The recovery of outstanding loans generally advanced by banks to individual borrowers or 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 getting impacted to the extent that the growth of the economy had slowed down. 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 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 Narasimham Committee I, in the year 1992. The Committee recommended setting up a quasi judicial body to deal with recovery of amounts advanced as loans by Banks. The reason for this recommendation was the Civil courts were too over burdened with other type of recovery claims that banks claims failed to get any importance and 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 its inception the DRT and DRAT have a huge role to play in Debt Recovery.
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 customer within 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 and 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 instalment 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 in the manner required before 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 try and settle cases for recovery of loans and amounts from NPAs as classified by the banks under the RBI guidelines. The Tribunal had all the power 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 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 followed the 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 was much appreciated vis a vis the scene prior to 1994, where 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 assets and distribute the proceeds from the liquidation among all the creditors, depending on the priority of the claim. On the contrary, if 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 the civil procedures progressed it would take years for a bank to recover their dues. With the establishment of DRT the procedure for recovery of dues was faster as compared to the Civil Court. But later this was hampered because many borrowers started cross litigating 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 already before the Debts Recovery Tribunal, thereby resulting in a deadlock, which on some occasions still remains to be resolved.
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 the dues. Nevertheless, interest rates arose after the DRTs were established and all issues for credit expansion were resolved. Although, clashes are inevitable the DRT has helped the Banks and financial sectors recover huge amounts of loans, which earlier would take years to recover on account of the 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 to 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 security pledged to the Bank. The only possible remedy to the Banks and Fis to avoid clashes is do a complete due diligence before advancing loans to borrowers viz. title search, residence verification etc. However, there is no dispute to the fact that be it Public Sector or Private Sector Banking DRT is the forum for speedy recovery of debts.