Credit is a delicate plant which flourishes under favourable conditions
and is exceedingly quick to whither in adversity. It bears the seed of its own
destruction. Hence when banks/financial institutions are going to lend, the foremost
point before them is that the loan will, in the first place be repaid when due
and in the second that it be used for legitimate purposes. However, recovery of
loans is one of the most difficult problems, to be tackled by these
institutions, irrespective of whether the loan is a short, medium or long-term or to whom the
loan is disbursed i.e. the types of borrowers which may either he large, medium
or small‑scale industries, transporters,, exporters, traders,
agriculturists, professionals etc. To ease the problem, certain safeguards must
be kept in view and proper steps, if taken in time, will help in speedy
recovery.
The common causes for low recovery of loans by banks and financial
institutions may be summed up as under:
(a) At
times, the credit‑worthiness of the borrowers is not assessed properly
which depends upon "willingness" ' of the borrower to repay i.e. his
character and integrity and also his capacity to earn and repay
(b) Improper appraisal of
the project.
(c) Lack of proper follow‑up and supervision after
the loan is, sanctioned.
(d) Diversion of funds by
borrowers for purposes other than for which they are sanctioned.
(e) Lack of assistance from
Sponsoring and Government agencies in recovering the loans.
(f) Lack
of effective administrative mechanism to supervise the proceedings of the
recovery and utilisation of advances.
(g) Unhealthy trend of
shielding of defaulters by the political heavyweights.
(h) Lack of co‑ordination
and follow‑up when more than one financing institutions are involved.
(i) Lack of proper and
timely guidance when the borrower is in adversity.
G) Time‑consuming
process of recovery if litigation is resorted to, which generally becomes
expensive too.
(k) Deteriorating integrity,
sincerity, dedication and morality.
Recovery of loans/debts is a ticklish problem. Therefore, concerted
efforts should be made to ensure speedy recovery which will lead to better
recycling of funds. Following can be the short and long term measures for
ensuring timely recovery
1. Rescheduling
the repayment period and to take rehabilitation measures, if required. A proper
and timely study of the units for ascertaining the causes of sickness and for
assessing their liability becomes imperative inasmuch
as, if the units are found potentially viable, they must be put
immediately under nursing programme, so that when out of adversity, they may
start repaying the loans.
2. Improving organisational
set up by appointing trained professionals to look after recovery.
3. Reducing
wilful defaults by resorting to greater emphasis on recovery, proper education
and training to staff, black‑listing of intentional defaulters and by
providing faster and more effective legal support.
4. Providing
incentives to staff members if they help in recovering sticky advances, on the
same lines if they happen to fetch deposits.
5. By
bringing about healthy changes in the behaviour of branch managers towards
recovery of such loans which have not been sanctioned during their tenure.
Instead resorting to filing of suits in such cases the managers/ officers may
be made to understand by proper education and training that, if the unit can be
revived back to health, it should be so done, in the interest of borrower,
financing institution and the nation, at large.
6. Timely
lodging of claims with Export Credit and Guarantee Corporation (ECGC) and with
all such agencies who have guaranteed the loan like 'Credit Guarantee Fund
Trust for Small Industries'.
7. Taking
resort to Public Debt Recovery Act in the states where such Acts are in force,
for here, in these States bank dues are treated as arrears of land revenue and can be recovered effectively with the help and assistance provided by respective State Governments.
8. Recovery
through out of court settlements and through compromises, as it is less
expensive and more fast technique of recovery.
9. Resorting
to legal action when it is well established that the borrower is a habitual or
wilful defaulter and his integrity is doubtful though he has repaying capacity.
The following points must he‑
ensured before taking any legal action :
(i)
The debt is not time‑barred and within
the period of limitation.
(ii)
The debt against which proceedings are to be
initiated in the court, must be reduced to minimum, by Sadjusting the amount of
securities available. This will help in siphoning off less amount on court fee,
counsel's fee etc.
(iii)
The securities like hypothecated goods, must be
effectively and legally possessed beforehand and preserved in such a way that
their quality is not deteriorated.
(iv)
The property, which can be attached a ' s
security must be valued properly (i.e. not to be overvalued) so that
presentation before court is on the sound
lines.
(v)
It must be ensured that all the relevant legal
documents are on record and have been properly examined by the legal counsel
and further the counsel must be explained all the facts of the case so that he
may file a proper and well‑drafted plaint.
10. Take
action under the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002.
11. Effecting
recovery of loans through Debt Recovery Tribunals (DRTs) established under
"The Recovery of Debts due to Banks and Financial Institutions Act,
1993".
Recovery of Debts
Due to Banks and Financial Institutions Act, 1993
Legal process of recovery of dues is a time consuming and expensive mode
which, even if awards decrees in favour of financial institutions, may not be
that much useful because of the inordinate delay involved in securing decrees
during which time the assets charged as securities get deteriorated and
commercial value diminished. A significant portion of the funds of the Banks
and Financial Institutions thus gets blocked in unproductive assets.
Realising this problem, the Parliament enacted "The Recovery of
Debts Due to Banks & Financial Institutions Act, 1993' which came into
force with effect from 24th June, 1993.
(i) The Act
applies to all banks including Regional Rural Banks and all India Financial
Institutions. However, State Level Financial Institutions are outside the
purview of this Act.
(ii) The
provisions of the 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 than Rs.10 lakh or as specified by the Central Government.
(iii) The
Central Government shall establish 'Debt Recovery Tribunals (DRTs)' with pre‑defined areas of jurisdiction.
The Tribunal will consist of one person
only designated as 'Presiding Officer'. The Tribunal will be provided
with one or more 'Recovery, Officers' and such other officers and employees
who will work under the general superintendence of the Presiding Officer.
Central Government will also establish "Debt Recovery Appellate Tribunal
(DRAT)" which shall also consist of one person only designated as
'Chairperson'.
(iv) The
Tribunals shall exercise powers and authority to entertain and decide applications
from banks & financial institutions for recovery of debts and no court or
other authority shall have any jurisdiction (except the Supreme Court and a High Court exercising jurisdiction under Articles 226 & 227 of the
Constitution).
(v) Where
the bank or a financial institution has to recover a debt, application in the
prescribed form, will have to be filed with Tribunal. The Tribunal will issue summons requiring the defendant to show cause within 30 days of the
service of summons. Before passing any
order including interim order both the applicant and defendant will be given
the opportunity of being heard. The Tribunal may also consider counter
claims/set off from the defendant.
(vi) The
Tribunal may, after being satisfied, consider to exclude counterclaim of the
defendant and dispose of the same independently, if an application in this
respect is filed by the applicant.
(vii) The
Tribunal may make an interim order by way of injunction/stay/ attachment,
debarring defendant from transferring, alienating or disposing of any property
and assets without its prior permission.
(viii) At
any stage of the proceedings, if the Tribunal is satisfied that the defendant
intends to obstruct or delay or frustrate the execution of the recovery order,
he may be ordered to furnish security of specified sum failing which attachment
orders may follow.
(ix) The
Tribunal may appoint Receiver of any property and confer upon him all such
powers like bringing and defending suit in the courts of filing; defending
application before the Tribunal; realisation, management, protection,
preservation and improvement of the property; collection of rents and profits
arising from the property and application and disposal of such rents an
profits; execution of documents; or other powers which the Tribunal thinks fit.
(x) The
Tribunal may also appoint Commissioner for the preparation of an inventory of
the properties of the defendant or the sale thereof.
(xi) Disobedience
of or breach of any of the terms of the order of the Tribunal made under
clauses (vii), (viii), (ix) and (x) above, may result in detention of the
guilty person in civil prison for a term not exceeding three months.
(xii) The
application shall be disposed of, as far as possible, within 180 days from the
date of its receipt. A certificate will be issued to the Recovery Officer for
recovery of amount of debt specified in the certificate.
(xiii) The
Tribunal may order to distribute the sale proceeds among the 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, where a recovery certificate is
issued against a company.
(xiv) The
Tribunal, issuing recovery certificate, if satisfied that the property is
situated within the jurisdiction of two or more Tribunals, may send the copies
of recovery certificate for execution
to such other Tribunals also.
(xv) An
appeal may be preferred to an 'Appellate Tribunal' within a period of 45 days
from the date of order. However, the Appellate Tribunal may condone the delay
in preferring an appeal beyond 45 days, if sufficient causes are shown. On
receipt of an appeal, an order confirming, modifying or setting aside the order
appealed against may be passed by the 'Appellate Tribunal'. Appeal can be filed
by depositing seventy five percent of the amount of debt as determined by the
Tribunal. Appellate Tribunal may, however, waive or reduce the amount of deposit. No appeal shall lie against an order which is passed by the Tribunal with the consent of the parties.
(xvi) The provisions of the
Limitation Act, 1963 shall apply to an application made to a Tribunal.
(xvii) The
Recovery Officer, after issuance of certificate by the Tribunal, shall recover
the amount of debt by one or more of the following modes:
(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 modes of recovery include requiring any person who is indebted to
the defendant, to deduct the amount of debt due from defendant from the amount
payable to the defendant. Recovery Officer is authorised to issue notice to any
person from whom money is due or may become due to the defendant. Such person
will be required to deposit the amount with Recovery Officer, who shall grant a
receipt for any amount so paid in compliance with the notice issued. The person
so paying will be fully discharged from his liability to the defendant to the
extent of amount so paid. While executing certificate of recovery, the Recovery
Officer may require any person and any of the officers of a company against
whom or which the recovery certificate is issued, to declare on affidavit the
particulars of his or its assets.
(xviii) Notwithstanding
anything contained in clause (xix) below, any person aggrieved by an order of
the Recovery Officer may prefer an appeal to the Tribunal within thirty days
from the date on which order is issued to him and the Tribunal may, after
giving an opportunity to the appellant of being heard and after making
necessary enquiry, confirm, modify or set aside the order made by the Recovery
Officer.
(xix) The
provisions of the Second and Third Schedules to the Income‑tax Act, 1961
and 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 the income‑tax.
(xx) The
provisions of this Act are in addition to, and not in derogation of, the
Industrial Finance Corporation Act, 1948, the State Financial Corporations Act,
195 1, the Unit Trust of India Act, 1963, the Industrial Reconstruction Bank of
India Act, 1984, the Sick Industrial Companies (Special Provisions) Act, 1985
and the Small Industries Development Bank of India Act, 1989. However, in other
matters, the provisions of this Act shall have effect notwithstanding anything
inconsistent there with 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.
(xxi) The
term 'Debt', can be expressed to mean any liability inclusive of interest which
is claimed as due by a bank, financial institution or consortium of banks and
financial institutions during the course of any business activity undertaken by
them. Such debt may be in cash or otherwise, secured or unsecured, or assigned,
or payable under a decree or order of any civil court or any arbitration award
or otherwise, or under a mortgage. It is further to be noted that the debt must
be subsisting on the date of filing of application with the Tribunal and is
legally recoverable.
The Reserve Bank of India has advised banks to incorporate a condition
in the loan agreement for obtaining the consent of borrowers to disclose their
names in the event of their becoming defaulters. The banks were asked to put in
place the system for obtaining the consent of borrowers by 30.9.2001.
Banks and financial institutions are required to submit to RBI a list of
names of defaulters of Rs. one crore and above against whom suits have been
filed to recover defaulted loans or non‑performing assets (NPAs) and the
RBI publishes a complete list as on 31st March every year. Another scheme for
collection and dissemination of information of wilful defaulters with
outstanding balance of Rs.25 lakh and above was also introduced in February
1999 on a quarterly basis. Wilful
defaults can be defined as failure to repay loans where either the
defaulter has a sound net worth and adequate cash flows, or where the promoter
has siphoned off funds from a sick unit or where the promoters/borrowers have
either clandestinely sold assets or not purchased them at all, although they
are charged to the bank. For details, refer to Chapter 'Role of Commercial
Banks'.
In the case of wilful defaulters, only the Board of Directors, should
consider any fresh limit, renewal or enhancement on merits of each case.
Various banks and financial institutions have agreed to form a corporate
debt restructuring cell with the objective of shortening the time for taking
decisions on big defaulter accounts above Rs.20 crore.
The cell will be headed either by a senior banker or a retired banker.
It would be a voluntary organisation. Under the cell, committees on separate
defaulter companies would comprise the bankers and institutions that are part
of the consortium of funding agencies for the company.
The bankers have also agreed that the cell would decide on whether to
opt for restructuring the debt or go in for legal action against the
defaulters, within a maximum time frame of 180 days.
Credit Information Bureau (CIB)
Indian Bankers' Association (IBA) has set up a Credit Information Bureau
which shall develop information on habitual as well as potential defaulters. To
nab defaulters all member banks will share the information so built up.
The managing committee of IBA will deliberate on the amount/capital
needed to set up such a bureau. Reserve Bank of India has advised the banks to
make the necessary in‑house arrangement for gathering and collection of
credit and other information in one place for transmitting it to the Credit
Information Bureau.
State Bank of India has already entered into an MOU with HDFC to set up
a Credit Information Bureau.
The RBI has advised banks to use Lok Adalats to settle disputes
involving small loans upto Rs.5 lakh. The RBI has issued detailed guidelines
for settlement of dues through Lok Adalats. The scheme includes all NPA
accounts (both suit filed and non‑suit filed accounts), which are in
"doubtful" and "loss" category, with outstanding balance of
Rs.5 lakh.
With a view to speed up recovery process of all disputed and sticky
loans upto Rs.10 lakhs, RBI is bringing out a new banking arbitration scheme
under the Arbitration and Conciliation Act, 1996. It is proposed to settle the
disputes under the scheme in one hearing without challenging the award given by
the panel in a court of law.
For the purpose of referring cases, the banks will be required to
incorporate a new clause in all loan agreements stating that, in case of any
dispute, the case will be referred to the banking arbitration panel. According
to the scheme, once a case is filed, the hearing will be held after three
months, to be settled on the spot. Recording of evidences will be done only in
selected cases.
The arbitration scheme will provide the banks with a third option to
speed up the recovery process of sticky loans upto Rs.10 lakh in addition to
Lok Adalats and settlement advisory panels. Sticky loans beyond Rs.10 lakh are
required to be referred to Debt Recovery Tribunals.
The Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 was passed by the Parliament in
December 2002 and it came into force w.e.f. 21.6.2002 as per an Ordinance
promulgated earlier.
The Government from time to time has taken various steps to curb the
problem of Non‑Performing Assets (NPAs) and to expedite their recovery
but the results have not been very encouraging.
The new Act will enable the secured creditor to realise more easily the
security given for a loan which has become an NPA. This Act will definitely
bring a cultural change among the defaulters.
The Act can be broadly divided into two parts:
(a) Enforcement of security
interest by secured creditor (Banks/Financial institutions).
(b) Regulation of
Securitisation and Reconstruction of Financial Assets of Banks and Financial
Institutions.
These are discussed in the following paragraphs
(a) Secured Creditors
(Banks/Financial Institutions) now have a remedy for enforcing security
directly, without intervention of the court or Tribunal. This remedy is
available to Banks/FI, if the following conditions are satisfied:
(i) The
borrower must have made a default in respect of the secured debt.
(ii) The
debt must have been classified as NPA by the secured creditor.
(iii) The
secured creditor must have given a notice in writing to the borrower to
discharge its liabilities within 60 days.
(b) In
case the borrower fails to discharge his liability in full, the secured
creditor can take the possession or management of the secured assets (whether
provided by borrowers or guarantors) and can transfer them by way of lease,
assignment or sale.
(c) The secured creditor can
also proceed against the guarantors or sell the pledged assets directly.
(d)
If dues are not fully recovered, the secured
creditor can fill application with Debt Recovery
‑ Tribunal for balance amount.
(e)
Banks/FI can, at their discretion‑band
over the asset to securitisation or reconstruction company, which in turn can am as a 'secured creditor'.
(f) The borrower can file an appeal with Debt Recovery Tribunal (DRT) within 45 days of taking over of asset or management by the secured creditor. The borrower will have to deposit 75% of the amount claimed in the notice with DRT before its appeal is entertained. It means no appeal can be filed by the borrower at the stage of receiving notice.
(g) Appeal against DRT's
order can be filed with Debt Recovery Appellate Tribunal (DRAT).
(h) Civil
courts shall have no jurisdiction in respect of the matters on which a DRT or
DRAT is empowered by this Act to determine.
(i) Overriding effect has
been given to this 'Act' to avoid conflict between various laws.
(j) The Act also has provision for compensation in case of wrongful
action by the secured creditor.
(k) The following securities
have been exempted from the provisions of the Act.
(i)
lien on goods, money or security,
(ii) pledge of movables,
(iii)
creation of security in aircraft under the Aircraft Act,
(iv)
creation of security in a vessel,
(v)
conditional sale, hire purchase or lease or any
other contract where no security interest has been created,
(vi) where
amount due is less than 20% of the principal amount and interest,
(vii)
in case financial asset does not exceed
Rs.1,00,000/-
(viii) Agricultural land
(ix) Rights
of unpaid seller
(x) Properties
exempted from attachment under the Civil Procedure Code.
The Act has introduced the concept of a securitisation company and' a
reconstruction company which may acquire right or interest in financial assets
from Banks/FIs. Once the securitization company acquires 'financial asset' from
Banks/F1s, it becomes 'secured creditor' for all purposes. In brief the Act has
provided legal framework for securitisation of assets.