CHAPTER – IV

LEGISLATIONS RELATING TO RECOVERY OF DUES TO BANKS IN FORCE IN

INDIA

“An unjust law is itself a species of violence. Arrest for its breach is more so”.

Mahatma Gandhi (1869-1948) Father of Nation

The extending of credit facilities for the economic activities is the main raison d’être of
banking. Apart from raising resources through fresh deposits, borrowings, etc, recycling of funds
received back from borrowers constitutes a major part of funding credit dispensation activity. Non-
recovery of instalments as also interest on the loan portfolio negates the effectiveness of this
process of credit cycle. Non-recovery also affects the profitability of banks besides being required
to maintain more owned funds by way of capital and creation of reserves and provisions to act as
cushion for the loan losses. Avoidance of loan losses in the business of banking may not be possible
and the attempt of bank managements shall be to keep the losses at a low level. In fact, it is the level
of non-performing advances which, to a great extent, differentiates between good and bad bank.
Mounting of Non-Performing Asset (NPA) has got widespread repercussions in the economy.

In India, the Non Performing Advances (NPA), which are considered to be at higher levels
than those in other countries having, of late, attracted the attention of public as also of International
Financial Institutions. This has gained further prominence in the wake of transparency and
disclosure measures initiated by Reserve Bank of India during recent years. The various committees
set up by the Reserve Bank of India and Ministry of Finance in Govt. of India have studied about
the alarming rise of Non Performing Advances and submitted their report for taking further action
to end the menace of Non Performing Advances.

The Reserve Bank of India has constituted a study group under the supervision of
Shri.A.Q.Siddiqi, Chief General Manager, Department of Banking Supervision, to study the
recovery procedures adopted by Bank for recover of Non Performing Advances in Banks 44. The
study group studied data from 33 banks (27 public sectors and 6 private sectors) and the study of
files relating to the measures taken for recovery by way of suit filed by the 15 banks have revealed
that banks do file suits exhausting other means of recovery. During 1996, the amounts involved in
suit filed cases accounted for 26.21 % of these bank’s NPAs. In 1997 and 1998 this was further
44
Study group report from website-www.rbi.org.in

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increased to 33.91% and 46.38% respectively. The recoveries made out of suit filing by these 33
banks during the three years (from 1996 to 1998) were 7.33%, 4.74% and 4.32% respectively of the
suit filed amounts evidencing decreasing trend of recovery through this route. In view of such
meagre recovery, banks before filing suit weigh the likely recovery prospects out of the suit and the
opportunity cost of any amounts that could be recovered immediately. Suit filing, as such, is
resorted to as the last alternative.

I. THE RECOVERY OF DEBTS DUE TO BANKS AND FINANCIAL

INSTITUTIONS ACT, 1993 (RDDBFI ACT)

The RDDBFI Act was enacted for the establishment of Tribunals for expeditious
adjudication and recovery of debts due to banks and financial institutions and for matters connected
therewith or incidental thereto. The Recovery of Debts Due to Banks and Financial Institutions Bill
having been passed by both the Houses of Parliament received the assent of the President on 27th
August 1993. It came on the Statute Book as THE RECOVERY OF DEBTS DUE TO BANKS
AND FINANCIAL INSTITUTIONS ACT, 1993 (51 of 1993). 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
or financial institutions is less then ten lakh rupees or such other amount, being not less than one
lakh rupees, as the Central Government may, by notification, specify.

1. THE DEFINITION OF THE TERM 'DEBT'

The Section 2 (g) of the RDDBFI Act defines the term debt. The “debt” means any liability
(inclusive of interest) which is claimed as due from any person by a bank of a financial institution
or by a consortium of banks or financial institutions during the course of any business activity
undertaken by the bank or the financial institution or the consortium under any law for the time
being in force, in cash or otherwise, whether secured or unsecured, or assigned, or whether payable
under a decree or order of any civil court or any arbitration award or otherwise or under a mortgage
and subsisting on, and legally recoverable on, the date of the application. This definition of debt has
got high importance as in many cases the borrowers and guarantors have challenged the claim of the
banks as it is not coming within the definition.

2. THE JURISDICTION, POWERS AND AUTHORITY OF TRIBUNALS

Another important provision is Section 17. This section defines Jurisdiction, Powers and
Authority of Tribunals. In terms of this provision, the Tribunal shall exercise, on and from the
appointed day, the jurisdiction, powers and authority to entertain and decide applications from the
banks and financial institutions for recovery of debts due to such banks and financial institutions.

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The Section 17A of the Act defined the powers of Appellate Tribunal. The Appellate Tribunal shall
exercise, on and from the appointed day, the jurisdiction, powers and authority to entertain appeals
against any order made, or deemed to have been made, by a Tribunal under this Act.

The Section 18 of the RDDBFI Act bars the Jurisdiction of other courts from entertaining
matters pertaining to the recovery of dues of Banks. It states that on and from the appointed day, no
court or other authority shall have, or be entitled to exercise, any jurisdiction, power or authority
(except the 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.

3. THE PROCEDURE FOR FILING APPLICATION

The Section 19 of the RDDBFI Act deals with the modus operandi for filing of application
by Banks for recovery of dues. It states that (1) where a bank or a financial institution has to recover
any debt from any person, it may make an application to the Tribunal within the local limits of
whose jurisdiction—
(a) the defendant, or each of the defendants where there are more than one, at the time of making
the application, actually and voluntarily resides or carries on business or personally works for gain;
or
(b) any of the defendants, where there are more than one, at the time of making the application,
actually and voluntarily resides or carries on business or personally works for gain; or
(c) the cause of action, wholly or in party, arises.
(2) Where a bank or a financial institution, which has to recover its debt from any person, has filed
an application to the Tribunal under subsection (1) and against the same person another bank or
financial institution also has claim to recover its debt, then, the later bank or financial institution
may join the applicant bank or financial institution at any stage of the proceedings, before the final
order is passed, by making an application to that Tribunal.
(3) Every application under sub-section (1) or sub-section (2) shall be in such form and
accompanied by such documents or other evidence and by such fee as may be prescribed:
(4) On receipt of the application under sub-section (1) or sub-section (2), the Tribunal shall issue
summons requiring the defendant to show cause within thirty days of the service of summons as to
why the relief prayed for should not be granted.
(5) The defendant shall, at or before the first hearing or within such time as the Tribunal may
permit, present a written statement of his defence.
(6) Where the defendant claims to set-off against the applicant’s demand any ascertained sum of
money legally recoverable by him from such applicant, the defendant may, at the first hearing of the

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application, but not afterwards unless permitted by the Tribunal, present a written statement
containing the particulars of the debt sought to be set-off.
(7) The written statement shall have the same effect as a plaint in a cross-suit so as to enable the
Tribunal to pass a final order in respect both of the original claim and of the set-off.
(8) A defendant in an application may, in addition to his right of pleading a set-off under sub-
section (6), set up, by way of counter-claim against the claim of the applicant, any right or claim in
respect of a cause of action accruing to the defendant against the applicant either before or after the
filing of the application but before the defendant has delivered his defence or before the time
limited for delivering his defence has expired, whether such counter-claim is in the nature of a
claim for damages or not.
(9) A counter-claim under sub-section (8) shall have the same effect as a cross-suit so as to enable
the Tribunal to pass a final order on the same application, both on the original claim and on the
counter-claim.
(10) The applicant shall be at liberty to file a written statement in answer to the counter-claim of the
defendant within such period as may be fixed by the Tribunal.
(11) Where a defendant sets up a counter-claim and the applicant contends that the claim thereby
raised ought not be disposed of by way of counter-claim but in an independent action, the applicant
may, at any time before issues are settled in relation to the counter-claim, apply to the Tribunal for
an order that such counter-claim may be excluded, and the Tribunal may, on the hearing of such
application, make such order as it thinks fit.

4. THE POWERS OF THE TRIBUNAL TO PASS INTERIM ORDERS.

The Section 19 (12) of the RDDBFI Act dealt with the powers of the Tribunal to pass
interim orders. It empowered the Tribunal to pass interim order (whether by way of injunction or
stay or attachment) against the defendant to debar him from transferring, alienating or otherwise
dealing with, or disposing of, any property and assets belonging to him without the prior permission
of the Tribunal.
The Section (13) (A) further states that where, at any stage of the proceedings, the Tribunal
is satisfied, by affidavit or otherwise, that the defendant, with intent to obstruct or delay or frustrate
the execution of any order for the recovery of debt that may be passed against him,--
(i) is about to dispose of the whole or any part of his property; or
(ii) is about to remove the whole or any part of his property from the local limits of the jurisdiction
of the Tribunal; or
(iii) is likely to cause any damage or mischief to the property or affect its value by misuse or
creating third party interest,

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the Tribunal may direct the defendant, within a time to be fixed by it, either to furnish security, in
such sum as may be specified in the order, to produce and place at the disposal of the Tribunal,
when required, the said property or the value of the same, or such portion thereof as may be
sufficient to satisfy the certificate for the recovery of the debt, or to appear and show cause why he
should not furnish security.
(B) Where the defendant fails to show cause why he should not furnish security, or fails to furnish
the security required, within the time fixed by the Tribunal, the Tribunal may order the attachment
of the whole or such portion of the properties claimed by the applicant as the properties secured in
his favour or otherwise owned by the defendant as appears sufficient to satisfy any certificate for
the recovery of debt.
(14) The applicant shall, unless the Tribunal otherwise directs, specify the property required to be
attached and the estimated value thereof.
(15) The Tribunal may also in the order direct the conditional attachment of the whole or any
portion of the property specified under subsection
(16) If an order of attachment is made without complying with the provisions of sub-section (13),
such attachment shall be void.
(17) In the case of disobedience of an order made by the Tribunal under sub-sections (12), (13) and
(18) or breach of any of the terms on which the order was made, the Tribunal may order the
properties of the person guilty of such disobedience or breach to be attached an may also order such
person to be detained in the civil prison for a term not exceeding three months, unless in the
meantime the Tribunal directs his release.
5. THE POWERS OF THE TRIBUNAL TO APPOINT RECEIVERS
The powers of the Tribunal to appoint receivers are given in Section 19 (18). It states that
where it appears to the Tribunal to be just and convenient, the Tribunal may, by order—
(a) appoint a receiver of any property, whether before or after grant of certificate for recovery of
debt;
(b) remove any person from the possession or custody of the property;
(c) commit the same to he possession, custody or management of the receiver;
(d) confer upon the receiver all such powers, as to bringing and defending suits in the courts or
filing and defending application before the Tribunal and for the realization, management,
protection, preservation and improvement of the property, the collection of the rents and profits
thereof, the application and disposal of such rents and profits, and the execution of documents as the
owner himself has, or such of those powers as the Tribunal thinks fit; and (e) appoint a
Commissioner for preparation of an inventory of theproperties of the defendant or for the sale
thereof.

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 6. ISSUE OF DEBT CERTIFICATE BY THE TRIBUNAL
The other relevant provisions which deals with issue of certificate by the Tribunal are cited
below:-
Section 19(19) -Where a certificate of recovery is issued against a company registered under the
Companies Act, 1956 (1 of 1956) the Tribunal may order the sale proceeds of such company to be
distributed among its secured creditors in accordance with the provisions of section 529A of the
Companies Act, 1956 and to pay the surplus, if any, to the company.
Section 19(20) -The Tribunal may, after giving the applicant and the defendant an opportunity of
being heard, pass such interim or final order, including the order for payment of interest from the
date on or before which payment of the amount is found due up to the date of realization or actual
payment, on the application as it thinks fit to meet the ends of justice.
Section 19(21) -The Tribunal shall send a copy of every order passed by it to the applicant and the
defendant.
Section 19(22) -The Presiding Officer shall issue a certificate under his signature on the basis of the
order of the Tribunal to the Recovery Officer for recoveryof the amount of debt specified in the
certificate.
Section 19(23) -Where the Tribunal, which has issued a certificate of recovery, is satisfied that the
property is situated within the local limits of the jurisdiction of two or more Tribunals, it may send
the copies of the certificate of recovery for execution to such other Tribunals where the property is
situated:
Provided that in a case where the Tribunal to which the certificate of recovery is sent for execution
finds that it has no jurisdiction to comply with the certificate of recovery, it shall return the same to
the Tribunal which has issued it.
Section 19(24) -The application made to the Tribunal under sub-section (1) or sub-section (2) shall
be dealt with by it as expeditiously as possible and endeavour shall be made by it to dispose of the
application finally within one hundred and eighty days from the date of receipt of the application.
Section 19(25) -The Tribunal may made such orders and give such directions as may be necessary
or expedient to give effect to its orders or to prevent abuse of its process or to secure the ends of
justice.
7. THE FILING OF APPEAL BEFORE DRAT
The Section 20 of RDDBFI Act deals with filing of appeal before DRAT. It says that any
person aggrieved by an order made, or deemed to have been made, by a Tribunal under this Act,
may prefer an appeal to an Appellate Tribunal having jurisdiction in the matter.
(2) No appeal shall lie to the Appellate Tribunal from an order made by a Tribunal with the consent
of the parties.

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(3) Every appeal under sub-section (1) shall be filed within a period of forty-five days from the date
on which a copy of the order made, or deemed to have been made, by the Tribunal is received by
him and it shall be in such form and be accompanied by such fee as may be prescribed:
Provided that the Appellate Tribunal may entertain an appeal after the expiry of the said period of
forty-five days if it is satisfied that there was sufficient cause for not filing it within that period.
(4) On receipt of an appeal under sub-section (1), the Appellate Tribunal may, after giving the
parties to the appeal, an opportunity of being heard, pass such orders thereon as it thinks fit,
confirming, modifying or setting aside the order appealed against.
The Section 20 (6) of the RDDBFI Act stipulates that the appeal filed before the Appellate
Tribunal under sub-section (1) shall be dealt with by it as expeditiously as possible and endeavour
shall be made by it to dispose of the appeal finally within six months from the date of receipt of the
appeal.
8. THE DEPOSIT OF AMOUNT OF DEBT ON FILING APPEAL.
The Section 21 of RDDBFI Act stipulate the deposit of amount of debt on filing appeal. It
states that where an appeal is preferred by any person from whom the amount of debt is due to a
bank or a financial institution or a consortium of banks or financial institutions, such appeal shall
not be entertained by the Appellate Tribunal unless such person has deposited with the Appellate
Tribunal seventy-five per cent of the amount of debt so due from him as determined by theTribunal
under section 19:
Provided that the Appellate Tribunal may, for reasons to be recorded in writing, waive or reduce the
amount to be deposited under this section.
9. TRIBUNAL SHALL BE GUIDED BY THE PRINCIPLES OF NATURAL
JUSTICE
The Section 22 of RDDBFI Act dealt with the procedure and powers of the Tribunal and the
Appellate Tribunal. It states that the Tribunal and the Appellate Tribunal shall not be bound by the
procedure laid down by the Code of Civil Procedure, 1908 (5 of 1908), but shall be guided by the
principles of natural justice and, subject to the other provisions of this Act and of any rules, the
Tribunal and the Appellate Tribunal shall have powers to regulate their own procedure including the
places at which they shall have their sittings.
10. TRIBUNAL SHALL EXCERCISE THE POWERS OF CIVIL COURT
The Tribunal and the Appellate Tribunal shall have, for the purposes of discharging their
functions under this Act, the same powers as are vested in a civil court under the Code of Civil
Procedure, 1908 (5 of 1908), while trying a suit, in respect of the following matters, namely:--
(a) summoning and enforcing the attendance of any person and examining him on oath;
(b) requiring the discovery and production of documents;

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(c) receiving evidence on affidavits;
(d) issuing commissions for the examination of witnesses or documents;
(e) reviewing its decisions;
(f) dismissing an application for default or deciding it ex parte;
(g) setting aside any order of dismissal of any application for default
or any order passed by it ex parte;
(h) any other matter which may be prescribed.
11. MODES OF RECOVERY
The Section 25 of the RDDBFI Act deals with the modes of recovery of debts. The
Recovery Officer shall, on receipt of the copy of the certificate under sub-section (7) of section 19,
proceed to recover the amount of debt specified in the certificate by one or more of the following
modes, namely:--
(a) attachment and sale of the movable or immovable property of the defendant;
(b) arrest of the defendant and his detention in prison;
(c) appointing a receiver for the management of the movable or immovable properties of the
defendant.
The Section 27 of the RDDBFI Act deals with stay of proceedings under certificate and
amendment or withdrawal thereof. It states that notwithstanding that a certificate has been issued to
the Recovery Officer for the recovery of any amount, the Presiding Officer may grant time for the
payment of the amount, and thereupon the Recovery Officer shall stay the proceedings until the
expiry of the time so granted.
(2) Where a certificate for the recovery of amount has been issued, the Presiding Officer shall keep
the Recovery Officer informed of any amount paid or time granted for payment, subsequent to the
issue of such certificate to the Recovery Officer.
(3) Where the order giving rise to a demand of amount for recovery of debt has been modified in
appeal, and, as a consequence thereof the demand is reduced, the Presiding Officer shall stay the
recovery of such part of the amount of the certificate as pertains to the said reduction for the period
for which the appeal remains pending.
(4) Where a certificate for the recovery of debt has been received by the Recovery Officer and
subsequently the amount of the outstanding demands is reduced 1[or enhanced] as a result of an
appeal, the Presiding Officer shall, when the order which was the subject-matter of such appeal has
become final and conclusive, amend the certificate or withdraw it, as the case may be.
12. OTHER MODES OF RECOVERY
The Section 28 deals with other modes of recovery. Where a certificate has been issued to
the Recovery Officer under sub-section (7) of section 19, the Recovery Officer may, without

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prejudice to the modes of recovery specified in section 25, recover the amount of debt by any one or
more of the modes provided under this section.
(2) If any amount is due from any person to the defendant, the Recovery Officer may require such
person to deduct from the said amount, the amount of debt due from the defendant under this Act
and such person shall comply with any such requisition and shall pay the sum so deducted to the
credit of the Recovery Officer:
(3) (i) The Recovery Officer may, at any time or from time to time, by notice in writing, require any
person from whom money is due or may become due to the defendant or to any person who holds
or may subsequently hold money for or on account of the defendant, to pay to the Recovery Officer
either forthwith upon the money becoming due or being held or within the time specified in the
notice (not being before the money becomes due or is held) so much of the money as is sufficient to
pay the amount of debt due from the defendant or the whole of the money when it is equal to or less
than that amount.
(ii) A notice under this sub-section may be issued to any person who holds or may subsequently
hold any money for or on account of the defendant jointly with any other person and for the
purposes of this subsection, the shares of the joint holders in such amount shall be presumed, until
the contrary is proved, to be equal.
(iii) A copy of the notice shall be forwarded to the defendant at his last address known to the
Recovery Officer and in the case of a joint account to all the joint holders at their last addresses
known to the Recovery Officer.
(iv) Save as otherwise provided in this sub-section, every person to whom a notice is issued under
the sub-section shall be bound to comply with such notice, and, in particular, where any such notice
is issued to a post office, bank, financial institution, or an insurer, it shall not be necessary for any
pass book, deposit receipt, policy or any other document to be produced for the purpose of any
entry, endorsement or the like to be made before the payment is made notwithstanding any rule,
practice or requirement to the contrary.
(v) Any claim respecting any property in relation to which a notice under this sub-section has been
issued arising after the date of the notice shall be void as against any demand contained in the
notice.
(vi) Where a person to whom a notice under this sub-section is sent objects to it by a statement on
oath that the sum demanded or the part thereof is not due to the defendant or that he does not hold
any money for or on account of the defendant, then, nothing contained in this sub-section shall be
deemed to require such person to pay any such sum or part thereof, as the case may be, but if it is
discovered that such statement was false in any material particular, such person shall be personally
liable to the Recovery Officer to the extent of his own liability to the defendant on the date of the

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notice, or to the extent of the defendant’s liability for any sum due under this Act, whichever is less.
(vii) The Recovery Officer may, at any time or from time to time, amend or revoke any notice under
this sub-section or extend the time for making any payment in pursuance of such notice.
(viii) The Recovery Officer shall grant a receipt for any amount paid in compliance with a notice
issued under this sub-section, and the person so paying shall be fully discharged from his liability to
the defendant to the extent of the amount so paid.
(ix)Any person discharging any liability to the defendant after the receipt of a notice under this sub-
section shall be personally liable to the Recovery Officer to the extent of his own liability to the
defendant so discharged or to the extent of the defendant’s liability for any debt due under this Act,
whichever is less.
(x) If the person to whom a notice under this sub-section is sent fails to make payment in pursuance
thereof to the Recovery Officer, he shall be deemed to be a defendant in default in respect of the
amount specified in the notice and further proceedings may be taken against him for the realization
of the amount as if it were a debt due from him, in the manner provided in sections 25, 26 and 27
and the notice shall have the same effect as an attachment of a debt by the Recovery Officer in
exercise of his powers under section 25.
(4) The Recovery Officer may apply to the court in whose custody there is money belonging to the
defendant for payment to him of the entire amount of such money, or if it is more than the amount
of debt due an amount sufficient to discharge the amount of debt so due.
(4A) The Recovery Officer may, by order, at any stage of the execution of the certificate of
recovery, require any person, and in case of a company, any of its officers against whom or which
the certificate of recovery is issued, to declare on affidavit the particulars of his or its assets.
(5) The Recovery Officer may recover any amount of debt due from the defendant by distraint and
sale of his movable property in the manner laid down in the Third Schedule to the Income-Tax Act,
1961 (43 of 1961).
13. APPLICATION OF THE PROVISIONS OF INCOME TAX ACT
The Section 29 deals with application of certain provisions of Income-tax Act to the
RDDBFI Act. The provisions of the Second and Third Schedules to the Income-tax Act, 1961 and
the Income-tax (Certificate Proceedings) Rules, 1962, as in force from time to time shall, as far as
possible, apply with necessary modifications as if the said provisions and the rules referred to the
amount of debt due under this Act instead of to the Income-tax:
Provided that any reference under the said provisions and the rules to the “assessee” shall be
construed as a reference to the defendant under this Act.
The Section 30 deals with appeal against the order of Recovery Officer. Notwithstanding anything
contained in section 29, any person aggrieved by an order of the Recovery Officer made under this

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Act may, within thirty days from the date on which a copy of the order is issued to him, prefer an
appeal to the Tribunal.
(2) On receipt of an appeal under sub-section (1), the Tribunal may, after giving an opportunity to
the appellant to be heard, and after making such inquiry as it deems fit, confirm, modify or set aside
the order made bythe Recovery Officer in exercise of his powers under sections 25 to 28 (both
inclusive).
14. TRANSFER OF PENDING CASES
The Section 31 of the Act deals with transfer of pending cases. Every suit or other
proceeding pending before any court immediately before the date of establishment of a Tribunal
under this Act, being a suit or proceeding the cause of action whereon it is based is such that it
would have been, if it had arisen after such establishment, within the jurisdiction of such Tribunal,
shall stand transferred on that date to such Tribunal:
Provided that nothing in this sub-section shall apply to any appeal pending as aforesaid before any
court.
(2) Where any suit or other proceeding stands transferred from any court to a Tribunal under sub-
section (1),--
(a) the court shall, as soon as may be after such transfer, forward the records of such suit or other
proceeding to the Tribunal; and
(b) the Tribunal may, on receipt of such records, proceed to deal with such suit or other proceeding,
so far as may be, in the same manner as in the case of an application made under section 19 from
the stage which was reached before such transfer or from any earlier stage as the Tribunal may deed
fit.
The Section 34 of the Act state that RDDBFI Act will have over-riding effect. Save as
provided under subsection (2), 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.

II.THE SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS

AND ENFORCEMENT OF SECURITY INTEREST ACT, 2002 (SARFAESI ACT)

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security

Interest Act, 2002 has been enacted with an intention to strengthen the creditors rights through
enforcement of securities by the banks and financial institutions by conferring on the creditors the
right to seize the secured asset and sell of the same in order to recover dues promptly by passing the
costly and very time consuming legal process through courts.

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 The Securitisation and Reconstruction of Financial Assets and Enforcement of Security
Interest Act (hereinafter referred to as SARFEASI Act) basically deals with three aspects:-

Enforcement of Security Interest by secured creditor - Banks/Financial Institutions

1. Transfer of non- performing assets to Asset Reconstruction Company, which will then
dispose of those assets and realise the proceeds.

2. To provide a legal framework for Securitisation of assets.

3. To enforce the secured assets for recovery of dues to the bank.

4. To provide for adjudication of grievances of the affected persons.

Looking from the standpoint of practicality, in essence, the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act (hereinafter SARFEASI Act) has got
four different dimensions which was displayed below as follows:-

S SECURITISATION OF
SECURITISATION OF
A ASSETS
ASSETS
R
F RECONSTRUCTION OF
RECONSTRUCTION OF
A ASSETS
ASSETS
E
S
I ENFORCEMENT OF
ENFORCEMENT OF
SECURITY INTEREST
A SECURITY INTEREST

C
T CUSTOMER GRIEVANCE
CUSTOMER GRIEVANCE
REDRESSAL MECHANISM
REDRESSAL MECHANISM

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 The Sarfaesi Act formulates four types of activities. At the first instance, the Act deals with
provisions which enable the secured creditor to undertake the process of securitization. Secondly,
the Act enables the secured creditor to enforce the securities to recover dues from the Non-
Performing Accounts. It also enables to reconstruction of financial assets by the secured creditor
and borrower. It also contained provisions for redressal of the grievances of the
borrowers/guarantors and third parties who are adversely affected by the provisions of the Act. By
conferring on lenders the right to seize and sell assets held as collateral in respect of overdue loans,
it allows banks and financial institutions to recover their dues promptly without going through a
costly and time-consuming legal process. However, since the proceedings under the SARFAESI
Act are non-judicial & non-adjudicatory procedures, the Authorised Officer must ensure that the
provisions of the SARFAESI Act & Rules are strictly complied with.The Hon'ble Supreme Court of
India in its judgment45 upheld that Banks can take action against the defaulting borrower under the
SARFAESI Act and also simultaneously proceed against the same borrower at DRT. The Hon'ble
Court observed that SARFAESI Act is an additional remedy and is not inconsistent with the DRT
Act46. We may examine the provisions of the Sarfaesi Act and Rules in detail so as to understand
whether the principles of natural justice and other canons of jurisprudence have been applied in this
Act.

1. SERVICE OF NOTICE

In order to ensure the principles of natural justice are being complied with, the Sarfaesi Act
contains stringent provisions regarding of serving of notice to the borrower/guarantor before
initiating Sarfaesi proceedings for taking possession of secured assets. The initiation of proceedings
under the Sarfaesi Act starts with issuing of demand notice under S.13 (2) of the Act. The rights of
the secured creditor under this act may be exercised by one or more his officers authorised in this
behalf in such manner as may be prescribed. According to the rules, the authorised officer who can
take action under this act shall be an officer not less than a Chief Manager (officer in the scale of
Senior Management Cadre IV) of the public sector bank. In case of private secotr bank, it is officer
in the sale of Assistant General Manager. The service of 13(2) Demand Notices need tol 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 carried on
45
Appeal (Civil) 3228 of 2006 -M/s. Transcore V. Union of India & An
46
Appeal (Civil) 3228 of 2006 -M/s. Transcore V. Union of India & An

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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 any
means of transmission of documents like fax message or electronic mail service.

The demand notice under Sec.13 (2) of the Act 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/guarantor. The date on which the account was
classified as Non Performing Asset shall also be specifically mentioned in the 13(2) notice. The
particulars of complete loan documents executed by the borrower i.e. term loan agreement, cash
credit agreement, supplementary documents and revival letters, balance confirmation letters, deposit
of title deeds confirmation letter, etc should be stated very clearly in Schedule of notice. In case,
13(2) demand notice is issuing against both mortgaged and hypothecated properties, separate
schedules must be provided each for mortgaged and hypothecated properties.

In order to bring more transparency, the Govt. of India, Ministry of Finance has instructed all
the Banks/Financial Institutions that while issuing demand notice under section 13(2) of the
Sarfaesi Act, the Banks should attach a statement of account from the date of declaration of NPA up
to the date of demand notice clearly indicating the rate of interest charged.

2. NON-SERVICE OF NOTICE

If Demand Notices could not be served on the borrower(s)/guarantor(s), then as per the
SARFAESI Rules, the service should be effected by affixing a copy of the demand notice on the
outer door/other conspicuous place where the borrower(s) /guarantor(s) reside and the contents of
the notice to the published in two leading news papers, one in vernacular, having sufficient
circulation in that locality.

3. REPLY TO REPRESENTATION OR OBJECTION

Upon receipt of the notice, the borrower/guarantor makes any representation or raises any
objection, the secured creditor (bank) shall consider such representation or objection and if the
secured creditor (bank) comes to the conclusion that such representation or objection is not
acceptable or tenable, secured creditor / bank shall communicate within 15 days of receipt of such
representation or objection the reasons for non-acceptance of the representation or objection to the
borrower/guarantor. In order to ensure the application of the legal maxim “no one should be a judge
in his own case, many of the public sector banks have issued internal circulars stating that the
objections should be considered by an authority higher than the notice issuing authority. The state

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bank of india has issued such circular to its operational functionaries.

4. LIMITATION PERIOD

It is pertinent to note that exercising of the powers under this act does not save the period of
limitation. The Authorised Officer of Bank cannot exercise the rights under this act in respect of
time- barred debts. With respect to consortium lending accounts, wherein the security is shared by
more than one bank / financial institution, consent from all other secured creditors should
necessarily be sought before issue of notice. Thereafter, if at least 60% of secured creditors by value
agree, the bank which is leading the consortium lending, should initiate action under this act.

5. FURTHER PROCEEDING AFTER EXPIRY OF 60 DAYS IN 13(2) NOTICE

Where there is no response from the borrower against the notice issued under section 13(2) of
the SARFAESI Act, the Authorised Officer of Bank may take the following steps: -

1. After expiry of 60 days’ notice period and the borrower(s)/Guarantor(s) failed to discharge
the debt, possession notice under Section 13(4) is required to be served and steps may be
taken to taken possession of the secured asset.

 Where the mortgaged property is let-out or information of receivables due to the

borrower/guarantor are known, notice may be served on tenants/sundry debtor/s to pay the
amounts due and payable to the borrower/guarantor, to the Bank.

2. Any payment made by any person to the secured creditor (Bank), shall give such person a
valid discharge as if he has made payment to the borrower.

6. TAKING POSSESSION OF MOVABLE ASSETS

 As discussed above, after expiry of 60 days’ notice if the borrower(s)/Guarantor(s) failed to

discharge the debt, the authorised officer shall take possession of such movable property in
the presence of two witnesses after panchanama drawn and duly signed by the witnesses.

 The Authorised Officer may file necessary application/petition before the Chief
Metropolitan Magistrate or Dist. Magistrate within whose jurisdiction the secured
assets/documents are situated or found for obtaining orders for eviction. The application
filed by the Bank under Section 14 of the Act for taking physical possession shall be

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 accompanied by an affidavit duly affirmed by the authorized officer declaring the aggregate
amount of dues, confirmation regarding the service of 13(2) notice on the borrower, disposal
of objection raised by the borrower, etc – [Section 14(1)].
 It is important to note that no act of the chief Metropolitan Magistrate or the Dist. Magistrate
done under SARFAESI Act shall be called in question in any court or before any authority
under Sec 14(3) of the Act.
 After taking possession, the authorised officer should make the inventory of the property as
per the and deliver a copy of such inventory to the borrower/guarantor or any person
authorised to receive on their behalf.
 The property under possession should be kept in the custody of the authorised officer or in
the custody of any person authorised or appointed by him.
 The Authorised Officer or his custodian should take as much care of the property as a man
of ordinary prudence would, under similar circumstances take of his own property.
 If the property taken possession of is subject to speedy and natural decay, or the expenses of
keeping such property in custody are likely to exceed its value, the Authorised officer may
sell it at once.

7. TAKING POSSESSION OF IMMOVABLE ASSETS

The Authorised Officer shall take possession of the immovable property by issuing
possession notice as per the format given in the Rules. The following steps need to be
undertaken by the Authorised Officer/Branch Officials:

 The possession notice should also be published in 2 newspapers (one in vernacular). In

vernacular newspaper, possession notice should be in vernacular language only.

 As per the amendment made in Rule 8(2) of the Security Interest (enforcement) rules 5, the
possession notice shall also be published, as soon as possible but in any case not later than
seven days from the date of taking possession in two leading newspapers, one in vernacular
language having sufficient circulation in that locality.

XII. In order to take actual physical possession or control of secured assets, the authorized
officer may file necessary application/petition before the Chief Metropolitan Magistrate or
Dist. Magistrate within whose jurisdiction the secured assets/documents are situated or
found. The application filed by the Bank under Section 14 of the Act for taking physical
possession shall be accompanied by an affidavit duly affirmed by the authorized officer
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 declaring the aggregate amount of dues, confirmation regarding the service of 13(2) notice
on the borrower, disposal of objection raised by the borrower, etc – [Section 14(1)]. In this
connection, the Branches may avail the service of the bank’s empanelled advocate. The
Chief Metropolitan Magistrate or Dist. Magistrate on request of the Authorized Officer may
issue necessary orders for assistance in take possession of such asset and documents
relating thereto and forward such asset and documents to the secured creditor.

8. VALUATION OF THE MOVABLE AND IMMOVABLE ASSETS

III. In order to ensure that the properties taken possession by Bank/FI's through authorised
officer are sold at a fair price, the provisions have been incorporated in the Sarfaesi Act for
obtaining valuation report from the valuer whose name has been approved by the Board of
Director of Bank and registered as Valuer under the provisions of the Wealth Tax Act.
Hence, Immediately after taking possession and in any case before sale, the Authorised
Officer should arrange for valuation of the assets by an approved valuer.

 As per the amendment made in Rule 2(d) of the Security Interest (Enforcement) Rules,
20026, 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 Trustees of the
secured creditor.

 As per the practice prevailing in Bank's/FI's, the reserve price is being approved by the
committee consisting of senior officials. The reserve price of the assets to be sold may be
determined on the basis of valuation obtained. The Committee will approve the reserve price
and convey the same to the Authorised officer.No sale should be finalised below the reserve
price fixed by the SARFAESI valuation Committee.In case, if it is found that the reserve
price cannot be realised, the Authorised Officer may submit fresh recommendations to the
SARFAESI valuation committee for a lower reserve price, and the property may be sold
again by following the same procedures.

 While discussing the procedure of fixation of reserve price, it is pertinent to examine how
far the privisions are ensuring the fair price to the bottower and his views on the reserve
price fixed by the Authorised Officer of Bank'/ FI's. The valution of the property by a
registered valuer, who is satisfying with the conditions stipulated in the rules is one of the
measures in ensuring fair price to the mortgagor. The committee system for approval of

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 reserve price is another measure.

9. NOTICE OF SALE

 A 30 days’ notice of intended sale is required to be given to borrower/guarantor and in the

case of death of borrower/guarantor, the sale notice should be addressed to legal heirs of
borrowers/ guarantors. The sale can be conducted only after expiry of 30 days’ notice given
to borrower/ guarantor/legal heirs of borrowers/guarantors.
 It is well within the discretion of the Secured creditor/ Bank to proceed against the
guarantors(s) or sell his assets without first taking any of the measures specified in Sec.
13(4) in relation to the secured assets (mortgage/hypothecation/charge) of the borrower
under this Act.

10. SALE PROCEDURE OF MOVABLE PROPERTY

 The authorized officer may sell the movable secured assets in one or more lots by any of the
following methods to secure the maximum sale price for the assets:

 by obtaining quotation from parties dealing with secured assets or otherwise interested
in buying the secured assets or

 by inviting tenders from the public or

 by holding a public auction or

 by private treaty

The authorized officer shall serve to the borrower a notice of thirty days for sale of the
movable secured assets. f the sale of such secured assets is being effected either by inviting
tenders or by holding public auction, the secured creditor shall make 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 the following: -

a) Details about the borrower and the secured creditor;

b) Description of movable secured assets to be sold with identification marks or numbers, if

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 any, on them;

c) Reserve price, if any and the time and manner of payment;

d) 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 thing, which the authorized officer considers it material for a purchaser to know
in order to judge the nature and value of movable secured assets.

 It is important to note down here that 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 i.e.
between the borrower/guarantor, secured creditor(Bank) and the parties interested in buying
the secured assets.

 On payment of sale price, the authorized officer shall issue a certificate of sale in the
prescribed form specifying the movable secured assets sold, price paid and the name of the
purchaser and thereafter sale shall become absolute. The certificate of sale so issued shall be
prima facie evidence of title of the purchaser.

11. SALE PROCEDURES OF IMMOVABLE PROPERTY

 The authorized officer shall take or cause to taken possession, by delivering a possession
notice to the borrower and by affixing the possession notice on the outer door or at such
conspicuous place of the property.
 The authorized officer shall also publish the possession notice, as soon as possible but in any
case not later than 7 days from the date of taking possession, in two leading newspapers, one
in vernacular language having sufficient circulation in that locality.
 In the event of actual possession of immovable property by the authorized officer, such
property shall be kept in his own custody or in the custody of any person authorized 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. The
authorized officer shall take steps for preservation and protection of secured assets and
insure them, if necessary, till they are sold or otherwise disposed off.

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v. Before effecting sale of the immovable property, the authorized officer shall obtain
valuation of the property from an approved valuer and 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: -

 by obtaining quotations from the persons dealing with similar secured assets or
otherwise interested in buying such assets: or

 by inviting tenders from the public;

 by holding public auction; or

 by private treaty

 The authorized officer shall serve to the borrower a notice of thirty days for sale of the
immovable secured assets.
 If the sale of 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 to be sold, including details of the encumbrances
known to the secured creditor;
b. The secured debt for recovery of which the property is to be sold;
c. Reserved price below which the property may not be sold;
d. 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 Authorised Officer of the secured
creditor;
f. Any other thing which the authorised officer considers material for a purchaser to know in
order to judge the nature and value of the property;

 As per the instructions of Govt. of India, Ministry of Finance auction under Sarfaesi Act
need to be conducted only in e-auction mode only.
 Every notice of sale shall be affixed on a conspicuous part of the immovable property and
may, if the authorized officer deems it fit, put on the web site of the secured creditor on the

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 Internet.
 Sale by any method other than public auction or public tender shall be on such terms as may
be settled between the parties in writing i.e. between the borrower/guarantor, secured
creditor(Bank) and the parties interested in buying the secured assets.
 In cases, where the dues of the secured creditor Bank together with all costs, charges and
expenses incurred by him are tendered by the borrower/guarantor at any time before the date
fixed for sale or transfer, the secured asset shall not be sold or transferred by the secured
creditor Bank and no further step shall be taken by him for transfer or sale of that secured
asset.The sale shall be confirmed only in favour of the highest bidder and the sale
confirmation letter must be issued to the successful bidder.
 The sale cannot be confirmed if the sale price is less than the reserve price fixed. However,
in cases where the Authorised Officer fails to obtain a higher price than the reserve price,
with the written consent of the borrower/guarantor, the sale can be confirmed at the reserve
price subject to the approval of the controller/appropriate authority.
 The purchaser shall immediate deposit 25% of the sale price and balance to be paid on or
before 15 days or any extended period agreed in writing. If balance is not paid within the
stipulated time, the deposit shall be forfeited and steps should be taken to re-sale the
property. The Authorised Officer shall deliver the property to the purchaser free from
encumbrances known to the secured creditor on deposit of money as specified.

12. ISSUE OF SALE CERTIFICATE

If the sale proceeds are more than the reserve price, the sale may be confirmed by the authorised
officer.On compliance of all the terms & conditions of sale and on deposit of the sale proceeds
in full, the sale shall be confirmed in favour of the purchaser.A sale certificate is to be issued in
favour of the purchaser and in the sale certificate, it should mention specifically, whether the
purchaser has purchased the property free from encumbrances or not.
Where there are prior encumbrances, the purchaser should be asked to deposit such amount to clear
the encumbrances before issuing the sale certificate. Sale of movable/immovable properties
will be subject to payment of local taxes, stamp duty on the documents prepared for effecting
sale including the sale certificate as per the State /Local Law.

13. RECOVERY OF SHORT FALL, IF ANY

vii. All the monies recovered shall be first applied in payment of costs, charges and expenses

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 incurred in connection with proceedings initiated under this act and secondly, in discharge
of the dues of the bank and residue of the money so received shall be paid to the person
entitled. In order to avoid legal complications, the surplus money after completion of the
sale must be paid to the borrower/guarantor, who is the owner of the property at the earliest.
viii. If there is a short fall in recovery of the debt due by the borrower, an application
should be filed before the Debt Recovery Tribunal (where the short fall exceeds Rs.10 lacs)
or Civil Court (where the short fall is less than Rs.10 lacs) for recovery against the
borrowers/guarantors within the period of limitation of the loan documents.

14. JURISDICTION OF CIVIL COURT BARRED

Under Section 34 of the Act, Civil Court is barred from entertaining any suit or proceeding
where Debt Recovery Tribunal is empowered to determine. The Hon’ble High Courts held in
number of cases that no injunction shall be granted by any civil court in respect of any action taken
in pursuance of any power conferred under this Act.

15. APPEAL TO DEBT RECOVERY TRIBUNAL (DRT)

Any person aggrieved by any measure taken by secured creditor or his authorised officer
under Sec.13(4) of the SARFAESI Act may file an appeal to Debts Recovery Tribunal, within 45
days from date on which such measure was taken. However, non-acceptance of representation or
objection by the Authorised Officer/Bank shall not entitle the borrower/guarantor to make an
application to the Debt Recovery Tribunal. In terms of Sec.17 (5) of the SARFAESI Act, the DRT
is required to dispose the application within four months from the date of the application.

16. DEBT RECOVERY APPELATE TRIBUNAL

If a person is aggrieved by the order of the DRT, he can file an appeal to the Appellate
Tribunal within 30 days from date of receipt of the DRT order.

17. EXEMPTIONS FROM THE ACT

The provision of the Act shall not apply to the following:

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1. A lien on any goods, money or security given by or under the Indian Contract Act, 1872 or
the Sale of Goods Act, or any other law for the time being in force.
2. A pledge of movables within the meaning of section 172 of Indian Contract Act,
3. Creation of any security in any aircraft as defined u/s 2(1) of Aircraft Act,
4. Creation of any security interest in any vessel as defined in section 3 (35) of Merchant
Shipping Act.
5. Any conditional sale, hire -purchase or lease or any other contract in which no security
interest has been created.
6. Any right of unpaid seller u/s 47 of Sale of Goods Act.
7. Any properties not liable to attachment or sale under first provision to section 60(1) of Code
of Civil Procedure.
8. Any security interest for securing repayment of any financial asset not exceeding one lakh
rupees.
9. Any security interest created in agricultural land.
10. Any case in which the amount due is less than 20% of the principal amount and interest
thereon (i.e. where borrower has repaid more than 80% of principal amount and interest.)

18. ASSISTANCE OF CHIEF METROPOLITAN MAGISTRATE OR

DISTRICT MAGISTRATE IN TAKING POSSESSION OF SECURED ASSET

 The secured creditor can take over possession of assets after 60 days from the receipt of the
notice.

 Where possession of assets is required to be taken or if any asset is required to be sold or

transferred and expects any resistance or law & order problems, the secured creditor may
file necessary applications before the Chief Metropolitan Magistrate/Chief Judicial
Magistrate or the District Magistrate within whose jurisdiction the assets are located, to take
possession of the assets. The Chief Metropolitan Magistrate shall appoint advocate
commissioner on the application of the Bank for taking over possession of the property with
the assistance of the police and hand over to the Bank. The Bank is also entitled to approach
District Magistrate who in turn can issue necessary direction for taking over possession with
the assistance of the police.

19. CHANGE OF DIRECTORS / APPOINTMENT OF ADMINISTRATOR

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  On the management being taken over, the secured creditor can change the directors of
borrower company if borrower is a company and appoint administrator if borrower is not a
company. A notice to the effect should also publish in the newspaper.

 On publishing of such notice, the earlier directors (in case of a company) and persons
holding any office of power of superintendence (if borrower is not a company) shall be
deemed to have vacated their office.

 Any contract of management, which borrower had with any director or manager of borrower
holding office shall be deemed to be terminated.

 The new directors/administrator appointed by secured creditor will take over the custody or
control all the property, effects or actionable claims to which the business of the borrower is
entitled.

 The new directors/administrator shall alone be entitled to exercise all the powers of
superintendence, direction and control of business of borrower.

20. EFFECT OF TAKEOVER OF MANAGEMENT

 SHAREHOLDERS CANNOT APPOINT DIRECTORS - After the takeover of assets,

shareholders of company cannot appoint or nominate any director of the company.

 NO RESOLUTION WITHOUT CONSENT OF SECURED CREDITORS - Any resolution

passed by shareholders will be effective only if approved by secured creditors.

 NO PROCEEDING FOR WINDING UP - No proceeding for winding up of such company

or appointment of receiver shall lie in any court, without the consent of secured creditor.

 NO COMPENSATION FOR LOSS OF OFFICE - Any Managing Director or Director of

the borrower shall not be entitled to any compensation for loss of office or for premature
termination of any contract or agreement with the borrower.
In the case of financing of a financial asset by more than one secured creditors or joint financing of
a financial asset by secured creditors, no secured creditor shall be entitled to excise any or all of the
rights conferred on him under or pursuant to sub-section (4) unless exercise of such right is agreed
upon by the secured creditors representing not less than sixty per cent in value of the amount
outstanding as on a record date and such action shall be binding on all the secured creditors.

21. PROTECTION OF ACTION TAKEN IN GOOD FAITH

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Under section 32 of the Act, no suit, prosecution or other legal proceedings shall lie against any
secured creditor or any of his officers or manager exercising any of the rights of the secured creditor
by the borrower/ guarantor for anything done or omitted to be done in good faith under this act.

22. LIMITATION PERIOD

No secured creditor shall be entitled to take all or any of the measures under sub section (4) of Sec.
13 of the Act, unless his claim in respect of the financial asset is made within the period of the
limitation prescribed under the limitation act. Therefore, wherever any claim is barred by limitation,
the claim under this law shall not be applicable. The secured creditors cannot exercise the rights
under this act in respect of time barred debts.

II. LOK ADALAT

Lok Adalat is another legal forums which have been playing an important role in settlement of
disputes. The Legal Services Authorities Act, 1987 has paved way for administering justice without
resorting to courts. It is voluntary process and works on the principle that both parties to the dispute
are willing to sort out their dispute amicably. Through this mechanism, disputes can be settled in a
simpler, quicker and cost effective way. Lok Adalats are conducted by State Level, District Level
and Taluk Level Legal Services Authority in the respective states. The Branches need to identify the
accounts which can be referred to Lok Adalat.

The settlement of accounts in Lok Adalat will benefit our Bank in four ways:-

 The award passed in Lok Adalat is at par with the Decree by the civil court and has got legal
enforceability.
 Since no court fee and advocate fee is required to be paid for Lok Adalat, both the bank and
the borrowers/guarantors can save both court fee and advocate fee.
 It saves enormous time to the bank and the borrowers/guarantors as there is no need to go
through the lengthy and time consuming legal process.
 In case of suit filed cases, bank is entitled to receive refund of court fee by filing suitable
application through Bank’s advocate.

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In view of the aforesaid advantages of Lok Adalat vis-à-vis initiating the long drawn legal
proceedings, both the bank and borrowers/guarantors can resort to Lok Adalat in bigger way so as
to reduce the level of NPA.

III.REVENUE RECOVERY ACT

In some states Recovery Act has been made applicable to banks. Since this is also an
expeditious process of adjudicating claims, banks may be notified to be covered under the Act by
states having such Act.

The NPA’s in banks need tackling promptly through a double pronged approach viz.
preventive and curative measures by banks at marco and micro levels. This may include a well
structured NPA management policy, formulating risk rating system, introducing pre-disbursement
audit and credit audit system for large advances and also systems to tackle potential problem loans
(including likely BIFR cases) well in time. Further, maximizing recovery through transparent
compromise proposals, setting up of internal committees at different levels in the bank for quick
disposal of settlement proposals and forming of special recovery/NPA cells at controlling offices
will accelerate the pace of recovery. Actions such as making accountable concerned staff for
recovery, opening up of specialized rehabilitation branches for providing focused attention to BIFR
cases and cases marked for recovery through legal means may also help in this regard. Up gradation
of information technology will facilitate better credit administration and help sharing vital
information between branches as also between banks and FLs and this should be the priority area
for bank managements. The bank should also start playing the role of friend, philosopher and guide
by counseling corporate borrowers to sell out assets not necessary for their core area of
production/competence. It is of utmost importance that necessary changes are brought about in the
related legislations for making recovery process more smooth and less time consuming and also
create other alternative channels/agencies for recovery of debt/reduction of non-performing
advances. As the Lok Adalat have proved a very good agency for quick justice and recovery of
smaller loans, their use could go a long way as a supplement to the efforts of recovery by the DRTs.
The setting up of Asset Reconstruction Company can also play a vital role in reduction of NPAs
and thereby provide necessary liquidity to banks through securitization of bank’s loan assets.

CONCLUSION

In the course of recovery of dues through legal process, there are two important legislations

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such as the Recovery of Debts Due to Banks and Finanacial Institutions Act, 1993 (RDDBFI Act)
and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest
Act (SARFAESI Act), 2002. The provisions of RDDBFI Act have been framed to expedite the legal
proceedings for adjudication of bank's dues above Rs.10 Lakhs. As regards the dues below Rs.10
Lakhs, the civil courts having jurisdiction will adjudicate such claims. Since the adjudication
proceedings by the Debt Recovery Tribunals were not able to deliver results, the Union of India
came up with the SARFAESI Act, which enabled the banks to take possession and conduct sale of
the property without approaching the Courts or Tribunals. The Lokadalat’s constituted under the
Legal Services Authority Act and Revenue Recovery Laws have also contributed to the recovery of
dues to the banks.

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