RECOVERY OF LOANS

Recovery is defined as the process of

regaining and saving something lost
or in danger of becoming Lost.
DEFAULT
NON PAYMENT OF AGREED INSTALLMENTS
GENUINE DEFAULTS
 DEFAULTS DUE TO REASONS BEYOND BORROWER’S CONTROL
 SICKNESS, LOSS OF JOB ETC
 BUSINESS LOSS, INDUSTRY DOWNTURN

WILLFUL DEFAULTS
 DELIBRATE DEFAULT WITH MALAFIDE INTENTIONS
 BORROWER HAS STEADY INCOME
 DIVERTS FUNDS FOR OTHER PURPOSES
 DISPOSED OFF ASSET
IMPACT OF CHANGE INCREASE IN INTEREST RATE
IMPACTS
 MONTHLY INSTALLMENTS
 LOAN PERIOD
MEASURES AGAINST WILLFUL DEFAULTERS

NO ADDITIONAL FACILITIES BY ANY BANK/FI TO LISTED WILLFUL DEFAULTERS

LEGAL PROCESS AGAINST BORROWER/GUARANTOR
CRIMINAL PROCEEDINGS CAN BE INITIATED.
DIVERSION OF FUNDS
UTILIZATION OF FUNDS NOT AS PER SANCTION TERMS
TRANSFERRING OF FUNDS TO OTHER PERSON/COMPANIES
ROUTING OF FUNDS THROUGH OTHER BANK OTHER THAN LENDER
BANK/CONSORTIUM WITHOUT APPROVAL
SHORTFALL IN DEPLOYMENT OF FUNDS
INVESTMENT IN OTHER COMPANIES WITHOUT APPROVAL

CUT OFF LIMIT FOR PENAL PROVISION IS Rs 25 Lakhs or more.

NON – EXHAUSTIVE INDICATIVE LIST OF SIGNS OF
FINANCIAL DIFFICULTY
Irregularities in cash credit/overdraft accounts such as inability to maintain stipulated margin basis or drawings
exceeding sanctioned limits, periodic interest debited remaining unrealised;
Failure/anticipated failure to make timely payment of instalments of principal and interest on term loans;
Delay in meeting commitments towards payments of installments due, crystallized liabilities under LC/BGs, etc.
Excessive leverage;
Inability to adhere to financial loan covenants;
Failure to pay statutory liabilities, non- payment of bills to operational creditors, etc.;
Non-submission or undue delay in submission or submission of incorrect stock statements and other control statements,
delay in publication of financial statements and adversely qualified financial statements;
Steep decline in production figures, downward trends in sales and fall in profits, margin erosion etc.;
Elongation of working capital cycle, excessive inventory build-up;
Significant delay in project implementation;
Downward migration of internal/external ratings/rating outlook.
RESOLUTION OF STRESSED ASSETS
– REVISED FRAMEWORK
RBI FRAMEWORK – FEB 2018
 Insolvency and Bankruptcy Code, 2016 (IBC)
 Various instructions aimed at resolution of stressed
assets
 Revised Framework
A. Early identification and reporting of stress
B. Implementation of Resolution Plan
C. Timelines for Large Accounts to be Referred under IBC
D. Prudential Norms
 EARLY RECOGNITION OF FINANCIAL DISTRESS
INITIATED BY RAGHURAM RAJAN IN 2014
BANKS ASKED TO IDENTIFY LIKELY STRESSED ASSETS
CREATE – SPECIAL MENTION ACCOUNTS (SMA)
EARLY WARNING SYSTEM

SMA Subcategories Basis for Classification

SMA 0 Principal or Interest payment not overdue for more than 30 days but
account showing signs of incipient stress
SMA 1 Principal or Interest payment overdue between 31-60 days

SMA 2 Principal or Interest payment overdue between 61-90 days

Lenders shall report credit information, including classification of an account as SMA to Central Repository of Information
on Large Credits (CRILC) on all borrower entities having aggregate exposure3 of ₹ 5 CRORES and above with them.
RESOLUTION PLAN (RP)
ALL LENDERS TO HAVE POLICIES FOR RESOLUTION OF STRESSED ASSETS
 THESE POLICIES SHOULD BE APPROVED BY LENDER’S BOARD
 INITIATE STEPS TO CURE THE DEFAULT AS SOON AS THERE IS A DEFAULT.
 RESOLUTION PLAN INCLUDES
 ACTIONS/PLANS/REORGANIZATION INCLUDING BUT NOT LIMITED TO
 PAYMENT OF ALL OVER DUES
 SALE OF EXPOSURE TO OTHER ENTITIES
 CHANGE IN OWNERSHIP
 RESTRUCTURING

 RP SHOULD BE CLEARLY DOCUMENTED BY ALL THE LENDERS (EVEN IF THERE IS NO

CHANGE IN ANY TERMS AND CONDITIONS)
IMPEMENTATION CONDITIONS FOR RP
FOLLOWING CONDITIONS NEED TO BE MET FOR PLAN TO BE DEEMED IMPLEMENTED
BORROWER ENTITY IS NO LONGER DEFAULT WITH ANY LENDER
IF RESOLUTION INVOLVES RESTRUCTURING THEN
• ALL RELATED DOCUMENTATION COMPLETED BY ALL LENDERS
• NEW CAPITAL STRUCTURE AND/OR CHANGES IN THE TERMS OF CONDITIONS OF THE EXISTING LOANS
GET DULY REFLECTED IN THE BOOKS OF ALL THE LENDERS AND THE BORROWER.

INDEPENDENT CREDIT EVALUATION - RP INVOLVING RESTRUCTURING/CHANGE IN

OWNERSHIP FOR EXPOSURE GREATER THAN 100 CRORES
2 EVALUATIONS IF EXPOSURE EXCEEDS 500 CRORES
TIMELINES FOR LARGE ACCOUNTS TO BE REFERRED
UNDER IBC
ACCOUNTS WITH AGGREGATE EXPOSURE OF THE LENDERS AT ₹ 2000 CRORES
AND ABOVE
ON OR AFTER MARCH 1, 2018 (‘REFERENCE DATE’)
 RP shall be implemented as per the following timelines:
• If in default as on the reference date, then 180 days from the reference date.
• If in default after the reference date, then 180 days from the date of first such default.

IF RP IS NOT IMPLEMENTED AS PER ABOVE TIMELINES THEN LENDERS CAN FILE
FOR INSOLVENCY APPLICATION UNDER IBC 2016
PRUDENTIAL NORMS
ASSET CLASSIFICATION
In case of restructuring, the accounts classified as 'standard' shall be immediately
downgraded as non-performing assets (NPAs),
CONDITIONS FOR UPGRADE
Standard accounts classified as NPA and NPA accounts retained in the same category
on restructuring by the lenders may be upgraded only when all the outstanding loan
/ facilities in the account demonstrate ‘satisfactory performance’ (i.e., the payments in
respect of borrower entity are not in default at any point of time) during the
‘specified period’
PROVISIONING NORMS
 CATEGORIES OF NPAS
NON PERFORMING ASSETS ARE CLASSIFIED INTO THREE CATEGORIES BASED ON THE PERIOD
FOR WHICH THE ASSET HAS REMAINED NON PERFORMING AND THE REALIZABILITY OF THE DUES:
SUBSTANDARD ASSETS
 REMAINED NPA FOR A PERIOD LESS THAN OR EQUAL TO 12 MONTHS
 WELL DEFINED CREDIT WEAKNESSES
 DISTINCT POSSIBILITY THAT THE BANKS WILL SUSTAIN SOME LOSS, IF DEFICIENCIES ARE NOT CORRECTED

DOUBTFUL ASSETS
• IF IT HAS REMAINED IN THE SUBSTANDARD CATEGORY FOR A PERIOD OF 12 MONTHS.
• COLLECTION OR LIQUIDATION IN FULL IS HIGHLY QUESTIONABLE AND IMPROBABLE.

LOSS ASSETS
• LOSS HAS BEEN IDENTIFIED BY THE BANK OR INTERNAL OR EXTERNAL AUDITORS OR THE RBI INSPECTION
• BUT NOT WRITTEN OFF WHOLLY
PROVISIONING NORMS
Banks should make provision against substandard assets, doubtful assets and loss
assets as below:
Loss assets
• Loss assets should be written off

Doubtful assets
• UNSECURED LOANS 100%
• SECURED LOANS

Period for which the advance has remained in ‘doubtful’ category Provision requirement (%)
Up to one year 25
One to three years 40
More than three years 100
Note: Valuation of Security for provisioning purposes

Substandard assets
• 15 percent on total outstanding
• ‘Unsecured exposures’ which are identified as ‘substandard’ would attract additional provision of 10
per cent,
PROVISIONING NORMS
Standard assets
•Farm Credit to agricultural activities and Small and Micro Enterprises (SMEs) sectors
at 0.25 per cent;
•Advances to Commercial Real Estate (CRE) Sector at 1.00 per cent;
•Advances to Commercial Real Estate – Residential Housing Sector (CRE - RH) at 0.75
per cent
•Provisioning for housing loans at teaser rates - increased from 0.40 per cent to 2.00
per cent in view of the higher risk associated with them
•All other loans and advances not included in above at 0.40 per cent.
INCOME RECOGNITION
 HAS TO BE OBJECTIVE AND BASED ON THE RECORD OF RECOVERY
 INCOME FROM NON-PERFORMING ASSETS (NPA) IS NOT RECOGNISED ON
ACCRUAL BASIS BUT IS BOOKED AS INCOME ONLY WHEN IT IS ACTUALLY
RECEIVED.
 ACCRUAL INCOME OF NPA ACCOUNTS IS NOT RECOGNISED
 NPA ACCOUNT INCOME ONLY BASIS RECOVERY
 INTEREST ON ADVANCES AGAINST TERM DEPOSITS, NATIONAL SAVINGS
CERTIFICATES (NSCS), INDIRA VIKAS PATRAS (IVPS), KISAN VIKAS PATRAS (KVPS)
AND LIFE POLICIES MAY BE TAKEN TO INCOME ACCOUNT ON THE DUE DATE,
PROVIDED ADEQUATE MARGIN IS AVAILABLE IN THE ACCOUNTS.
 REVERSAL OF INCOME
ANY ADVANCE, INCLUDING BILLS PURCHASED AND DISCOUNTED, BECOMES NPA, THE ENTIRE
INTEREST ACCRUED AND CREDITED TO INCOME ACCOUNT IN THE PAST PERIODS, SHOULD BE
REVERSED IF THE SAME IS NOT REALISED. THIS WILL APPLY TO GOVERNMENT GUARANTEED
ACCOUNTS ALSO.
IN RESPECT OF NPAS, FEES, COMMISSION AND SIMILAR INCOME THAT HAVE ACCRUED
SHOULD CEASE TO ACCRUE IN THE CURRENT PERIOD AND SHOULD BE REVERSED WITH
RESPECT TO PAST PERIODS, IF UNCOLLECTED.
LEASED ASSETS
• THE FINANCE CHARGE COMPONENT OF FINANCE INCOME [AS DEFINED IN ‘AS 19 LEASES’ ISSUED BY THE
COUNCIL OF THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI)] ON THE LEASED ASSET WHICH HAS
ACCRUED AND WAS CREDITED TO INCOME ACCOUNT BEFORE THE ASSET BECAME NON PERFORMING, AND
REMAINING UNREALISED, SHOULD BE REVERSED OR PROVIDED FOR IN THE CURRENT ACCOUNTING PERIOD.
COMPUTATION OF NPA LEVELS
Gross Advances, Net Advances, Gross NPAs and Net NPA
(Rs. in Crore up to two decimals)
Particulars Amount
1. Standard Advances
2. Gross NPAs *
3. Gross Advances ** (1+2 )
4. Gross NPAs as a percentage of Gross Advances (2/3) (in %)
5. Deductions
(i) Provisions held in the case of NPA Accounts as per asset
classification (including additional Provisions for NPAs at higher
than prescribed rates).
(ii) DICGC / ECGC claims received and held pending adjustment
Part payment received and kept in Suspense Account or any other
(iii)
similar account
Balance in Sundries Account (Interest Capitalization - Restructured
(iv)
Accounts), in respect of NPA Accounts
(v) Floating Provisions***
Provisions in lieu of diminution in the fair value of restructured
(vi)
accounts classified as NPAs
Provisions in lieu of diminution in the fair value of restructured
(vii)
accounts classified as standard assets
6. Net Advances(3-5)
7. Net NPAs {2-5(i + ii + iii + iv + v + vi)}
8. Net NPAs as percentage of Net Advances (7/6) (in %)
* Principal dues of NPAs plus Funded Interest Term Loan (FITL) where the
corresponding contra credit is parked in Sundries Account (Interest Capitalization
- Restructured Accounts), in respect of NPA Accounts.
** For the purpose of this Statement, ‘Gross Advances' mean all outstanding loans
and advances including advances for which refinance has been received but
excluding rediscounted bills, and advances written off at Head Office level
(Technical write off).
*** Floating Provisions would be deducted while calculating Net NPAs, to the extent,
banks have exercised this option, over utilising it towards Tier II capital.
PART 2
 LOAN CONTRACT
THE TERMS AND CONDITIONS OF THE CONTRACT IN TERMS OF THE RECOVERY
POLICY AND SHOULD CONTAIN PROVISIONS REGARDING :
A. NOTICE PERIOD BEFORE TAKING POSSESSION
B. CIRCUMSTANCES UNDER WHICH THE NOTICE PERIOD CAN BE WAIVED
C. THE PROCEDURE FOR TAKING POSSESSION OF THE SECURITY
D. A PROVISION REGARDING FINAL CHANCE TO BE GIVEN TO THE BORROWER FOR REPAYMENT OF
LOAN BEFORE THE SALE/
E. AUCTION OF THE PROPERTY
F. THE PROCEDURE FOR GIVING REPOSSESSION TO THE BORROWER
G. THE PROCEDURE FOR SALE/AUCTION OF THE PROPERTY.

BANKS ARE ENCOURAGED TO USE THE FORUM OF LOK ADALATS FOR RECOVERY
OF PERSONAL LOANS, CREDIT CARD LOANS OR HOUSING LOANS WITH LESS THAN
RS. 20 LAKH AS SUGGESTED BY THE HONOURABLE SUPREME COURT.
STRATEGY FOR RECOVERY
COLLECTION PROCESS SHOULD BE COMPLIANT TO THE BANK SPECIFIC RECOVERY NORMS
AND ALSO REGULATORY GUIDELINES.
THE COLLECTION TIMING SHOULD BE SYNCHRONIZED TO THE CASH INFLOW PATTERN OF THE
DEBTORS.
ADOPT DIFFERENT COLLECTION STRATEGY FOR DIFFERENT DEBTOR TYPES
I. NORMAL DEBTORS, I.E. WHO ‘CAN PAY’ AND ‘WILL PAY’ IF REMINDED OR/AND
PERSUADED TO PAY.
II. DIFFICULT DEBTORS, I.E. THOSE WHO ‘CAN PAY’, BUT ‘WILL NOT PAY’.
III. DOUBTFUL DEBTORS, I.E. THOSE WHO CAN PAY THE REDUCED AMOUNT AS NEGOTIATED
WITH THEM.
RECOVERY POLICY
 PREAMBLE
• FAIRNESS AND TRANSPARENCY
• TREATMENT, INTEREST, REPOSSESSION, VALUATION AND REALIZATION

 GUIDELINES TO BANK STAFF / AUTHORIZED REPRESENTATIVE

 HOW, WHEN TO MEET CUSTOMER
 LANGUAGE TO BE USED, BE COURTEOUS
 RESPECT PRIVACY ETC.
RECOVERY PROCESS
RECOVERY PROCESS IS A SCIENTIFIC AS WELL AS AN ESSENTIAL TOOL FOR
MAINTAINING THE QUALITY OF RETAIL ASSETS.
1. GIVING NOTICE TO BORROWERS
2. REPOSSESSION OF SECURITY
3. VALUATION AND SALE OF PROPERTY
4. OPPORTUNITY FOR THE BORROWER TO TAKE BACK THE SECURITY
RECOVERY EFFORT STARTS WITH THE ESTABLISHING A GOOD
RAPPORT WITH THE DEBTOR. COMMUNICATION, LISTENING
AND PERSUASIVE SKILLS WOULD BE APPLIED IN BUILDING
GOOD INTERPERSONAL RELATIONS.
‘KNOW YOUR CUSTOMER’ DOCUMENTS TO KNOW THE
CUSTOMER’S IDENTIFY AND PERSONAL PROFILE.
COPY OF THE LOAN AGREEMENT TO UNDERSTAND THE
FINANCIAL POSITION, CASH FLOW PATTERN, AND ASSETS
CHARGED TO THE BANK.
RECOVERY POLICY CLAUSES
 GIVING NOTICE TO BORROWERS
• NO RECOVERY MEASURES WITHOUT GIVING DUE NOTICE IN WRITING

REPOSSESSION OF SECURITY
• PRIMACY IS RECOVERY OF DUES
• REPOSSESSION, VALUATION AND REALISATION
• FAIR AND TRANSPARENT MANNER
• ENSURE SAFETY AND SECURITY OF THE PROPERTY.

VALUATION AND SALE OF PROPERTY

• AS PER LAW AND IN FAIR, TRANSPARENT MANNER
• BANK CAN RECOVER ALL OUTSTANDINGS
• BANK CAN CLOSE DEPOSITS
• EXCESS AMOUNT IF ANY IS RETURNED TO THE BORROWER

OPPORTUNITY TO TAKE BACK THE SECURITY

DEBT RECOVERY PROCESSES
DIFFICULT RECOVERY PROCESS
• WHERE THE DEBTORS ARE NOT WILLING TO PAY
• INTENTIONALLY RESIST OR AVOID RECOVERY EFFORTS:
• THE RECOVERY AGENT HAS TO FOLLOW SPECIAL PROCESS OF RECOVERY AGAINST THE RECALCITRANT
DEFAULTERS, IN CONSULTATION WITH THE BANK.

ASSETS POSSESSION PROCESS

• MOVABLE ASSETS CHARGED TO THE BANK BY WAY OF HYPOTHECATION OR PLEDGE CAN BE
POSSESSED BY THE BANK OR THE RECOVERY AGENT
• AUCTIONED OR OTHERWISE SOLD TO RECOVER THE DUES.

LEGAL RECOVERY PROCESS

• THE INTERVENTION OF THE COURT MAY BE REQUIRED TO POSSESS MORTGAGED IMMOVABLE PROPERTY
BY THE RECOVERY AGENT.
• ALSO IF THE CHARGED ASSETS DO NOT EXIST, OR THE DEBT IS UNSECURED, THE DEBTOR WILL HAVE TO
BE SUED FOR RECOVERY OF THE DUES BY THE BANK/RECOVERY AGENT.
LEGAL PROVISIONS
DEBT RECOVERY TRIBUNALS (DRTS)
DRTS ARE GOVERNED BY PROVISIONS OF THE RECOVERY OF DEBT DUE TO BANKS AND
FINANCIAL INSTITUTIONS ACT, 1993, ALSO POPULARLY CALLED AS THE RDB ACT.
 EACH DEBT RECOVERY TRIBUNAL IS PRESIDED OVER BY A PRESIDING OFFICER.
 THE PRESIDING OFFICER IS GENERALLY A JUDGE OF THE RANK OF DIST. & SESSIONS
JUDGE.
 THE PRESIDING OFFICER OF A DEBT RECOVERY TRIBUNAL IS THE SOLE JUDICIAL
AUTHORITY TO HEAR AND PASS ANY JUDICIAL ORDER.
 EACH DEBT RECOVERY TRIBUNAL HAS TWO RECOVERY OFFICERS.
 DRTS CAN APPOINT RECEIVERS, COMMISSIONERS, PASS EX-PARTE ORDERS, AD-INTERIM
ORDERS, INTERIM ORDERS APART FROM POWERS TO REVIEW ITS OWN DECISION AND
HEAR APPEALS AGAINST ORDERS PASSED BY THE RECOVERY OFFICERS OF THE TRIBUNAL.
 AMOUNT DUE HAS TO BE MORE THAN RS 20 LAKHS
DEBT RECOVERY TRIBUNALS
 PRIOR TO 90S, BANKS HAD VERY HARD TIME RECOVERING BAD LOANS.
 BECAUSE OFTEN, BORROWERS (LOAN TAKERS) WOULD FILE FRIVOLOUS CASES IN CIVIL
COURTS, THEN PROCEEDING WOULD GO ON FOR YEARS.
 SO 1993, GOVERNMENT ESTABLISHED DEBT RECOVERY TRIBUNALS TO DEAL WITH NPA
MATTERS.
 NOW BORROWER CANNOT APPROACH CIVIL COURT, THEY’VE TO GO TO SPECIAL DEBT
RECOVERY TRIBUNAL (DRT).
 THIS LED TO SOME RELIEF, BUT THEN DRTS CLOGGED DOWN BY TRUCKLOAD OF CASES.
(EVEN NOW, MORE THAN 60,000 CASES PENDING WITH DRTS)
 IN 2002, GOVERNMENT CAME UP WITH NEW ACT, NAMED “SARFAESI ACT”.
 MONETARY LIMIT FOR DRT IS NOW RS 20 LAKHS
 THERE ARE 39 DRTS IN INDIA
LOK ADALATS
 SETUP UNDER SECTION 19 OF THE LEGAL SERVICES AUTHORITIES ACT, 1987
 COMES UNDER ALTERNATIVE DISPUTES REDRESSAL MECHANISM
 CHEAPEST, EASIEST AND FASTEST MODE OF RECOVERY
 LOANS, PERSONAL LOANS, CREDIT CARD, LOANS AND HOUSING LOANS WITH
LESS THAN RS. 20 LAKH CAN BE REFERRED TO LOK ADALATS.
 BANKS WANT TO INCREASE THE LIMIT TO RS 50 LAKH.
 COVERS “DOUBTFUL” AND “LOSS” CATEGORIES
 SO DOES NOT COVER??
 METHOD OF ORGANIZING LOK ADALATS
1. THE MANAGER OF THE BANK SHALL CONTACT THE BORROWERS AND NEGOTIATE WITH THEM
THE TERMS OF SETTLEMENT.
2. THE MANAGER SHOULD CONVINCE THE BORROWERS ABOUT THE BENEFITS OF SETTLING THE
MATTER VIA LOK ADALAT.
3. THE BRANCH OFFICE HAS TO TAKE THEIR HIGHER OFFICE PERMISSION/SANCTION WHEREVER
NECESSARY, WITH REGARDS TO PROPOSED TERMS OF SETTLEMENT.
4. THE LEGAL SERVICE AUTHORITIES SHALL BE APPROACHED BY THE BANK TO CONDUCT LOK
ADALAT ALONG WITH A LIST OF THE ACCOUNTS WHERE SETTLEMENT IS FEASIBLE.
5. THE LEGAL SERVICE AUTHORITY FIXES THE DATE OF LOK ADALAT AND INFORMS THE SAME TO
THE BANK.
6. THE BANK IN TERN SHALL SERVICE NOTICE TO ALL THE PARTIES CONCERNED.
7. THE CONCERNED BRANCH OF THE BANK SHOULD PERSONALLY CONTACT THE BORROWERS
AND ENSURE THAT ALL PARTIES BE PRESENT AT LOK ADALAT ON THE DATE FIXED.
8. THE LOK ADALAT WILL BE CONVENED ON THE DATE FIXED AND SAME DAY AWARD WILL BE
PASSED. THE AWARD IS FINAL AND BINDING ON ALL THE PARTIES.
ADVANTAGE OF LOK ADALAT
1. EVERY AWARD OF THE LOK ADALAT IS EQUIVALENT TO A DECREE OF A CIVIL
COURT.
2. OTS (ONE TIME SETTLEMENT) CAN BE PUT THROUGH LOK ADALAT, SO THAT ON
DEFAULT, THE AWARD COULD BE EXECUTED BY THE COURT (LIKE EXECUTION OF
DECREE).
3. NO APPEAL WILL BE ENTERTAINED AGAINST THE AWARD OF LOK ADALAT.
4. NO CASE COULD BE INSTITUTED IN ANY COURT WITH REGARD TO CASE
DECIDED BY LOK ADALAT.
5. ENTIRE COURT FEE PAID FOR FILING SUIT WILL BE RETURNED BACK AND NO
LAWYER FEE IS PAYABLE.
6. THE AWARD CAN ALSO BE PASSED ON A HOLIDAY.
RECOVERY AGENTS
 PSBS ADMINISTER RECOVERY MANAGEMENT THROUGH THEIR OWN STAFF IN CASE OF RETAIL
LOANS.
 PRIVATE AND FOREIGN BANKS OUTSOURCE THEIR RECOVERY PROCESS AND ENTRUST THE SAME
TO RECOVERY AGENTS.
 RECOVERY AGENTS DO END TO END RECOVERY MANAGEMENT WHEN THE ACCOUNTS BECOME
DELINQUENT.
 RESERVE BANK HAS REQUESTED THE INDIAN BANKS' ASSOCIATION TO FORMULATE, IN
CONSULTATION WITH INDIAN INSTITUTE OF BANKING AND FINANCE (IIBF), A CERTIFICATE
COURSE FOR DIRECT RECOVERY AGENTS WITH MINIMUM 100
 HOURS OF TRAINING. ONCE THE ABOVE COURSE IS INTRODUCED BY IIBF, BANKS SHOULD
ENSURE THAT OVER A PERIOD OF ONE YEAR ALL THEIR RECOVERY AGENTS UNDERGO THE
ABOVE TRAINING AND OBTAIN THE CERTIFICATE FROM THE ABOVE INSTITUTE.
 NEED FOR SARFESI
 THE OBJECT OF REDUCING ‘NON-PERFORMING ASSETS’ COULD NOT BE ACHIEVED EVEN AFTER
ENACTING ‘RECOVERY OF DEBTS DUE TO BANKS AND FINANCIAL INSTITUTION ACT, 1993’ AND AS A
RESULT, ANOTHER LEGISLATION ON THE SIMILAR FIELD WAS ENACTED AND CALLED ‘SARFAESI
ACT’.

 MANY KNOW AS TO WHAT HAPPENS IN CIVIL COURTS AND MANY KNOW AS TO HOW TO
DELAY A CIVIL CASE FOR SO MANY YEARS.

 . UNDER SARFAESI ACT, 2002, THE BANK CAN DETERMINE THE OUTSTANDING DUE AFTER
NOTING THE OBJECTIONS FROM THE BORROWER/GUARANTOR IF ANY PROCEED AGAINST THE
‘SECURED ASSET’ BY TAKING PHYSICAL POSSESSION OF THE SAME AND INITIATING AUCTION
PROCEEDINGS IN ACCORDANCE WITH THE PROVISIONS AND THE SARFAESI RULES.
SARFAESI ACT
 SARFAESI ACT , 2002
SECURITIZATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND ENFORCEMENT OF
SECURITY INTEREST (SARFAESI) ACT, 2002
 AN ACT TO REGULATE SECURITISATION AND RECONSTRUCTION OF THE FINANCIAL ASSETS AND
ENFORCEMENT OF THE SECURITY INTEREST AND MATTER CONNECTED THEREWITH OR INCIDENTAL
THERETO.
 THE ACTS EXTENDS TO WHOLE OF INDIA. IT CAME INTO FORCE ON THE 21ST DAY OF JUNE
2002.
IT ENABLES BANKS TO REDUCE THEIR NPAS BY ADOPTING MEASURES FOR RECOVERY OR
RECONSTRUCTION.
ALLOWS BANKS TO AUCTION PROPERTIES (RESIDENTIAL, COMMERCIAL) WHEN BORROWERS
FAIL TO PAY THEIR LOANS.
 SARFAESI ACT, 2002
ON DEFAULT, BANK’S CAN SEIZE THE SECURITIES (EXCEPT AGRICULTURE LAND) WITHOUT
INTERVENTION OF THE COURT.
SARFAESI IS EFFECTIVE ONLY FOR SECURED LOANS WHERE BANK CAN ENFORCE UNDERLYING
SECURITY (E.G. HYPOTHECATION, PLEDGE, MORTGAGE)
COURT INTERVENTION IS NOT REQUIRED UNLESS SECURITY IS INVALID/FRAUDULENT
IN CASE OF UNSECURED ASSET, BANK WILL HAVE TO MOVE COURT AND FILE CIVIL CASE
AGAINST DEFAULTERS.
 SECURED CREDITORS POWERS
SECURED CREDITOR IS CONFERRED WITH POWERS UNDER THE SARFAESI
ACT TO:

A. TAKE POSSESSION OF THE SECURED ASSETS OF THE BORROWER, INCLUDING

TRANSFER BY WAY OF LEASE, ASSIGNMENT OR SALE, FOR REALIZING THE SECURED
ASSETS
B. TAKEOVER OF THE MANAGEMENT OF THE BUSINESS OF THE BORROWER
INCLUDING THE RIGHT TO TRANSFER BY WAY OF LEASE, ASSIGNMENT OR SALE FOR
REALIZING THE SECURED ASSETS,
C. APPOINT ANY PERSON TO MANAGE THE SECURED ASSETS POSSESSION OF WHICH
IS TAKEN BY THE SECURED CREDITOR, AND
D. REQUIRE ANY PERSON, WHO HAS ACQUIRED ANY OF THE SECURED ASSETS FROM
THE BORROWER AND FROM WHOM MONEY IS DUE TO THE BORROWER, TO PAY
THE SECURED CREDITOR SO MUCH OF THE MONEY AS IF SUFFICIENT TO PAY THE
SECURED DEBT.
 EXAMPLE
Mr. Mehta has opened factory with Rs.100 crores. He financed this, via mixture of Debt + equity in following way.

Holder Rupees in Cr.

Mr Mehta and his family 20
Equity (IPO->Shares)
Public 30
Debt (loans, Bonds) Business loan from SBI 40
Bonds 10
Total 100

 Initially the company runs well and good.

 But then Mr. Mehta doesn’t revise his MBA books often, so he forgets the business concepts. His company starts
making losses.
 He fails to pay loan EMIs for many months.
 SBI gives him notice to correct his behaviour.
 Still, he doesn’t start paying money.
 SBI declares this Rs.40 crores loan NPA (Non-Performing Asset).
 Once a loan is declared as non-performing asset, SBI can take actions under SARFAESI act, to recover the loan
money.
BANK HAVE FOLLOWING POWERS UNDER SARFAESI ACT
TAKE POSSESSION OF MR. MEHTA’S ASSETS WITHOUT REQUIRING COURT
ORDER. (COMMERICIAL OR RESIDENTIAL, FIXED OR MOVING ASSETS.)
AUCTION / SALE THEM.
CHANGE THE ADMINISTRATION/ MANAGEMENT OF THOSE ASSETS.
IF MR. MEHTA HAD SOLD AWAY THE MORTGAGED ASSET TO THIRD PARTY MR.X,
BANK CAN ORDER MR.X TO SURRENDER THAT ASSET.
IF MR.X OWES MONEY TO MR. MEHTA , HE CAN BE ORDERED TO PAY MONEY.
 SARFAESI APPLIES ONLY TO LOANS ABOVE RS.10 LAKHS.
 SARFAESI APPLIES ONLY TO THOSE ASSETS “MORTGAGED/SECURED” TO GET
THE LOAN.
 E.G. IF MR. MEHTA HAD TAKEN BUSINESS-LOAN, SBI WOULD HAVE ASKED HIM
TO SIGN AWAY HIS FACTORY/MACHINERY/VEHICLES/LAND ETC. SPECIFIC ITEMS
AS MORTGAGE.
 HENCE SBI CAN ATTACH ONLY THOSE ASSETS.
 BUT SBI CANNOT TAKE AWAY MEHTA’S PERSONAL HOME-FURNITURE, EXPENSIVE
WRIST-WATCH OR HIS SON’S BICYCLE IN THE NAME OF SARFAESI.
 SIMILARLY, AGRICULTURAL LAND IS EXEMPTED FROM SARFAESI ATTACHMENT.
BORROWER CAN APPEAL
THE BORROWER (LOAN TAKER) HAS FOLLOWING OPTIONS:
 GET A STAY ORDER FROM DEBT RECOVERY TRIBUNAL (DRT) AGAINST THE
AUCTION/SALE OF HIS PROPERTIES. (HE CANNOT FILE CASE IN CIVIL COURTS.)
 FIGHT THE CASE IN DRT.
 IF UNHAPPY WITH DRT VERDICT, HE CAN APPEAL TO DEBT RECOVERY APPELLATE
TRIBUNAL (DRAT).
 BUT BEFORE FILING APPEAL WITH DRAT, HE’LL HAVE TO DEPOSIT 50% OF HIS
PENDING LOAN MONEY.
BANK’S POWER TO AUCTION
 FIRST SBI CONTACTS THE EXPERTS, GETS VALUATION OF MR. MEHTA’S ASSETS.
 EXPERT SAYS “THOSE ASSETS ARE WORTH RS.50 CRORES ACCORDING TO PRESENT
MARKET VALUE OF LAND/ BUILDING/ MACHINERY WHATEVER.”
 THEN SBI WILL GIVE ADVERTISEMENT IN NEWSPAPERS “WE ARE AUCTIONING XYZ
LAND/MACHINERY/BUILDING. MINIMUM BIDDING AMOUNT IS RS.50 CRORES. WHOEVER
WISHES TO BID, SEND US APPLICATION ALONG WITH RS.50,000 AS DEPOSIT, AND THEIR
CLASS 10, 12 MARK-SHEETS AND SCHOOL LEAVING CERTIFICATES, DULY ATTESTED BY A
GAZETTED OFFICER.”
 PROBLEM: SOMETIMES, BIDDERS DO NOT TAKE INTEREST IN BUYING SUCH PROPERTIES,
FACTORIES ETC.
 TO FIX THIS PROBLEM, AMENDMENT BILL OF 2011, MAKES A NEW PROVISION: IF NO
ONE ELSE COMES TO BID IN THE AUCTION, BANK ITSELF CAN BUY THAT PROPERTY.
PROBLEMS DON’T END THERE
 SUPPOSE SBI ATTACHED A WAREHOUSE OF MR. MEHTA
 IF THE LAND WAS IN GOOD URBAN AREA, SBI COULD OPEN A NEW BRANCH
OFFICE THERE (OR HOUSING FOR ITS EMPLOYEES).
 BUT IF PLOT/FACTORY/HOUSE IS IN SOME REMOTE AREA= USELESS FOR SBI’S
PERSONAL BUSINESS.
 UNDER THE BANKING REGULATION ACT, A BANK CANNOT KEEP SUCH
IMMOVABLE PROPERTY BEYOND 7 YEARS, (MAX 12 YEARS WITH RBI’S
PERMISSION).
 SO ULTIMATELY SBI WILL HAVE TO AUCTION IT TO SOMEONE. WHAT IF THEY
DON’T GET BETTER PRICE? CRITIQUES OF THE BILL SAY, THIS IS NOT CLARIFIED IN
THE BILL.
INSOLVENCY AND BANKRUPTCY CODE, 2016
 UNIFORM COMPREHENSIVE INSOLVENCY LEGISLATION TO CORPORATIONS, FIRMS AND INDIVIDUALS
(OTHER THAN FINANCIAL FIRMS).
 CREDITORS TO ASSESS THE VIABILITY OF A DEBTOR AS A BUSINESS DECISION, AND AGREE UPON A PLAN
FOR ITS REVIVAL OR A SPEEDY LIQUIDATION.
 NEW INSTITUTIONAL FRAMEWORK, CONSISTING OF A REGULATOR, INSOLVENCY PROFESSIONALS,
INFORMATION UTILITIES AND ADJUDICATORY MECHANISMS TS REVIVAL OR A SPEEDY LIQUIDATION.
 PROVIDES EASY EXIT WITH A PAINLESS MECHANISM IN CASES OF INSOLVENCY OF INDIVIDUALS AS WELL
AS COMPANIES
 CODE HAS SIGNIFICANT VALUE FOR ALL STAKEHOLDERS INCLUDING VARIOUS GOVERNMENT
REGULATORS
 INTRODUCTION OF THIS CODE HAS DONE AWAY WITH OVERLAPPING PROVISIONS CONTAINED IN
VARIOUS LAWS :
• SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT, 1985,
• THE RECOVERY OF DEBTS DUE TO BANKS AND FINANCIAL INSTITUTIONS ACT, 1993,
• THE SECURITIZATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND ENFORCEMENT OF SECURITY INTEREST ACT, 2002 AND
• THE COMPANIES ACT, 2013.
SARFAESI ACT V/S INSOLVENCY AND BANKRUPTCY
CODE, 2016
SARFAESI Act, 2002 provides a safety net to secured financial creditors (banks and financial
institutions) by empowering them to enforce their security interests without the intervention of
any court.
On the other hand, under IBC, the rights and interests of all types of creditors have been taken
into consideration including that of secured creditors
Section 14(1)(c) of the Insolvency and Bankruptcy Code, 2016 clearly provides that during the
insolvency resolution process as defined in the Code, the Code takes precedence over the DRT
Act and SARFAESI Act.