DRT( Debt Recovery Tribunal) & SARFAESI (The Securitization and Reconstruction

of Financial Assets and Enforcement of Security Interest Act) & the Law
It is very clear that the Banks should follow RBI guidelines on Asset-Classification before
classifying any loan account as Non-performing Asset (NPA). There were judgments
saying that it is mandatory for the Banks to follow RBI guidelines while classifying an
account as Non-Performing Asset (NPA) and any deviation in this regard can vitiate the
proceedings initiated under SARFAESI Act, 2002.
1
While RBI guidelines are detailed when
it comes to Asset Classification and related issues; the Bank officials or the Banks may have
to make a subjective assessment of certain issues. It is understood from the reading of RBI
guidelines on Asset-Classification that genuine borrowers facing temporary difficulties may
be treated separately and based on reasonable assurance of recovery. Obviously, no creditor
and especially secured creditor want to harass a genuine borrower having a good track-record
with the Bank for a considerable time.
2
However, with constant emphasis on the issue of
reduction of NPAs, it seems that the Banks are very strict while getting the accounts
classified as NPAs. The most important thing about the issue of recovery by the Bank is
that they are allowed to proceed against the borrower for default in any of the facilities
availed by him when a borrower avails multiple credit facilities. Banks are asked to initiate
recovery proceedings Borrower-Wise and not Facility-Wise and it is very clear in the RBI
guideline 4.2.7.
3
Again, Banks are not supposed to lay complete focus on the value of the
security available with the Bank as such while initiating the recovery proceedings and it is
very clear in RBI guideline 4.2.3. The extract of the said RBI guidelines are as follows:

4.2.7 Asset Classification to be borrower-wise and not facility-wise:

i) It is difficult to envisage a situation when only one facility to a borrower/one investment in
any of the securities issued by the borrower becomes a problem credit/investment and not
others.
4
Therefore, all the facilities granted by a bank to a borrower and investment in all the

1
Dilip Mookherje,
,
The Distributive Impact of Reforms in Credit Enforcement: Evidence From Indian Debt
Recovery Tribunals, Volume 80, Issue 2, pages 497558, March 2012
2
Ibid.
3
VIKRANT VIG, Access to Collateral and Corporate Debt Structure: Evidence from a Natural Experiment,
Volume 68, Issue 3, pages 881928, June 2013


4
Ibid.
securities issued by the borrower will have to be treated as NPA/NPI and not the particular
facility/investment or part thereof which has become irregular.
The problems for many borrowers or the Small Businessmen availing the loan facilities from
the Bank comes from the issue that the Banks are asked to initiate recovery proceedings
borrower-wise and not facility-wise.
5
Borrowers availing facilities from the Bank with the
complex commercial arrangements and agreements face problems with this discretion
available with the Banks or the Bank Officials. Many complain that there is no effective
redressel mechanism to raise all these issues even when the borrower has a very good case for
restructuring or for questioning the judgment of the Bank in classifying a particular account
as a Non-Performing Asset. In most cases, the borrowers are driven either to approach the
High Court under Article 226 of Constitution of India challenging the classification of an
account as NPA or the borrower may have to inevitably file an Appeal before the Debt
Recovery Tribunal under section 17 of SARFAESI Act, 2002. Even-though Banks can
consider the proposal for restructuring of a loan account upon certain conditions and re-
negotiating the terms, Banks do exercise great discretion in this regard. Coupled with this
situation, as the Banks can argue that the value of security has got nothing to do while
classifying an account as NPA, genuine borrowers or borrowers/small businessmen with
temporary/genuine/understandable problems face lot of pressure and problems
6
. For example,
an industry may have a very valuable property lying with the Bank as a security and may be
facing some problems in its business with the obvious reasons which are beyond its control,
and in such cases also, if the Bank is not convinced, the borrower becomes remediless.

On certain issues, RBI guidelines are very clear as to when an account should be treated as
NPA. But, with regard to providing relaxation or understanding the temporary difficulties of
the borrower while considering up gradation of loan account or regularizing the loan account,
Banks do exercise lot of discretion. If at all the borrower feels that the Secured Creditor or the
Banks are unfair in dealing with his loan account or loan accounts, he can do nothing except
approaching superior officers, approaching Banking ombudsmen or approaching High Court
under Article 226 of Constitution of India. Though, even the DRT (Debt Recovery Tribunal)
can consider all objections raised by the borrower while entertaining an Appeal under section
17 of SARFAESI Act, 2002, DRT may not have power to analyze a particular case in the

5
NIMRIT KANG AND NITIN NAYAR, The Evolution of Corporate Bankruptcy Law in India, Money and
finance, OCT. 03 MAR. 04
6
Supra Note 2.
light of RBI guidelines in its entirety though DRT can certainly look into the guideline
dealing with the criteria for classifying a particular loan account or accounts as Non-
performing Assets. Normally, Banks do not commit any mistakes in classifying an Account
as NPA applying the RBI guidelines strictly. Apart from the criteria, the DRT can look into
the issue of debt, objections regarding debt and the correctness of the procedure followed
by the Bank under SARFAESI Act, 2002.
7
Normally, Banks do not commit mistakes in the
procedure and the borrower will have objection to the classification on the basis that he is not
a willful-defaulter and the deficiency in making payment is temporary in nature.
8
However,
these things are not considered by the DRT normally as I think and they may not have power
to consider all these issues in-spite of various judgments of the Constitutional Courts from
time to time emphasizing at the powers of the Tribunal under section 17. Only due to the
judgments of the Courts, the borrowers are allowed to question every measure initiated by the
Banks under SARFAESI Act, 2002 now and technicalities are normally ignored while
entertaining appeals under section 17.
9
It is also clear that they can look into all objections
pertaining to the loan account or even raised by the third-party if he is connected. The Civil
Court may be having limited jurisdiction to look into the issues connected to the SARFAESI
proceedings and the jurisdiction of the High Court under Article 226 of Constitution of India
is largely dependent on the facts of the case, and the discretion of the Court.
10


Now, if the Bank takes a decision to classify an account as NPA and rejects the objections or
the request by the borrower, then, apart from writ remedy, the remedy available to the
borrower is to file an appeal under section 17 of the SARFAESI Act, 2002. Based on the
merits of the case, the DRT will grant interim relief and finally, only when it is established
that there is a procedural irregularity, the DRT will allow the SARFAESI Appeal and can
order the restoration of property if the physical possession has already been taken by the
Bank pursuant to steps taken under section 13 (4) or by taking assistance of the police etc.
using the mechanism provided under section 14 of SARFAESI Act, 2002.
11
In many cases,

7
Reddy, Y. V., Indian Banking: Paradigm Shift in Public Policy, valedictory address at 23
rd
Bank
Economists Conference, Kolkata, January, 2002.

8
Ross Craston, Credit, Security and Debt Recovery: Laws Role in Asia and the Pacific, 39 St. Louis U. L.J. 758
(1994-1995)
9
Bhaumik, S. K. and P. Mukherjee,The Indian Banking Industry: a commentary, in P. Banerjee and F.J.
Richter (eds). Economic Institutions in India:Sustainability under Liberalization and Globalization, Palgrave
Macmillan, November 2002
10
Ibid.
11
Supra note 10.
DRT can insist on payment of some deposit while granting an interim-relief when the
borrower approaches the Tribunal under section 17 of the Act challenging the proceedings
initiated by the Bank under SARFAESI Act, 2002.
12
If the Bank proceeds with the
proceedings even during the pendency of the Appeal under section 17, then, it becomes
further more complicated to the borrower and it is very often heard that the borrower is asked
to file another appeal literally instead of looking into all developments in the pending Appeal
itself by way of entertaining affidavits or petitions in the pending Appeal.
13
Filing an Appeal
against the order of the DRT to the DRAT under section 18 is another big process and many
normally get discouraged to do this in-view of pre-deposit condition. In each and every step,
the borrower is discouraged and made to run from pillar to post even in cases with some
merit and it is the view of many of the professionals or the borrowers facing SARFAESI
proceedings.
14
There is no reason as to why Appeals cant be speeded-up, additional
Tribunals cant be set-up. If Appeals are speeded-up and if sufficient Tribunals and Appellate
Tribunals are constituted, then, at-least genuine borrowers seeking remedy may feel protected
and at-present, every case of so-called default is treated in a same way.

The SARFAESI Act, 2002 (The Securitisation and Reconstruction of Financial Assets &
Enforcement of Security Interest Act, 2002) seems to be proceeding on the basis that the
Banks or the Bank officials do not commit any mistakes. It is quite possible to ensure speedy
recovery through special legislations like SARFAESI Act, 2002 and also giving confidence
to the borrower that he will be heard fairly especially when the borrower has got a very good
track-record and long standing relation with the Bank along with having valuable and
marketable security lying with the Bank. It is quite possible. Now, it seems that there is an
amendment or the provision allowing the Authorized Officers to bid for the property when
there were no bidders initially and the reason given for this step is that it will allow the Banks
to clean-up their balance-sheets. But, this kind of provisions can harm the borrowers and
already it has become extremely difficult for the borrowers to establish or state his case and
coordinating with the Banks. If there is too much pressure from the Banks when the
businesses are not doing well for the reasons beyond their control, then, small business may
be suffering irreparable loss if the Bank doesnt understand their concerns reasonably and

12
Sujata Visaria, Legal Reform and Loan Repayment: The Microeconomic Impact of Debt Recovery Tribunals
in India, American Economic Journal: Applied Economics , Vol. 1, No. 3 (July 2009) , pp. 59-81
13
Ibid.
14
BM Mundra, SRAFESI Act 2002passes the test, The Chartered Accountant, August 2014

sympathetically.
15
Normally, at-times, taking note of industry specific problems, the Finance
Ministry may come-up with some kind of directions to the Bank to be lenient or
understandable while insisting on the speedy recovery in-respect of some specific industries
and Banks also are asked at-times to post-phone the recovery process also.

Instead of discouraging the borrower to get any remedy or forum to advocate his problems,
the legal frame-work governing recovery of secured loans can still be very fair, few more
Tribunals and Appellate Tribunals can be constituted and well-drafted powers are to be
conferred on the Tribunals to even give directions to the Bank when needed and in-favour of
the borrower.
16
For example, if the loan to be recovered is only 10 lakh and the security lying
with the Bank is worth 50 lakh admittedly, and if the borrower seeks for payment of
outstanding loan amount with interest and charges seeking regularization, then, DRT should
be able to give direction to the Bank to accept the proposal. Delays in adjudication can
certainly be curtailed and technicalities can be ignored while entertaining pleas from the
Borrower. Admittedly, on the issues of reduction of interest, acceptance of OTS etc., Banks
will have their own internal systems and DRT may have little role in this regard.
17

With many more stringent provisions like allowing the Banks to file Caveats before Tribunals
under SARFAESI Act, 2002, allowing the Banks to bid for the properties; discretion of the
Banks or the Bank officials has grown like anything and the borrower increasingly feels that
he cannot state his case and get remedy.
RBI keeps updating or modifies the guidelines governing Asset Classification, but,
borrowers feel that it has become so difficult for them to establish or advocate their case even
when they are not clearly will full defaulters and even when a valuable and marketable
security is lying with the Bank.

Whether it is a Public Sector Bank or Private Sector Bank, borrowers should have a forum
providing speedy, effective and efficacious remedy


15
Muniappan, G. P., The NPA Overhang Magnitude, Solutions, Legal Reforms,address at CII Banking
Summit 2002, Mumbai, April 2002
16
P Mukherjee, Dealing with NPAs: Lessons from international experiences, Money and Finance, 2003 - icra.in
17
J Armour, Law, finance, and politics: the case of IndiaP Lele - Law & Society Review, 2009 - Wiley Online
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