Principles Of Good Lending

Lending constitutes the primary operation of banks, essential for fostering economic growth
by channeling funds to various sectors. However, it inherently carries risks, requiring banks
to adopt a prudent approach and adhere to established principles to safeguard the interests
of depositors and maintain financial stability.

While banking involves both art and science, it operates not under rigid rules but guided by
overarching principles that ensure responsible lending practices. Across the financial
landscape, banks and financial institutions are bound by regulatory frameworks, with the
Reserve Bank of India (RBI) delineating the Fair Practices Code for Lenders as a guiding
document.

When extending lendings the bankers must consider the following principles:

1. Principle of Fund Safety:

The foremost principle is to ensure the safety of the funds lent. This involves
assessing the creditworthiness of the borrower, the purpose of the loan, and
the feasibility of repayment.The cornerstone of banking, fund safety underscores
the need for bankers to exercise caution and prudence in disbursing depositors'
funds. It is imperative for banks to ensure that funds are allocated to creditworthy
borrowers and utilized judiciously to serve productive purposes, facilitating trade,
industry, and agriculture. This principle emphasizes the criticality of protecting
depositors' interests and maintaining the integrity of the banking system.

Assessing Creditworthiness: Lenders use various tools and methods to assess the
creditworthiness of borrowers, including credit scores, income verification, and debt-
to-income ratios.
Loan Purpose: Lenders evaluate the purpose of the loan to ensure it aligns with the
borrower's financial goals and ability to repay.
Feasibility of Repayment: Lenders analyze the borrower's income stability,
employment status, and existing debt obligations to determine the feasibility of
repayment.

2. Principle of Profitability: Lending should be profitable for the lender,

considering the interest rate, the cost of funds, and the risk involved.
Profitability is integral to the sustainability of banks' lending operations. Banks incur
various expenses, including interest on deposits, operational costs, and provisions
for non-performing assets. Therefore, lending rates are determined based on factors
such as borrower creditworthiness, nature of security, and prevailing market
conditions to ensure that lending remains profitable. Amidst heightened competition
and economic liberalization, banks must prioritize profitability and viability to sustain
their operations effectively.
Interest Rate Consideration: Lenders set interest rates based on the cost of funds,
prevailing market rates, and the risk profile of the borrower.
Risk-Return Tradeoff: Lenders consider the risk-return tradeoff when lending,
aiming to earn a profit while managing risk.

3. Liquidity Principle:
Effective liquidity management is essential for banks to meet their financial
obligations promptly. While profitability is paramount, banks must also ensure
adequate liquidity to sustain their lending activities and address unforeseen
contingencies. In the dynamic financial landscape characterized by globalization and
increased competition, banks must strike a balance between profitability and
liquidity to maintain financial resilience. Lending should be done in a way that
maintains liquidity for the lender. This means ensuring that funds are available
when needed, even if some loans default.

Maintaining Adequate Reserves: Lenders keep a portion of their funds in liquid

assets to ensure they can meet withdrawal demands and other obligations.
Balancing Loan Portfolio: Lenders balance their loan portfolio to maintain liquidity,
ensuring that a portion of their loans are short-term and easily liquidated if needed.

4. Purpose Principle:
Lending must be directed towards socially and economically beneficial purposes to
foster inclusive growth and development. Banks must evaluate loan proposals based
on their intended use, ensuring that funds are utilized for productive activities that
contribute to economic advancement. Additionally, banks are encouraged to support
priority sectors such as agriculture, small-scale industries, and rural economies,
thereby fostering employment generation and sustainable development.

5. Risk Spread Principle:

Diversification of lending portfolios is essential to mitigate risks and enhance
resilience against adverse economic conditions. By lending to a diverse range of
borrowers across industries and regions, banks can minimize the impact of sector-
specific downturns and maintain a balanced risk profile. This principle underscores
the importance of prudent risk management practices in ensuring the long-term
sustainability of banks' lending operations. Risks should be spread across a wide
range of borrowers and industries to avoid large losses from a single default.

Risk Management Policies: Lenders have risk management policies in place to

identify, assess, and mitigate risks.
Portfolio Analysis: Lenders regularly analyze their loan portfolio to ensure risks are
spread across a wide range of borrowers and industries.
Stress Testing: Lenders conduct stress tests to assess the impact of adverse
economic conditions on their loan portfolio.

6. Security Principle:
While security serves as a safeguard for lenders, creditworthiness assessment
extends beyond collateral to encompass borrower integrity, capacity, and capital.
Banks must evaluate various types of security, including personal and tangible
assets, to mitigate lending risks effectively. Furthermore, adherence to regulatory
guidelines ensures that lending decisions are based on comprehensive risk
assessment and due diligence. Loans should be adequately secured to protect
the lender's interests in case of default.

Collateral: Lenders may require borrowers to provide collateral, such as real estate
or other assets, to secure the loan.
Personal Guarantees: Lenders may require personal guarantees from the borrower
or guarantors to secure the loan.
Insurance: Lenders may require borrowers to purchase insurance to cover the loan
amount in case of default.

Position of Weaker Sections

The position of weaker sections in the context of banking and lending refers to the special
consideration given to certain segments of society that may have limited access to financial
services or face socio-economic challenges. In India, the position of weaker sections is a
crucial aspect of banking policy due to the country's diverse population and the need for
inclusive growth. Here's a detailed look at the position of weaker sections:
### Definition of Weaker Sections
- Small and Marginal Farmers
 Definition: Small farmers typically own less than two hectares of agricultural
land, while marginal farmers own less than one hectare. These farmers often
have limited resources and face challenges in accessing credit and other
resources.
 Importance: Small and marginal farmers play a crucial role in India's
agricultural sector, contributing significantly to food production and rural
livelihoods.
 Challenges: These farmers often face challenges such as limited access to
credit, lack of modern agricultural techniques, and vulnerability to weather-
related risks.
Artisans
 Definition: Artisans are skilled manual workers who produce goods by hand,
often using traditional techniques. They are often involved in crafts such as
pottery, weaving, and metalwork.
 Importance: Artisans play a vital role in preserving traditional crafts and
cultural heritage. They also contribute to the economy through the production
and sale of handicrafts.
 Challenges: Artisans often face challenges such as lack of access to markets,
limited financial resources, and competition from mass-produced goods.
Village and Cottage Industries
 Definition: Village and cottage industries are small-scale industries typically
operated in rural areas. These industries often use locally available resources
and traditional techniques.
 Importance: Village and cottage industries contribute to rural employment,
income generation, and economic development. They also help in utilizing
local resources and promoting self-employment.
 Challenges: These industries face challenges such as limited access to finance,
lack of modern technology, and competition from larger industries.
Micro and Small Enterprises
 Definition: Micro and small enterprises (MSEs) are small businesses with
limited investment in plant and machinery. They are often considered the
backbone of the Indian economy, contributing significantly to employment
and industrial output.
 Importance: MSEs play a crucial role in creating employment opportunities,
especially in rural and semi-urban areas. They also contribute to
entrepreneurship development and economic growth.
 Challenges: MSEs face challenges such as access to finance, technology
upgradation, and marketing.
Other Low-Income Groups
 Definition: Other low-income groups refer to individuals or households with
limited income and assets, often belonging to disadvantaged communities.
These groups may include landless laborers, urban slum dwellers, and
marginalized communities.
 Importance: Providing financial services to low-income groups is essential for
poverty alleviation and inclusive growth. Access to credit and banking services
can help improve their livelihoods and standard of living.
 Challenges: Low-income groups face challenges such as lack of access to
formal banking services, limited financial literacy, and vulnerability to
exploitation by moneylenders.

### Importance of Including Weaker Sections

- ** 1. Inclusive Growth
 Including weaker sections ensures that the benefits of economic growth are
distributed equitably across society, reducing income disparities and
promoting social harmony.

2. Poverty Alleviation

 Providing financial services and support to weaker sections can help lift them
out of poverty by enabling them to start businesses, generate income, and
improve their living standards.

3. Economic Development

 Weaker sections, when empowered through access to credit and financial

services, can contribute to economic development by engaging in productive
activities and creating employment opportunities.

4. Social Welfare

 Banking services for weaker sections can support social welfare programs and
government initiatives aimed at improving healthcare, education, and other
essential services for marginalized communities.

5. Financial Inclusion

 Including weaker sections in the banking sector promotes financial inclusion,

ensuring that all segments of society have access to basic financial services
and can participate in the formal economy.
6. Sustainable Development

 By including weaker sections, banks and financial institutions can contribute to

sustainable development by supporting environmentally friendly practices and
empowering communities to protect natural resources.

7. Human Capital Development

 Providing financial support to weaker sections can help develop human capital
by enabling access to education, healthcare, and other essential services,
leading to a more skilled and healthy workforce.

8. Social Cohesion

 Inclusion of weaker sections promotes social cohesion by reducing

inequalities and creating a more inclusive society where all members have
equal opportunities for growth and development.

### Initiatives for Weaker Sections

- ** There are several initiatives and schemes implemented by governments and
financial institutions to address the financial needs of weaker sections and promote
their socio-economic development. Some of the key initiatives include:

1. Priority Sector Lending (PSL)

 Banks are mandated to allocate a certain percentage of their lending to

priority sectors, including agriculture, micro, small, and medium enterprises
(MSMEs), and other weaker sections. This ensures that a portion of credit is
directed towards these sectors, which are crucial for economic development
and inclusive growth.

2. Microfinance

 Microfinance institutions (MFIs) provide small loans and financial services to

poor and low-income individuals who have limited access to traditional
banking services. These loans help individuals start or expand small businesses
and improve their livelihoods.

3. Self-Help Groups (SHGs)

 SHGs are informal groups of individuals, especially women, who come

together to save and borrow money for their self-employment activities. Banks
 provide loans to SHGs, which then distribute the funds among their members
based on their needs.

4. Government Schemes

 Various government schemes, such as the Pradhan Mantri Jan Dhan Yojana
(PMJDY), Pradhan Mantri Mudra Yojana (PMMY), and National Rural
Livelihoods Mission (NRLM), aim to provide financial inclusion, credit, and
other support to weaker sections and low-income groups.

5. Credit Guarantee Funds

 Credit Guarantee Funds, such as the Credit Guarantee Fund Trust for Micro
and Small Enterprises (CGTMSE), provide guarantees to banks for loans
extended to MSMEs and other small borrowers, reducing the risk for lenders
and encouraging them to lend to these sectors.

6. Skill Development and Training

 Many initiatives focus on skill development and training for weaker sections to
enhance their employability and income-generating capabilities. These
programs help individuals acquire skills that are in demand in the market.

7. Financial Literacy Programs

 Financial literacy programs are conducted to educate weaker sections about

banking services, savings, credit, and other financial matters. These programs
empower individuals to make informed financial decisions and access banking
services effectively.

8. Subsidized Credit

 Governments often provide subsidized credit to weaker sections for various

purposes, such as agriculture, housing, and education. These subsidies reduce
the cost of borrowing and make credit more accessible to those in need.

### Challenges and Solutions

- 1. Limited Access to Banking Services
 Many weaker sections, especially those in rural and remote areas, still lack
access to formal banking services, such as bank branches and ATMs. This
limits their ability to save, borrow, and invest.
2. Lack of Financial Literacy
 Many weaker sections have limited understanding of financial products and
services, making them vulnerable to exploitation and unable to make
informed financial decisions.
3. Collateral Requirement
 Traditional banking practices often require collateral for loans, which many
weaker sections are unable to provide, leading to limited access to credit.
4. Informal Credit Sources
 Weaker sections often rely on informal credit sources, such as moneylenders,
who charge exorbitant interest rates, leading to a cycle of debt and poverty.
5. Limited Awareness of Government Schemes
 Despite the government's efforts to provide financial assistance through
various schemes, many weaker sections are unaware of these schemes or face
challenges in accessing them.
6. Vulnerability to External Shocks
 Weaker sections are often more vulnerable to external shocks, such as natural
disasters or economic downturns, which can further exacerbate their financial
difficulties.
7. Lack of Infrastructure
 Inadequate infrastructure, such as roads, electricity, and internet connectivity,
in rural and remote areas, hinders access to banking services and financial
inclusion.
8. Gender Disparities
 Women, especially in rural areas, face additional challenges in accessing
financial services and credit due to social and cultural factors.
9. Limited Institutional Capacity
 Financial institutions may lack the capacity to effectively cater to the diverse
needs of weaker sections, leading to inefficiencies in service delivery.
10. Regulatory Constraints
 Regulatory constraints and bureaucratic hurdles may impede the effective
implementation of policies and initiatives aimed at addressing the financial
needs of weaker sections.

### Regulatory Framework

- **Reserve Bank of India (RBI)**: The RBI issues guidelines and regulations to ensure that
banks fulfill their obligations towards weaker sections, such as priority sector lending targets.
- **Government Policies**: The government introduces policies and schemes to promote
financial inclusion and support the economic development of weaker sections.
Regulatory Framework
 Reserve Bank of India (RBI): The RBI plays a crucial role in regulating and
supervising banks to ensure compliance with regulations related to lending to
weaker sections. It issues guidelines and directives to banks on priority sector
lending targets, which include specific targets for lending to agriculture, micro,
small, and medium enterprises (MSMEs), and other weaker sections. The RBI
also monitors banks' compliance with these targets and takes necessary
actions to ensure adherence.
 Government Policies: The government formulates and implements various
policies and schemes to promote financial inclusion and support the
economic development of weaker sections. These policies may include
subsidies, interest rate concessions, and credit guarantee schemes to
encourage banks to lend to weaker sections. The government also provides
support for skill development, entrepreneurship, and capacity building among
weaker sections to enhance their economic opportunities.
RBI Guidelines for Priority Sector Lending
 The RBI has set specific targets for banks to lend to priority sectors, including
agriculture, MSMEs, education, housing, and weaker sections. These targets
are expressed as a percentage of the banks' total advances.
 Banks are required to allocate 18% of their total advances to agriculture and
7.5% to micro enterprises. Within the agriculture sector, a sub-target of 8% is
specified for small and marginal farmers.
 For weaker sections, banks are required to ensure that 10% of their total
advances are extended to these segments. This includes specific targets for
lending to individual farmers, micro and small enterprises, and other weaker
sections.
 The RBI closely monitors banks' performance in meeting these targets and
takes corrective action against banks that fail to comply.
Government Policies and Schemes
 The government has introduced various policies and schemes to promote
financial inclusion and support the economic development of weaker sections.
These include the Pradhan Mantri Jan Dhan Yojana (PMJDY), which aims to
provide universal access to banking services, and the Pradhan Mantri Mudra
Yojana (PMMY), which provides collateral-free loans to small entrepreneurs.
 Other schemes include the National Rural Livelihoods Mission (NRLM), which
aims to alleviate rural poverty by promoting self-employment and
entrepreneurship, and the Stand-Up India scheme, which provides financial
support to women and SC/ST entrepreneurs.

### Conclusion
The position of weaker sections in banking reflects a commitment to inclusive growth and
social welfare. By providing access to financial services and support, banks and governments
can empower weaker sections to improve their economic and social well-being.
priority sector lending

Priority sector lending (PSL) is a regulatory requirement in India that mandates banks to lend
a certain percentage of their total lending to specific sectors identified as priority sectors by
the Reserve Bank of India (RBI). The objective of PSL is to ensure that adequate credit is
available to sectors that are critical for the country's economic development and social
welfare. Here's an overview of priority sector lending:

### Objectives of PSL

- **Inclusive Growth**: PSL aims to promote inclusive growth by ensuring that credit is
available to sectors that are vital for the development of the economy, including agriculture,
micro, small, and medium enterprises (MSMEs), housing, education, and other weaker
sections of society.
- **Financial Inclusion**: PSL helps in promoting financial inclusion by ensuring that credit
reaches underserved and marginalized segments of the population, such as small farmers,
artisans, and women entrepreneurs.
- **Rural Development**: PSL contributes to rural development by providing credit to
agriculture and allied activities, which are crucial for the livelihoods of a large section of the
rural population.
- **Employment Generation**: PSL supports sectors that have the potential to generate
employment, such as MSMEs, which are major contributors to employment generation in the
country.

### Categories of Priority Sector

- **Agriculture**: Loans to farmers, agriculture infrastructure, and agri-allied activities.
- **Micro, Small, and Medium Enterprises (MSMEs)**: Loans to MSMEs for
manufacturing, services, and business enterprises.
- **Export Credit**: Export credit is included in the priority sector to promote exports.
- **Education**: Loans for education, including vocational courses and loans for students.
- **Housing**: Loans for housing projects, including loans for affordable housing.
- **Social Infrastructure**: Loans for social infrastructure projects, such as hospitals,
schools, and drinking water facilities.
- **Renewable Energy**: Loans for renewable energy projects.

### Priority Sector Lending Targets

- **Domestic Scheduled Commercial Banks**: At least 40% of their total lending should go
to priority sectors.
- **Foreign Banks with 20 Branches or More**: At least 40% of their total lending should go
to priority sectors.
- **Foreign Banks with Less than 20 Branches**: At least 32% of their total lending should
go to priority sectors.

### Monitoring and Compliance

- The RBI monitors banks' compliance with PSL targets regularly and takes corrective action
against banks that fail to meet these targets.
- Banks are required to report their PSL lending to the RBI on a quarterly basis.

### Conclusion
Priority sector lending is a key policy tool used by the RBI to ensure that credit is channeled
to sectors that are critical for the country's economic and social development. By meeting
PSL targets, banks contribute to inclusive growth and sustainable development.

Nature of Securities
### Nature of Securities

#### Immovable Property

- **Land**: Land is a commonly used form of collateral due to its tangible nature and
relatively stable value. Banks typically require a clear title and may conduct a valuation to
determine its market value.
- **Buildings**: Buildings, including residential, commercial, and industrial properties, can
also be offered as collateral. The value is assessed based on factors such as location, size,
condition, and potential for rental income.

#### Movable Property

- **Stocks and Bonds**: Marketable securities, such as stocks and bonds, can be pledged as
collateral. The value of these securities is subject to market fluctuations and may require
periodic valuation.
- **Debentures and Government Securities**: Banks may also accept debentures and
government securities as collateral, providing a relatively stable value compared to equities.
- **Mutual Fund Units**: Units of mutual funds can be pledged as collateral, with their value
linked to the performance of the underlying assets.

#### Other Assets

- **Gold**: Gold is a popular form of collateral due to its liquidity and relatively stable
value. Banks may require physical possession of the gold or accept it in dematerialized form.
- **Vehicles**: Vehicles, such as cars, trucks, and machinery, can be offered as collateral.
The value is determined based on factors like age, condition, and resale value.
- **Machinery and Equipment**: Industrial machinery and equipment can be pledged as
collateral, with their value assessed based on market conditions and depreciation.

### Conclusion
The nature of securities accepted by banks as collateral varies, with each type of asset having
its unique characteristics and risks. Effective risk management practices, including thorough
valuation, legal due diligence, and monitoring, are essential to mitigate these risks and ensure
the safety of lending operations.

risks involved

The risks involved with accepting different types of securities as collateral can vary
depending on the nature of the asset and market conditions. Here are some common risks
associated with each type of security:

### Immovable Property

- **Market Risk**: The value of real estate can fluctuate due to changes in market
conditions, such as economic downturns or changes in demand for property.
- **Legal Risk**: There is a risk of legal disputes over the ownership or title of the property,
which can affect the bank's ability to foreclose on the collateral in case of default.
- **Maintenance Risk**: If the property requires significant maintenance or upkeep, the
value of the collateral may decrease over time.

### Movable Property

- **Market Risk**: The value of stocks, bonds, and other securities can be volatile,
subjecting the collateral to fluctuations in market prices.
- **Liquidity Risk**: Some securities may have limited liquidity, making it difficult to sell
them quickly in case of default.
- **Counterparty Risk**: There is a risk that the issuer of the security may default, leading to
a loss in value of the collateral.

### Other Assets

- **Market Risk**: The value of assets like gold, vehicles, and machinery can be influenced
by market conditions, affecting their suitability as collateral.
- **Physical Risk**: There is a risk of damage or destruction to the asset, which can reduce
its value as collateral.
- **Legal Risk**: Some assets may be subject to legal restrictions or encumbrances that limit
their use as collateral.

### Mitigation of Risks

- **Diversification**: Banks can mitigate risk by diversifying their collateral portfolio,
spreading exposure across different types of assets.
- **Due Diligence**: Thorough valuation and legal due diligence can help identify and
mitigate risks associated with the collateral.
- **Margin Requirements**: Banks may require borrowers to provide additional margin or
maintain a certain loan-to-value ratio to mitigate market and liquidity risks.

### Conclusion
While accepting securities as collateral can help mitigate credit risk, banks must also consider
the risks associated with each type of security. Effective risk management practices,
including thorough due diligence and monitoring, are essential to mitigate these risks and
ensure the safety of lending operations.
assessment of risk

Assessment of risk is a critical process for banks and financial institutions when deciding to
accept securities as collateral for loans. Here's a detailed overview of the assessment process:

### 1. **Risk Identification**

- **Asset-specific Risks**: Identify the specific risks associated with the type of security
being offered as collateral (e.g., market risk, liquidity risk, legal risk).
- **Borrower-specific Risks**: Consider the borrower's creditworthiness, financial stability,
and ability to repay the loan.

### 2. **Risk Analysis**

- **Market Analysis**: Assess the current market conditions and trends that may affect the
value of the collateral (e.g., real estate market conditions, stock market trends).
- **Legal Analysis**: Conduct a legal review of the collateral to ensure there are no
encumbrances or legal issues that could affect its use as collateral.

### 3. **Risk Measurement**

- **Valuation**: Determine the value of the collateral based on current market prices,
appraisals, or other valuation methods.
- **Loan-to-Value (LTV) Ratio**: Calculate the LTV ratio to determine the percentage of
the loan amount that is covered by the value of the collateral. A lower LTV ratio indicates
lower risk.

### 4. **Risk Mitigation**

- **Margin Requirements**: Require the borrower to provide additional margin or collateral
to cover potential fluctuations in the value of the collateral.
- **Insurance**: Require the borrower to obtain insurance for the collateral to protect against
damage, loss, or theft.
- **Diversification**: Spread the risk by accepting a diversified portfolio of securities as
collateral.

### 5. **Risk Monitoring**

- **Regular Valuation**: Monitor the value of the collateral regularly to ensure it remains
adequate to cover the loan amount.
- **Review of Borrower's Financial Situation**: Monitor the borrower's financial condition
and ability to repay the loan.

### 6. **Risk Reporting**

- **Internal Reporting**: Report on the risks associated with collateral to senior management
and risk management committees.
- **Regulatory Reporting**: Comply with regulatory requirements related to risk assessment
and reporting.

### Conclusion
Assessment of risk is a comprehensive process that involves identifying, analyzing,
measuring, mitigating, monitoring, and reporting on risks associated with accepting securities
as collateral. By effectively managing these risks, banks can reduce their exposure and ensure
the safety and soundness of their lending operations.
kinds of risks

Risk is an inherent part of banking and financial activities, and understanding the different
kinds of risks is crucial for effective risk management. Here's a detailed overview of the
various types of risks:

### 1. Credit Risk

- **Definition**: The risk of loss due to a borrower's failure to repay a loan or meet
contractual obligations.
- **Causes**: Poor creditworthiness of borrowers, economic downturns, industry-specific
factors.
- **Impact**: Loss of principal and interest, increased provisioning, liquidity issues.
- **Mitigation**: Credit assessment, collateral, diversification, credit insurance.

### 2. Market Risk

- **Definition**: The risk of loss due to adverse changes in market prices or rates.
- **Types**:
- **Interest Rate Risk**: Losses due to changes in interest rates affecting the value of fixed-
income securities.
- **Equity Price Risk**: Losses due to changes in stock prices affecting the value of equity
investments.
- **Foreign Exchange Risk**: Losses due to changes in exchange rates affecting the value
of foreign currency-denominated assets.
- **Mitigation**: Hedging, diversification, asset-liability management.

### 3. Liquidity Risk

- **Definition**: The risk of not being able to meet short-term obligations due to inability to
liquidate assets or obtain funding.
- **Causes**: Sudden withdrawals, lack of marketability of assets, funding mismatches.
- **Impact**: Inability to meet obligations, fire sales of assets, reputational damage.
- **Mitigation**: Liquidity management, maintaining adequate liquid assets, access to
emergency funding.

### 4. Operational Risk

- **Definition**: The risk of loss due to inadequate or failed internal processes, systems, or
human error.
- **Causes**: Technology failures, fraud, errors, inadequate controls.
- **Impact**: Financial losses, regulatory fines, reputational damage.
- **Mitigation**: Robust internal controls, regular audits, staff training, contingency
planning.

### 5. Compliance Risk

- **Definition**: The risk of legal or regulatory sanctions, financial loss, or reputational
damage due to non-compliance with laws, regulations, or industry standards.
- **Causes**: Failure to adhere to regulations, lack of awareness or understanding of laws.
- **Impact**: Fines, penalties, loss of reputation, legal action.
- **Mitigation**: Compliance programs, regular audits, legal advice.
### 6. Reputational Risk
- **Definition**: The risk of loss due to damage to a bank's reputation or brand.
- **Causes**: Poor customer service, unethical behavior, negative publicity.
- **Impact**: Loss of customers, reduced market share, difficulty in attracting talent.
- **Mitigation**: Strong ethical standards, customer-centric approach, crisis management.

### 7. Strategic Risk

- **Definition**: The risk of loss due to poor business decisions, improper implementation of
strategies, or failure to adapt to changes in the business environment.
- **Causes**: Inadequate strategic planning, competition, technological changes.
- **Impact**: Loss of market share, financial losses, decline in shareholder value.
- **Mitigation**: Robust strategic planning, scenario analysis, continuous monitoring of
business environment.

### Conclusion
Understanding and effectively managing these risks are essential for banks and financial
institutions to ensure their long-term sustainability and protect the interests of their
stakeholders. By implementing robust risk management practices, banks can mitigate these
risks and navigate the complexities of the financial landscape.

Recovery of debts with and without intervention of courts / tribunal: Recovery of

Debts due to Banks and Financial Institutions Act, 1993,
The Recovery of Debts due to Banks and Financial Institutions Act, 1993 (RDDBFI Act),
was enacted to provide for the establishment of Debt Recovery Tribunals (DRTs) and the
Appellate Tribunals for expeditious adjudication and recovery of debts due to banks and
financial institutions. The Act aimed to streamline the process of debt recovery and provide a
specialized forum for resolving disputes related to debt recovery. Here's a detailed
explanation of the recovery process under the RDDBFI Act, both with and without the
intervention of courts/tribunals:

### Recovery Without Intervention of Courts/Tribunals

1. Demand Notice
 Process: Before initiating recovery proceedings, the bank or financial
institution must issue a demand notice to the borrower, demanding
repayment of the debt.
 Content: The notice must specify the amount due, details of the debt, and a
demand for repayment within a specified period.
  Purpose: The notice serves as a formal communication to the borrower
regarding the outstanding debt and the consequences of non-repayment.
2. Negotiated Settlement
 Process: Banks may attempt to negotiate a settlement with the borrower
outside the formal legal process.
 Advantages: Quick resolution, avoidance of legal proceedings, possibility of
maintaining a customer relationship.
 Challenges: Risk of default on negotiated terms, need for borrower
cooperation.
 Terms: The negotiated settlement may include a revised repayment schedule,
reduction in the outstanding amount, or other mutually agreed-upon terms.
3. Out-of-court Settlement
 Process: Mediation or arbitration may be used to resolve disputes and reach a
settlement without court intervention.
 Advantages: Avoidance of lengthy court proceedings, lower legal costs,
flexibility in terms of settlement.
 Challenges: Need for cooperation from both parties, risk of non-compliance
with settlement terms.
 Effectiveness: The effectiveness of out-of-court settlements depends on the
willingness of both parties to cooperate and the complexity of the dispute.
4. Recovery Agents
 Role: Banks may engage recovery agents to assist in recovering debts.
 Methods: Recovery agents use various methods to recover debts, including
negotiation, persuasion, and legal action.
 Regulation: Recovery agents are regulated by the RBI and must adhere to
guidelines regarding their conduct and practices.
 Controversies: The use of recovery agents has been controversial due to
reports of aggressive tactics and harassment of borrowers.
5. Corporate Debt Restructuring (CDR)
 Definition: CDR is a mechanism for the restructuring of corporate debts
outside the formal legal process.
 Process: Banks and financial institutions, along with the borrower, negotiate a
restructuring plan to address the borrower's financial difficulties.
 Objective: The objective of CDR is to revive the financial health of the
borrower and ensure repayment of debts.
 Benefits: CDR allows for a coordinated approach to debt restructuring and
may help avoid the need for legal action.
6. One Time Settlement (OTS)
 Definition: OTS is a settlement scheme offered by banks to borrowers to
settle their outstanding debts in a lump sum payment.
 Terms: The terms of the OTS may include a discount on the outstanding
amount or waiver of certain charges.
  Advantages: Quick resolution, avoidance of legal proceedings, possibility of
reducing the burden on the borrower.
 Conditions: OTS schemes are usually offered to borrowers facing financial
difficulties and may require compliance with certain conditions.

### Recovery With Intervention of Courts/Tribunals

#### 1. **Debt Recovery Tribunals (DRTs)**-GIVEN SEPARATELY-LATER

- **Process**: Banks or financial institutions may file a case with the DRT for the recovery
of debts.
- **Jurisdiction**: DRTs have jurisdiction over matters involving recovery of debts due to
banks and financial institutions.
- **Powers**: DRTs have the power to adjudicate on matters related to debt recovery, issue
recovery certificates, and enforce recovery orders.
- **Advantages**: Specialized forum for debt recovery, expeditious process, legal recourse
for banks.
- **Challenges**: Backlog of cases, delays in obtaining recovery orders, enforcement
challenges.

#### 2. **Securitization and Reconstruction of Financial Assets and Enforcement of Security

Interests (SARFAESI) Act, 2002** https://blog.ipleaders.in/overview-of-the-sarfaesi-axt-
2002/
- **Process**: Banks can enforce their security interests under the SARFAESI Act without
the intervention of courts.
- **Advantages**: Empowers banks to recover debts quickly, without court intervention,
streamlined process for asset recovery.
- **Challenges**: Compliance with procedural requirements, borrower resistance, legal
challenges.

#### 3. **Civil Courts**

- **Process**: Banks can file civil suits for recovery of debts through regular court
proceedings.
- **Advantages**: Legal recourse for recovery, enforcement of court orders.
- **Challenges**: Lengthy court proceedings, legal costs, possibility of appeals and delays.

### Conclusion
The RDDBFI Act provides banks and financial institutions with various mechanisms for the
recovery of debts, both with and without the intervention of courts/tribunals. By providing a
specialized forum for debt recovery and empowering banks with additional recovery options,
the Act aims to expedite the process of debt recovery and reduce the burden on the regular
court system.
other modes of recovery

Apart from the methods mentioned earlier, banks and financial institutions have several other
modes of recovery available to them to pursue debtors and recover outstanding dues. These
methods vary in complexity and effectiveness depending on the circumstances of each case.
Here are some additional modes of recovery:

### 1. **Garnishee Order**

- **Definition**: A court order that directs a third party (usually a debtor's employer or bank)
to withhold funds owed to the debtor and pay them directly to the creditor.
- **Process**: Creditor obtains a judgment from the court and then applies for a garnishee
order to be issued against the third party.
- **Effectiveness**: Can be an effective way to recover funds if the debtor has a regular
income or assets held by a third party.

### 2. **Attachment of Property**

- **Definition**: A legal process where the court seizes and takes control of the debtor's
property to satisfy the debt.
- **Process**: Creditor obtains a court order for attachment of the debtor's property, which
may include real estate, vehicles, or other valuable assets.
- **Effectiveness**: Effective if the debtor has valuable assets that can be seized to recover
the debt.
Attachment of property is a legal remedy available to creditors to recover debts by
seizing and taking control of the debtor's property. Here's a more detailed
explanation of this process:

1. Legal Basis
 The legal basis for attachment of property varies by jurisdiction but generally
allows creditors to seek court orders to seize and sell the debtor's assets to
satisfy the debt.
2. Initiation of Process
 The creditor initiates the process by filing a petition or application with the
court, seeking an order for the attachment of the debtor's property.
 The creditor must provide evidence of the debt and the debtor's failure to
repay.
3. Court Order
 If the court finds merit in the creditor's claim, it issues an order for the
attachment of the debtor's property.
 The order specifies the property to be attached and may include real estate,
vehicles, bank accounts, or other valuable assets.
4. Execution of Order
 The court-appointed officer, such as a bailiff or sheriff, executes the order by
physically seizing the identified property.
 The officer may take possession of the property or place a lien on it,
preventing the debtor from selling or transferring it.
5. Sale of Property
 Once the property is seized, it may be sold through a public auction or other
means to realize funds to repay the debt.
 The proceeds from the sale are used to satisfy the debt, and any surplus is
returned to the debtor.
6. Challenges
 Debtors may challenge the attachment of their property by claiming
exemptions or disputing the validity of the debt.
 Legal challenges and delays in the process can affect the effectiveness of
attachment as a recovery method.
7. Effectiveness
 Attachment of property can be effective if the debtor has valuable assets that
can be seized and sold to recover the debt.
 However, the process can be time-consuming and expensive, and the actual
recovery amount may be limited by the value of the attached assets.
8. Conclusion
 Attachment of property is a legal remedy that allows creditors to recover
debts by seizing and selling the debtor's assets.
 While effective in certain cases, it is important for creditors to consider the
costs and complexities of the process before pursuing attachment as a
recovery method.

### 3. **Bankruptcy Proceedings**

- **Definition**: A legal process initiated by a debtor or creditor to declare the debtor
bankrupt and distribute their assets to creditors.
- **Process**: Creditor files a bankruptcy petition against the debtor, and if approved by the
court, a trustee is appointed to manage the debtor's assets.
- **Effectiveness**: Can be a last resort for creditors if other methods of recovery have
failed, but may result in partial or no recovery of the debt.
Bankruptcy proceedings are a legal process through which individuals or entities can
seek relief from their debts. Here's a detailed explanation of bankruptcy proceedings:

1. Filing for Bankruptcy

 Voluntary Bankruptcy: The debtor initiates the process by filing a petition for
bankruptcy with the court.
 Involuntary Bankruptcy: Creditors can also file a petition for bankruptcy
against a debtor under certain conditions, such as non-payment of debts.
2. Bankruptcy Petition
 The bankruptcy petition contains details of the debtor's financial situation,
including assets, liabilities, income, and expenses.
 The court reviews the petition to determine if the debtor qualifies for
bankruptcy relief.
3. Automatic Stay
 Once a bankruptcy petition is filed, an automatic stay goes into effect, which
prohibits creditors from pursuing further collection actions against the debtor.
 The stay gives the debtor a temporary reprieve from creditor actions while the
bankruptcy case is being processed.
4. Appointment of Trustee
 In a bankruptcy case, a trustee is appointed to oversee the process and
manage the debtor's assets.
 The trustee reviews the debtor's financial affairs, liquidates non-exempt assets,
and distributes the proceeds to creditors.
5. Types of Bankruptcy
 Chapter 7: Liquidation bankruptcy, where non-exempt assets are sold to
repay creditors, and remaining debts are discharged.
 Chapter 11: Reorganization bankruptcy for businesses, allowing them to
restructure debts and continue operations.
 Chapter 13: Reorganization bankruptcy for individuals with a regular income,
allowing them to repay debts over time under a court-approved plan.
6. Debt Discharge
 In Chapter 7 bankruptcy, eligible debts are discharged, meaning the debtor is
no longer legally obligated to repay them.
 In Chapter 13 bankruptcy, debts are restructured and repaid according to a
court-approved plan.
7. Effectiveness
 Bankruptcy can be effective in providing relief to debtors burdened by
overwhelming debt.
 For creditors, bankruptcy can result in partial or no recovery of debts,
especially if the debtor's assets are insufficient to cover the debts.
8. Conclusion
 Bankruptcy proceedings provide a legal framework for debtors to seek relief
from their debts and for creditors to seek repayment.
 While bankruptcy can be an effective tool for debtors in financial distress, it
can also have significant implications for creditors, potentially resulting in
losses.

### 4. **Winding-Up Proceedings**

- **Definition**: A legal process to liquidate a company's assets to pay off its debts.
- **Process**: Creditor files a winding-up petition against the debtor company, and if
approved by the court, a liquidator is appointed to sell off the company's assets and distribute
the proceeds to creditors.
- **Effectiveness**: Typically used for recovery from corporate debtors and can result in
partial or full recovery of the debt.
Winding-up proceedings, also known as liquidation, is a legal process through which
a company's assets are liquidated to pay off its debts. Here's a detailed explanation
of the process:

1. Filing a Winding-Up Petition

 Creditor Petition: A creditor files a winding-up petition in court against the
debtor company, citing its inability to repay debts.
 Voluntary Liquidation: The company's directors or shareholders may also
choose to voluntarily wind up the company by passing a resolution.
2. Appointment of Liquidator
 If the court approves the winding-up petition, a liquidator is appointed to
oversee the process.
 The liquidator takes control of the company's assets, sells them, and
distributes the proceeds to creditors according to the priority set by law.
3. Realization of Assets
 The liquidator identifies, collects, and sells the company's assets, which may
include property, equipment, inventory, and investments.
 The proceeds from the sale are used to repay creditors, starting with secured
creditors and then unsecured creditors.
4. Distribution to Creditors
 The liquidator distributes the proceeds from the sale of assets to creditors
according to their priority.
 Secured creditors, such as those with a mortgage or charge over the
company's assets, are paid first.
 Unsecured creditors, such as suppliers and trade creditors, are paid next,
followed by shareholders if any assets remain.
5. Conclusion of Winding-Up
 Once all assets have been liquidated and distributed, the liquidator prepares a
final account and submits it to the court for approval.
 The court issues an order for the dissolution of the company, and the
company ceases to exist as a legal entity.
6. Effectiveness
 Winding-up proceedings can be an effective way to recover debts from
corporate debtors, especially if the company has valuable assets.
 However, the actual recovery amount may be limited by the value of the
company's assets and the priority of creditors.
7. Conclusion
 Winding-up proceedings provide a legal mechanism for creditors to recover
debts from insolvent companies.
 While effective in certain cases, winding-up proceedings can be complex and
time-consuming, and the actual recovery amount may vary depending on the
company's assets and liabilities.

### 5. **Asset Reconstruction Companies (ARCs)**

- **Definition**: Specialized financial institutions that acquire non-performing assets
(NPAs) from banks and financial institutions for resolution and recovery.
- **Process**: Banks and financial institutions sell their NPAs to ARCs, which then work to
recover the debts through various means, including restructuring, settlement, or enforcement
of security.
- **Effectiveness**: Provides banks with an avenue to offload NPAs and recover some of the
outstanding dues.
Asset Reconstruction Companies (ARCs) are specialized financial institutions that play
a crucial role in the resolution and recovery of non-performing assets (NPAs) in the
banking sector. Here's a detailed explanation of how ARCs work:

1. Acquisition of NPAs
 Banks and financial institutions transfer their NPAs to ARCs at a mutually
agreed-upon price.
 The transfer of NPAs to ARCs helps banks clean up their balance sheets and
improve their financial health.
2. Resolution Process
 ARCs undertake the resolution of NPAs through various means, including
restructuring of loans, settlement with borrowers, or enforcement of security
interests.
 The objective is to recover as much of the outstanding dues as possible and
maximize the value of the distressed assets.
3. Restructuring of Loans
 ARCs may restructure the loans of distressed borrowers by modifying the
repayment terms, extending the repayment period, or reducing the interest
rate.
 The aim is to make the repayment schedule more manageable for the
borrower and increase the likelihood of recovery.
4. Settlement with Borrowers
 ARCs may negotiate settlements with borrowers, wherein the borrower agrees
to pay a portion of the outstanding dues in exchange for the remaining debt
being written off.
 Settlements are typically reached through mutual agreement between the
ARC and the borrower.
5. Enforcement of Security
 If restructuring or settlement efforts fail, ARCs may resort to enforcement of
security interests, such as taking possession of and selling the collateral
pledged by the borrower.
 The proceeds from the sale of the collateral are used to recover the
outstanding dues.
6. Effectiveness
 ARCs provide banks with an avenue to offload NPAs and recover some of the
outstanding dues.
 By specializing in NPA resolution, ARCs can often achieve better results
compared to banks, which may lack the expertise or resources for effective
NPA management.
7. Regulation
 ARCs are regulated by the Reserve Bank of India (RBI) and must comply with
regulatory guidelines regarding the acquisition and resolution of NPAs.
 The RBI regulates the functioning of ARCs to ensure transparency, fairness,
and efficiency in NPA resolution.
8. Conclusion
 ARCs play a crucial role in the banking sector by assisting banks in the
resolution and recovery of NPAs.
 By acquiring and resolving NPAs, ARCs help banks clean up their balance
sheets and improve their financial health, ultimately contributing to the
stability of the banking sector.

### Conclusion
These additional modes of recovery provide banks and financial institutions with a range of
options to recover debts from defaulting borrowers. Each method has its own process and
requirements, and the choice of method depends on factors such as the nature of the debt, the
financial position of the debtor, and the legal framework applicable in each case.
Recovery Of Money Under The
Recovery Of Debts Due To Banks
And Financial Institution Act,
1993
Origin of RDDBFI Act – An Introduction
Banks and financial institutions duly registered with Reserve Bank of India
(RBI) provide loan facility to legal entities and individuals (borrowers). In the
event where the borrower fails to repay loan amount or any part thereof
which also includes unpaid interests and other charges and/or debt becomes
Non-Performing Asset (NPA), banks and financial institutions can recover the
debt by approaching appropriate judicial forums.

Before, the enactment of the RDDBFI Act, banks, and financial institutions
were facing huge challenges in recovering debts from the borrowers as the
courts were overburdened with large numbers of regular cases due to which
courts could not accord priority to recovery matters of the banks and
financial institutions. The Government of India in 1981 constituted a
committee headed by Mr T. Tiwari, this committee suggested a quasi-judicial
setup exclusively for banks and financial institutions which by adopting a
summary procedure can quickly dispose-off the recovery cases filed by the
banks and financial institutions against the borrowers.

Again in 1991, a committee was set up under Mr Narashmam, which

endorsed the view of the Mr T. Tiwari Committee and recommended the
establishment of quasi-judicial for the speedy recovery of debts. Pursuant to
which Government of India enacted the RDDBFI Act. Through, the RDDBFI
Act quasi-judicial authorities were constituted, and the procedure was
specified for the speedy recovery of debt.

Authorities under RDDBFI Act

Debt Recovery Tribunal

Section 3, provides for the establishment of Debt Recovery Tribunal (DRT),
by notification to be issued by the Central Government, for exercising,
jurisdiction, powers, and authority conferred on such tribunal under the
RDDBFI Act. First DRT was established in Kolkata in the year 1994. Presently
33 DRTs are functioning at various places in India, and 6 more DRTs are also
being established[1]. As per section 4, DRT consists of sole member only,
known as Presiding Officer. Section 5, provides that a person who has been
or is qualified to become District Judge can be appointed as Presiding Office
of DRT. Section 6 provides that the terms of the Presiding Office shall end
after the expiry of the period of 5 years from the date he enters the office
and he will be eligible for reappointment provided he has not attained the
age of 65 years.

Debt Recovery Appellate Tribunal

Sections 8 -11 deals with the establishment, qualification, and term of the
Chair Person of the Debt Recovery Appellate Tribunal (DRAT). DRAT is
established to exercise control and powers conferred under the RDDBFI Act.
DRAT consist of sole member to be known as Chair Person. A person is
eligible to become a Chair Person, if he has been an or qualified to become a
High Court Judge, or has been a member of the Indian Legal Services and
held a Grade 1 post as such member for the minimum period of three years
or has held office of Presiding Officer of Tribunal for period of at least three
years. The Chair Person of DRAT can hold his office for the period of five
years and is also eligible for reappointment, provided, that he has not
attained the age of seventy years. Presently there are 5 DRATs in India in
Delhi, Chennai, Mumbai, Allahabad, and Kolkata. DRAT has appellate and
supervisory jurisdiction over DRTs.
Who can recover money from DRT under RDDBFI Act
As per section 1(4), the provisions of RDDBFI Act does not apply where the
amount of debt due to the bank or financial institution or the consortium of
banks and financial institutions is less than Rupees Ten Lakh or any other
amount not below Rupees One Lakh, cases where the central government
may by notification specify. Thus, in essence, minimum debt which is to be
recovered from DRT should not be less than Rupees Ten Lakh. In the case of
SARFESAI Act, if the asset has been declared as Non-Preforming Asset
(NPA), eligible banks and financial institutions after enforcing security can
recover remaining amount under RDDBFI Act which is in excess, of Rupees
One Lakh.

What type of debt can be recovered under the RDDBFI Act

As per section 2 (g) debt is any liability inclusive of interest, which is claimed
to due from any person by any bank or financial institution or consortium
thereof. Such liability may be secured or unsecured or assigned, whether
payable under the order of court or arbitration award or under the mortgage.
Such a liability shall be subsisting and validly recoverable on the date of
application.

The debt also includes liability towards debt securities which remains unpaid
in full or part after notice of ninety days served upon the borrowers by the
debenture trustees or any authority in whose favor a security interest is
created for the benefit of the holder of the debt security. Clause 2(ga)
defines debt security as securities listed in accordance with regulations
defined by SEBI under Securities and Exchange Board of India Act, 1992.

Jurisdiction, Powers, and Authority of DRT and DRAT

As per section 17 of RDDBFI Act, vests jurisdiction, power and authority on
DRT to entertain and decide application from banks and financial institutions
to recover a debt due to such banks and financial institutions. Further,
section 17A confers on DRAT power of general superintendence and control
and confers appellate jurisdiction on DRAT. DRAT is also empowered to
transfer a case from one DRT to another DRT. DRAT is also empowered to
call for information from DRT, about cases pending and disposed of them.
DRAT is also empowered to convene the meeting of Presiding Officers. It also
empowered to conduct an inquiry of Presiding Officer and recommend
suitable action to the Central Government.

Section 18 bars the jurisdiction of any civil court or authority for recovery of
debt, except High Court and Supreme Court in the exercise of their writ
jurisdiction under Article 226 and 227 of the Constitution of India. Thus in
essence order of DRAT can be challenged in writ jurisdiction of High Court or
Supreme Court

Procedure for filing cases for recovery of money under RDDBFI

Act[2]
Now having understood the basics of RDDBFI Act, including DRT and DRAT,
now understand the procedure which is to be followed or the process of
recovering money under this Act:

Types of pleadings/applications generally filed before DRT

Following are the pleadings which are filed in DRT by the parties

1. Original Application (O.A) refers to the claim filed by the bank or

financial institution for recovery of debt from the borrower.
2. Interlocutory Application (I.A) refers to the applications filed during
the pendency of the case. Miscellaneous Interlocutory Application
(Misc. I.A) refers to applications filed under clause e,g or h of
section 22(2) of the RDDBFI Act.
3. Written Statement/ reply refers to defense of the borrower

Application to be filed in local jurisdiction of DRT

An Application has to be filed within the local jurisdiction of relevant DRT, as
per section 19(1) of the Act, Application can be filed within the local limit of
DRT in whose jurisdiction where:

1. the branch or any other office of the bank or financial institution is

maintaining an account in which debt claimed is outstanding;
2. the defendant voluntarily resides or carries on his business or works
for gain;
3. in case there are more than one defendant, at the place where any
one of the defendants voluntarily resides or carries on his business
or works for gain;
4. where the cause of action wholly or partly arose.
Further, where a bank or a financial institution, which has to recover its debt
from any person, has filed an O.A 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 DRT.

Application contents
Along with the Application certified true copies of the documents on which
the bank or financial institution is relying in support of its claim needs to be
filed. Further, Applicant inter-alia should state the following:

1. Grounds of an application under different heads should be stated

concisely;
2. Particulars of debt secured by a security interest in the property or
assets belonging to the debtor and estimated value thereof;
3. If the secured assets are not sufficient to cover the debt then the
particulars of any other property or assets owned by the debtor
should be stated;
4. If the value of other assets is not sufficient to cover the debt, then a
prayer must be made requesting for direction to the debtor for
disclosing his other property or assets details.

Language and forms of pleading and other formalities

All pleadings shall be done in English or Hindi language. If in the English
language then font should be Times New Roman with a font size of 13. There
should be double spacing between the lines. Left-hand margin should be 5
centimetres and right-hand margin should be 2.5 centimetres. In all
pleadings, legal size (A3) paper should be used.

A paper book is made which should include following:

1. Index in Form 1
2. List of dates and events
3. Pleadings i.e Application
4. Interlocutory Application, if any
5. Affidavit
6. Index of documents/Annexure
7. Original/attested copy of documents
8. Power of attorney/board resolution/ authorization letter
9. Vakaltnanma, if represented by counsel
While filing O.A a copy of the statement of account, certified in accordance
with the provisions of the Bankers’ Books Evidence Act, 1891, needs to be
filed along with the O.A., stating the rate of interest with a certificate that
the interest has been charged at such rate. Also, details of penal interest
charged from the borrower needs to be mentioned along with a certificate
that the penal interest has not been capitalised.

While submitting torn or small document which is smaller than legal size
paper, such documents need to be pasted on legal size paper to ensure that
they fit the paper book.

All the pages of the paper book need to be signed, and the name of the
person who is signing the pleadings must be written in each page in capital
letters. Also, the party can affix digital signature, and in the case of illiterate
person thumb impression is affixed, and his/her name be written in capital
letters.

All the Annexures/documents should be attested with the following sentence

mentioned on each page

“This Annexure is the true copy of the original document”, with all the pages
of document duly signed.

One complete set of the paper book needs to be served to the other party.

Fee
While filing O.A or I.A or review or appeal. The fee must be paid by way of
Demand or Postal Order in favour of Register, of DRT, payable at the place
where DRT is situated. The amount of fee payable is as under:

Application for recovery of debts due

under section 19(1) or section 19(2)
of the Act

(a) Where amount of debt due is Rs. Rs. 12 000/-

10 lakhs

Rs. 12 000/- plus Rs. 1 000/- for every one lakh rupees
(b) Where the amount of debt due is of debt due or part thereof in excess of Rs. 10/- lakhs
above Rs. 10 lakhs
 subject to a maximum of Rs. 1 50 000/-

Application to counterclaim under

section 19(8) of the Act—

Rs. 12 000/-
(a) Where the amount of claim made
is up to Rs. 10 lakhs

(b) Where the amount of claim made

is above Rs. 10 lakhs Rs. 12 000/- plus Rs. 1 000/- for every one lakh rupees
or part thereof in excess of Rs. 10 lakhs subject to a
maximum of Rs. 1 50 000/-.

Application for Review including

review application in respect of the
counterclaim

(a) against an interim order Rs. 125/-

(b) against a final order excluding -50% of fee payable at rates as applicable to the
review for correction of clerical or applications under section 19(1) or 19(8) of the Act
arithmetical mistakes subject to a maximum of Rs. 15 000/-

Application for interlocutory order Rs. 250/-

Appeals against orders of the
Recovery Officer

If the amount appealed against is

 Rs. 12 000/-
(i) less than Rs. 10 lakhs

Rs. 20 000/-
(ii) Rs. 10 lakhs or more but less than
Rs. 30 lakhs

Rs. 30 000/-
(iii) Rs. 30 lakhs or more

Vakaltnama Rs. 5/-

Presentation/filing of application for recovery

After completing pre-filing formalities as mentioned above, the application
can be filed before Registrar or any other officer of DRT as authorised by the
Registrar. The application can be filed before 4:30 PM on any working day.
The application can also be filed through e-filing.

One presentation of application Registrar or the officer authorised by him

shall give diary number, date of filing with his endorsement, to the party
filing the application. The application so filed will be securitized by Registrar
or the officer authorised by him within 15 days. In the case of defects were
found applicant will be given 15 days’ time to remove the deficiency, in case
applicant failed to cure the deficiency within the period of 15 days, he can
apply for extension and registrar can give him extension subject to a
maximum of one month. Even after extension if the applicant fails to cure
the defect application will not be registered by the Registrar.

Once all the defects are cured, or there are no defects in the application,
Registrar of DRT will get the application/case registered and allot a serial
number to the application. Cause list of cases to be listed before Registrar
will be placed in board or website of DRT a day before scheduled hearing.

Service of Summon/Notice
The Registrar of DRT or any other officer authorised by Presiding Officer will
issue Summon/Notice, which will be served by the applicant to the
defendant/respondent. Following the details of the forms in which
Summons/Notice was issued:

1. Summons in respect of O.A in Form-3

 2. Notice in respect of S.A. in Form-4
3. Notice in respect of an application filed under section 31-A of the Act
in Form-5
4. Notice in respect of Misc. I.A. in Form-6
5. Notice in respect of an appeal in Form-7.
The Summon/Notice which also contains the paper book of
petition/application is generally served on to the defendant/respondent by
hand or registered post with acknowledgement due (AD) or speed post or
courier. With the permission, of Registrar, Summon/Notice can also be also
sent through email or fax, however, in such event, it must be ensured that
defendant/respondent gets a copy of the paper book on the first date of his
appearance. If the Summon/Notice is delivered to any adult family member
of respondent/defendant at his address, it shall be deemed to be delivered.
In case Summon/Notice has been sent through registered post with AD or
speed post or courier or email or fax, an affidavit should be filed stating
mode of dispatch and the correctness of the address where it was sent. In
such case Summon/Notice shall be deemed to be delivered irrespective of
the fact delivery acknowledgement has not be received back. If the
defendant/respondent is deliberately avoiding the service of the
Summons/Notice in that event with the permission of DRT Summon/Notice
can be pasted at the visible place of the premises of the
respondent/defendant or publication can be made in leading daily newspaper
and in both cases service will be deemed to be effected on
respondent/defendant. This is also known as substituted service.

Hearing of the case before Presiding Officer

Filing of reply/written statement – Defendant/Respondent within one month
from the date of service of Notice/Summon on him is required to file the
reply. However, with the permission of DRT respondent/defendant can seek
time for filing reply/written statement. Even if in the extended time period
the defendant/respondent failed to file his reply then DRT may proceed ex-
prate.

The claim of set off /counter claim – Defendant at the first date of hearing
can file a claim for set off/counterclaim. He cannot file it afterwards without
the permission of DRT. The claim of set off/counterclaim shall have the same
effect as a counter suit in any proceedings.

Admission of liability by respondent/defendant – If the respondent/defendant

admits his liability, in that event Presiding Officer will pass an order directing
respondent/defendant to pay the admitted amount within the period of 30
days from the date of the order of the DRT. If defendant/respondent fails to
pay the admitted amount within that period, then Presiding Office may issue
a certificate of debt due in terms of section 19 of the Act.
Affidavits- In the case where defendant/respondent denies his obligation, in
that event Presiding Office may require the parties to him to prove any fact
by filing an affidavit and such affidavits shall be read in the hearing in the
manner which DRT deems fit. After filing of the affidavits by the respective
parties where it appears to DRT that either the applicant or the
defendant/respondent desires the production of a witness for cross-
examination and that such witness can be produced and it is necessary for
the case, DRT shall for sufficient reasons to be recorded, order the witness to
be present for cross-examination, and in the event of the witness does not
appears for cross-examination, then, the affidavit shall not be taken into
evidence.

Interim Order by DRT

In cases where the applicant apprehends that the borrower may take steps
which may frustrate attempt of execution may make an application to DRT
along with details of property to be attached and value thereof, and on such
application may pass an interim order directing respondent/defendant,
directing him to deposit before it amount equivalent to property value or
amount which may be sufficient to recover the debt or as and when required
by DRT to place before it disposal the property.

Wherever DRT finds it fit, it may also pass following orders;

1. appoint a receiver of the property, before or after the grant of

Recovery Certificate (RC);
2. remove any persons from possession or custody of any property;
3. commit the same to custody, management of the receiver;
4. confer power on the receiver to file/defend the suit on behalf of
property, or to act in any manner for the improvement of the
property;
5. appoint a commissioner for collecting details of
defendant/respondent’s property or sale thereof.

Judgment and Recovery Certificate by DRT

DRT after giving both the parties opportunity of hearing and hearing their
submissions will within 30 days of the conclusion of such hearing pass its
interim or final order. Within 15 days of the passing of the order, DRT will
issue RC and forward the same to Recovery Officer. RC will contain the
details of the amount to be paid by recovered by the borrower debtor. RC
shall have the same effect as the decree of the civil court.
Appeal
An appeal by any aggrieved party against the order of DRT can be filed
within the period of 30 days from the date of receipt of the order. No appeal
can be filed against any order which has been filed with the consent of the
parties. DRAT shall endeavour to dispose-off appeal finally within the period
of six months.

Amount to be deposited for filing an appeal – Where the appeal is being

preferred by the debtor, who as per the order of DRT is liable to pay money
to bank or financial institution at the time of filing appeal is required to
deposit before DRAT 50% of the amount he is required to pay as per the
order of the DRT. However with the permission of DRAT, this amount can be
reduced by DRAT, but reduced amount should not below 25% of the debt
amount which Borrower is required to pay as per DRT order.

Recovery of debt by Recovery Officer

After receipt of RC from DRT, Recovery Office will initiate recovery by one or
more of following modes:

1. Attachment and sale of movable or immovable property of

defendants/debtors;
2. Taking possession of property over which security interest was
created or any other property of defendant/debtor and appointing
receiver for the management of the same;
3. Arrest of defendant/debtor and his detention in prison;
4. Appointment of receiver for management of movable or immovable
property of defendant/debtor;
5. Any other mode as may be prescribed by the central government.
Apart from above modes Recovery Officer may also, direct any person who is
liable to pay any amount to defendant/borrower, deduct from such amount
the recovery amount, and transfer to the credit of Recovery Officer the
amount so deducted. However, Recovery Officer will not deduct any such
amount which is exempt from attachment under Code of Civil Procedure,
1908.