Role of DRI in Banking Sector

The establishment of DRTs has provided security to banks and financial institutions that on account of any default by borrowers, the DRT will provide a suitable resolution mechanism to them for recovery of debts. This has led to reduced burden on Civil Courts. This article examines the impact of DRTs on the Indian judicial system with the key roles of DRTs.

Tue May 10 2022 | Business Law | Comments (0)

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The Recovery of Debts Due to Banks & Financial Institutions Act and SARFAESI have been key.The recovery of outstanding loans generally advanced by banks to individual borrowers and  corporate entities was a big issue, till the DRTs were established and largely determined the growth of the financial sector of the country. The Government revenues were  impacted to the extent that the growth of the economy had  stagnated. Banks and FIIS shied away from advancing loans as recovery of the loans was the biggest challenge they faced. The most important step to develop the economy was to have a progressive and effective adjudicating system and mechanism to recover the dues from borrowers.

Therefore, the Recovery of Debts Due to Banks & Financial Institutions Act, 1993 (RDDB&FI Act) was enacted. This Act finds its origins in the Tiwari Committee Report, which was drafted after the formation of the Narasimhama Committee I, in the year 1992. The Committee recommended setting up a  quasijudicial body to deal with recovery of amounts advanced as loans by Banks. The reason for this recommendation was that the Civil courts were overburdened  with other type of recovery claims that banks claims failed to  recover and this resulted in long ‘periods of litigation with no immediate effects or recoveries coming through’ .

Hence, this Act was enacted to cover all debts owed to banks and FIs (financial institutions) in excess of Rs10 lakh and the jurisdiction of civil courts on debts over these cases ceased to exist. The civil courts were directed to hand over all such cases to Debt Recovery Tribunals (DRTs) and Debt Recovery Appellate Tribunals (DRATs), constituted under the Act. As on date, there are 33 DRTs and 5 DRATs in the country and since its inception the DRT and DRAT have had a huge role to play in Debt Recovery.

Meaning of NPA- An overview

The meaning of a NPA is Nonperforming assets/loans of banks’, on account of loans that have been advanced. It is a loan that is not recovered from the loanee  within the stipulated time. Under the RBI guidelines, all banks are supposed to follow a particular procedure before classifying a NPA and the same  is based on the evidence  of recovery. Just because of a temporary deficiency, Banks cannot classify  an asset as a NPA. To broadly classify an asset as NPA, the Banks should base their record on shortfall of adequate drawing power based on the latest available  profit & loss statement and the balance that is still outstanding on the prescribed due date.

A non-performing asset (NPA) is classified according to the interest and/ or installment  or principal that has been overdue for a span of more than 90 days for any term loan advanced. Further, it could also apply to accounts that have been non- operational for more than 90 days for the Overdraft facilities or for the bills purchased and discounted. Once an asset is classified as NPA after following the appropriate procedure, as laid down by the RBI guidelines, banks and financial institutions can move for recovery of dues on the account and in the manner prescribed  before the DRT. 

Role of the DRT

The DRTs main object and role was to recover all outstanding loans due to banks and financial institutions.  The Tribunal’s power is limited to attempt to  settle cases for recovery of loans and amounts from NPAs, as classified by the banks, under the RBI guidelines. The Tribunal has  all the powers  of a District  Court and tried all pending cases with the District Court  under the Act which constituted it, viz the Recovery of Debts Due to Banks & Financial Institutions Act, 1993 (RDDB&FI).  The Tribunal followed the same procedure of issuing summons, summoning of witnesses, evidence  leading and argument  before the final judgment . The Tribunal also has a Recovery Officer,  who helps in executing the recovery Certificates as passed by the Presiding Officers.

Thus, the DRT  follows an efficient legal procedure emphasizing speedy disposal of the cases and fast implementation of the final order.

This procedure of fast trial for recovery by the DRT  is welcome.  The  situation  prior to 1994 meant that Debt Recovery involved filing a legal suit in the Civil Court,  where the banks stated the particulars of the case, and then the court directed the borrower to pay the money to the banks. If the loan was unsecured, the bank sought to liquidate the firm’s  assets and distribute the proceeds from the liquidation among all the creditors, depending on the priority of claims . On the contrary, if a loan was secured, the court would enforce its security interest by allowing the sale of collateral, so that the bank recovered their dues. But going by the way  civil procedures  resolved matters, it would take years for a bank to recover their dues. With the establishment of DRT, the procedure for recovery of dues is  faster as compared to the Civil Courts . But later, this was hampered because many borrowers started cross litigating by asserting that their claims were pending at Civil Courts  and that all recovery should be stalled. 

In addition, the biggest challenge faced was a conflict of jurisdiction among the Official Liquidators appointed by the High Courts and the Recovery Officers of the Debts Recovery Tribunals. The Official Liquidator, being an officer of a higher rank, took into possession all the properties, which actually belonged to secured creditors  before the Debts Recovery Tribunal, thereby resulting in a deadlock, which, on some occasions still remains to be resolved.

Conclusion

The Debts Recovery Tribunals performed well and helped the Banks and Financial Institutions recover substantially large parts of their non performing assets and bad debts. Further, the DRTs caused an increase in state-level bank lending, as Banks trusted that there is a mechanism in place to recover their  dues. Nevertheless, interest rates rose  after the DRTs were established and all issues for credit expansion were resolved.  Although, clashes are inevitable, the DRT has helped banks  and financial sectors recover huge amounts of loans, which earlier would take years to resolve  on account of  long civil procedures. With the enactment of the SARFAESI Act, 2002 (The Securitization and Reconstruction of Financial Assets & Enforcement of Security Interest Act, 2002), it has become possible to ensure speedy recovery and instill confidence in  the borrower that they would be heard fairly, especially when the borrower has got a very good track-record / relation with the Bank apart from having valuable and marketable securities  pledged to the Bank. The only possible remedy for  Banks and Financial Institutions  to avoid litigation  is  to perform a thorough  due diligence before advancing loans to borrowers viz. title search, residence verification etc. However, there is no disputing the  fact that, be it the Public Sector or the Private Sector Banking, DRT is the forum for speedy recovery of debts.

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