Rs.25 lakh and above. This was pursuant to the instructions
of the Central Vigilance Commission for collection of information on wilful
defaults of Rs.25 lakhs and above by RBI and dissemination to the reporting
banks and FIs.

A scheme was framed under which the banks and notified All India Financial
Institutions were required to submit to RBI the details of the wilful
defaulters. Wilful default broadly covered the following:

a) Deliberate non-payment of the dues despite adequate cash flow and

good networth;

b) Siphoning off of funds to the detriment of the defaulting unit;

c) Assets financed either not been purchased or been sold and proceeds
have misutilised;

d) Misrepresentation / falsification of records;

e) Disposal / removal of securities without bank's knowledge;

f) Fraudulent transactions by the borrower.

Definition of wilful default

The term "wilful default" has been redefined in supersession of the earlier
definition as under:

Page | 49
A "wilful default" would be deemed to have occurred if any of the following
events is noted :-

(a) The unit has defaulted in meeting its payment / repayment obligations
to the lender even when it has the capacity to honour the said obligations.

(b) The unit has defaulted in meeting its payment / repayment obligations
to the lender and has not utilised the finance from the lender for the
specific purposes for which finance was availed of but has diverted the
funds for other purposes.

(c) The unit has defaulted in meeting its payment / repayment obligations
to the lender and has siphoned off the funds so that the funds have not
been utilised for the specific purpose for which finance was availed of, nor
are the funds available with the unit in the form of other assets."

Diversion and siphoning of funds

The terms "diversion of funds" and "siphoning of funds" should construe to

mean the following:-

2.2.1 Diversion of funds, referred to at para 2.1(b) above, would be construed

to include any one of the undernoted occurrences:

(a) utilisation of short-term working capital funds for long-term purposes

not in conformity with the terms of sanction;

(b) deploying borrowed funds for purposes / activities or creation of

assets other than those for which the loan was sanctioned;

(c) transferring funds to the subsidiaries / Group companies or other

corporates by whatever modalities;

(d) routing of funds through any bank other than the lender bank or
members of consortium without prior permission of the lender;

(e) investment in other companies by way of acquiring equities / debt

instruments without approval of lenders;

Page | 50
(f) shortfall in deployment of funds vis-à-vis the amounts disbursed /
drawn and the difference not being accounted for.

2.2.2 Siphoning of funds, referred to at para 2.1(c) above, should be

construed to occur if any funds borrowed from banks / FIs are utilised for
purposes un-related to the operations of the borrower, to the detriment of
the financial health of the entity or of the lender. The decision as to
whether a particular instance amounts to siphoning of funds would have to
be a judgment of the lenders based on objective facts and circumstances of
the case.

The identification of the wilful default should be made keeping in view the
track record of the borrowers and should not be decided on the basis of
isolated transactions/incidents. The default to be categorised as wilful must
be intentional, deliberate and calculated.

End-use of Funds

The following are some of the illustrative measures that could be taken by
the lenders for monitoring and ensuring end-use of funds:

(a) Meaningful scrutiny of quarterly progress reports / operating

statements / balance sheets of the borrowers;

(b) Regular inspection of borrowers' assets charged to the lenders as

security;

(c) Periodical scrutiny of borrowers' books of accounts and the no-lien

accounts maintained with other banks;

(d) Periodical visits to the assisted units;

(e) System of periodical stock audit, in case of working capital finance;

(f) Periodical comprehensive management audit of the 'Credit' function of

the lenders, so as to identify the systemic-weaknesses in the credit-
administration.

Penal measures

Page | 51
There are certain penal measures prescribed against such willful defaulters:

- To prevent the access to the capital markets by the wilful defaulters, a

copy of the list of wilful defaulters (non-suit filed accounts) and list of
wilful defaulters (suit-filed accounts) are forwarded to SEBI by RBI and
CIBIL.

- It has been stipulated by RBI that No additional facilities should be

granted by any bank / FI to the listed wilful defaulters. In addition, the
entrepreneurs / promoters of companies where banks / FIs have identified
siphoning / diversion of funds, misrepresentation, falsification of accounts
and fraudulent transactions should be debarred from institutional finance
from the scheduled commercial banks, Development Financial Institutions,
Government owned NBFCs, investment institutions etc. for floating new
ventures for a period of 5 years from the date the name of the wilful
defaulter is published in the list of wilful defaulters by the RBI.

It is also advised that the legal process, wherever warranted, against the
borrowers / guarantors and foreclosure of recovery of dues should be
initiated expeditiously. The lenders may initiate criminal proceedings against
wilful defaulters, wherever necessary.

Important Note: A covenant in the loan agreements, with the companies in

which the banks / notified FIs have significant stake, should be
incorporated by the banks / FIs to the effect that the borrowing company
should not induct a person who is a promoter or director on the Board of a
company which has been identified as a wilful defaulter and that in case,
such a person is found to be on the Board of the borrower company, it would
take expeditious and effective steps for removal of the person from its
Board.

It would be imperative on the part of the banks and FIs to put in place a
transparent mechanism for the entire process so that the penal provisions
are not misused and the scope of such discretionary powers are kept to the
barest minimum. It should also be ensured that a solitary or isolated
instance is not made the basis for imposing the penal action.

Guarantees furnished by group companies

Page | 52
While dealing with wilful default of a single borrowing company in a Group,
the banks / FIs should consider the track record of the individual company,
with reference to its repayment performance to its lenders. However, in
cases where a letter of comfort and / or the guarantees furnished by the
companies within the Group on behalf of the wilfully defaulting units are not
honoured when invoked by the banks / FIs, such Group companies should also
be reckoned as wilful defaulters.

Criminal Action against Wilful Defaulters

J.P.C. Recommendations

(a) It is essential that offences of breach of trust or cheating construed

to have been committed in the case of loans should be clearly defined under
the existing statutes governing the banks, providing for criminal action in all
cases where the borrowers divert the funds with malafide intentions.

(b) It is essential that banks closely monitor the end-use of funds and
obtain certificates from the borrowers certifying that the funds have been
used for the purpose for which these were obtained.

(c) Wrong certification should attract criminal action against the

borrower.

It should also be ensured that the penal provisions are used effectively and
determinedly but after careful consideration and due caution. Towards this
end, banks / FIs are advised to put in place a transparent mechanism, with
the approval of their Board, for initiating criminal proceedings based on the
facts of individual case.

5. Reporting names of Directors

RBI / CIBIL disseminate information on non-suit filed and suit filed

accounts respectively, as reported to them by the banks / FIs and
responsibility for reporting correct information and also accuracy of facts
and figures rests with the concerned banks and financial institutions.
Therefore, banks and financial institutions should take immediate steps to
update their records and ensure that the names of current directors are
reported. In addition to reporting the names of current directors, it is
necessary to furnish information about directors who were associated with
Page | 53
the company at the time the account was classified as defaulter, to put the
other banks and financial institutions on guard. Banks and FIs may also
ensure the facts about directors, wherever possible, by cross-checking with
Registrar of Companies.

5.2 Position regarding Independent and Nominee directors

As a guiding principle of disclosure, no material fact should be suppressed

while disclosing the names of a company that is a defaulter and the names of
all directors should be published. However, while doing so, a suitable
distinguishing remark should be made clarifying that the concerned person
was an independent director. Similarly the names of directors who are
nominees of government or financial institutions should also be reported but
a suitable remark 'nominee director' should be incorporated.

Therefore, against the names of Independent Directors and Nominee

Directors, they should indicate the abbreviations “Ind" and "Nom"
respectively in brackets to distinguish them from other directors.

5.3 Government Undertakings

In the case of Government undertakings, it should be ensured that the

names of directors are not to be reported. Instead, a legend "Government of
____________ undertaking" should be added.

Important RBI Circulars – Wilful Defaulters

- Master Circular No. DBOD.No.DL.BC.12928/20.16.003/2007-08 dated 02.07.2007 - Wilful Defaulters

Page | 54
The Sick Industrial Companies Act, 1985

Dealing with BIFR cases filed under SICA 1985

In number of cases where Bank has financed to the Industrial Company and
the facilities are classified as Non-performing or otherwise, the industrial
company may become a Sick Industrial Company. To deal with such
companies, BIFR (Board of Industrial Finance Reconstruction) has been
formed to deal with the cases under SICA Act 1985. It is therefore
necessary to study the various provisions of the SICAct-1985. For ready
reference the important definitions and powers of the Board are given
hereunder.

Note: It is very common that the Company files the reference with the
BIFR under the SICA Act 1985 to get the protection from any legal action
against the company to delay the process of recovery and hence we need to
make in depth analysis of all financial statements and other documents and
counter their claim before BIFR.

Certain definitions and powers of the Board (BIFR):-

"sick industrial company" means an industrial company (being a company

registered for not less than five years) which has at the end of any financial
year accumulated losses equal to or exceeding its entire net worth.”

Explanation : For the removal of doubts, it is hereby declared that an

industrial company existing immediately before the commencement of the
Sick Industrial Companies (Special Provisions) Amendment Act, 1993,
registered for not less than five years and having at the end of any financial
year accumulated losses equal to or exceeding its entire net worth, shall be
deemed to be a sick industrial company;

"Board" means the Board for Industrial and Financial Reconstruction (BIFR)
established under section, 4;

"operating agency" means any public financial institution, State level

institution, scheduled bank or any other person as may be specified by
general or special order as its agency by the Board;

Page | 55
"net worth" means the sum total of the paid-up capital and free reserves.

"industrial company" means a company which owns one or more industrial

undertakings;

"Industrial undertakings" means any undertaking pertaining to a scheduled

industry carried on in one or more factories by any company but does not
include -

(i) an ancillary industrial undertaking as defined in clause (aa) of section 3 of

the Industries (Development and Regulation) Act, 1951 (65 of 1951); and

(ii) a small scale industrial undertaking as defined in clause (j) of the

aforesaid section 3;

REFERENCE TO BOARD.

(1) Where an industrial company has become a sick industrial company, the
Board of Directors of the Company, shall, within sixty days from the date of
finalisation of the duly audited accounts of the company for the financial
year as at the end of which the company has become a sick industrial
company, make a reference to the Board for determination of the measures
which shall be adopted with respect to the company.

In case, the Board of Directors had sufficient reasons even before

finalisation of audited accounts that the company had become a sick
industrial company, the Board of Directors shall, within sixty days after it
has formed such opinion, make a reference to the Board for the
determination of the measures which shall be adopted with respect to the
company.

(2) The Central Government or the Reserve Bank or a State Government or a

public financial institution or a State level institution or a scheduled bank
may, if it has sufficient reasons to believe that any industrial company has
become, for the purposes of this Act, a sick industrial company, make a
reference in respect of such company to the Board for determination of the
measures which may be adopted with respect to such company.

Page | 56
Provided that a reference shall not be made under this sub-section in
respect of any industrial company by –

(a) the government of any State unless all or any of the industrial
undertakings belonging to such company are situated in such State;

(b) a public financial institution or a State level institution or a scheduled

bank unless it has, by reason of any financial assistance or obligation
rendered by it, or undertaken by it, with respect to, such company, an
interest in such company.

INQUIRY INTO WORKING OF SICK INDUSTRIAL COMPANIES.

The Board may make such inquiry as it may deem fit for determining
whether any industrial company has become a sick industrial company -

(a) upon receipt of a reference with respect to such company under section
15; or

(b) upon information received with respect to such company or upon its own
knowledge as to the financial condition of the company.

(2) The Board may, If it deems necessary or expedient so to do for the

expeditious disposal of an inquiry under sub-section (1), require by order any
operating agency to enquire into and make a report with respect to such
matter as may be specified in the order.

(3) The Board or, as the case may be the operating agency shall complete its
inquiry as expeditiously as possible and Endeavour shall be made to complete
the inquiry within sixty days from the commencement of the inquiry.

(4) Where the Board deems it fit to make an inquiry or to cause an inquiry to
be made into any industrial company under sub-section (1) or, as the case
may be, under sub-section (2), it may appoint one or more persons to be a
special director or special directors of the company for safeguarding the
financial and other interests of the company or in the public interest.

Page | 57
POWERS OF BOARD TO MAKE SUITABLE ORDER ON THE
COMPLETION OF INQUIRY.

(1) If after making an inquiry under section 16, the Board is satisfied that a
company has become a sick industrial company, the Board shall, after
considering all the relevant facts and circumstances of the case, decide, as
soon as may be by order in writing, whether it is practicable for the company
to make its networth exceed the accumulated losses within a reasonable
time.

(2) If the Board decides that it is practicable for a sick industrial company
to make its networth exceed the accumulated losses within a reasonable
time, the Board shall give such time to the company as it may deem fit to
make its networth exceed the accumulated losses.

(3) If the Board decides that it is not practicable for a sick industrial
company to make its networth exceed the accumulated losses within a
reasonable time and that it is necessary or expedient in the public interest
to adopt all or any of the measures specified in section 18 in relation to the
said company it may direct any operating agency specified in the order to
prepare, having regard to such guidelines as may be specified in the order, a
scheme providing for such measures in relation to such company.

PREPARATION AND SANCTION OF SCHEMES.

(1) Where an order is made in relation to any sick industrial company, the
operating agency specified in the order shall prepare, as expeditiously as
possible and ordinarily within a period of ninety days from the date of such
order, a scheme with respect to such company providing for any one or more
of the following measures, namely :-

(a) the financial reconstruction of the sick industrial company;

(b) the proper management of the sick industrial company by change in or

take over of, management of the sick industrial company;

Page | 58
(c) the amalgamation of -

(i) the sick industrial company with any other company, or

(ii) any other company with the sick industrial company (hereafter in this
section, in the case of sub-clause (i), the other company, and in the case of
sub-clause (ii), the sick industrial company, referred to as 'transferee
company');

(d) the sale or lease of a part or whole of any industrial undertaking of the
sick industrial company;

(da) the rationalization of managerial personnel, supervisory staff and

workmen in accordance with law;

(e) such other preventive, ameliorative and remedial measures as may be

appropriate;

(f) such incidental, consequential or supplemental measures as may be

necessary or expedient in connection with or for the purposes of the
measures specified in clauses (a) to (e).

(2) The scheme prepared by the operating agency shall be examined by the
Board and a copy of the scheme with modification, if any, made by the Board
shall be sent, in draft to the sick industrial company and the operating
agency and in the case of amalgamation, also to any other company
concerned, and the Board shall publish or cause to be published the draft
scheme in brief in such daily newspapers as the Board may consider
necessary, for suggestions and objections, if any, within such period as the
Board may specify;

Important POINTs to remember:

A. Once the reference is filed by the Company we need to check the

following:-

1. Whether the Company’s reference is within the scope of the

definitions as laid down under the SICAct-1985?
2. If not we have to file our objections with the BIFR.

Page | 59
 3. Whether the Operating Agency has been appointed by BIFR?
4. Whether the Operating Agency has brought out any plan for
rehabilitation/restructuring of the Company?
5. We have to convey our views on the revival scheme if worked out by
OA and file our objections if any before the BIFR.

B. Filing of suit for recovery of dues - In case we are not agreeable

for the revival scheme we have to initiate separate recovery proceedings
with the permission of the Board. For this purpose Branches should
approach BIFR seeking permission to file suit by filing suitable application
u/s 22 (1) of SICA through FRR representative at Barakhamba branch. In
absence of such permission either the suit will not get admitted in court
or the court will stay the matter ab-initio.

C. Action under Securitization Act - It is to kept in mind that if 75% of

secured creditors agree for action under SARFAESI Act-2002, the BIFR
reference will get abated and the secured creditors can enforce the
security for recovery of their dues. In such case, Banks will also be free
to proceed legally against the companies.

D. Reference not maintainable - It has been noticed during various

matters before BIFR that the reference made by the industrial company
is not admitted if any of the lender has sold their NPA to ARCs.

E. Scheme of Arrangement : At times during the pendency of the BIFR

case, the Company submits the One Time Settlement and approaches
High Court under Section 391/394 for sanction of OTS scheme.
However, it has been now directed by High Court, Mumbai, that when the
reference is pending before BIFR, the Company can not bring in any OTS
scheme u/s 391/394 of the Companies Act.

Page | 60