CHALLENGES IN DEBT RECOVERY IN INDIAN BANKING SYSTEM

Kajal Tiwari,

Research Scholar, Amity University, Gwalior

ABSTRACT

Debt repayment is a major problem that all developing nations confront, thus it's critical that they have solid system in place to manage their debts all in all and ensure that their debt recovery techniques are up to the task NPAs are a problem that affects not only banks but harms entire economy. In fact, quantity of Non Performing Loans in the Indian financial market is a measure of the Indian industry's health and the trade's health The commercial banks uses debt collection procedures, which consist of the DRT, Lok Adalat, and the SARFAESI Act, 2002 to recover NPAs, which protects both the debtor and the creditor's interests The concern now is whether these laws are sufficient to meet all problems, and if not then, what revisions are required? This paper presents the challenges faced by the Indian Banking System during debt recovery and the legislations available for same.

INTRODUCTION

Due to the distinctive characteristics (the geographic, social, and economic) of India, its banking system is very different from that of other nations of Asia. India is a large country with regard to its population and land area, with a wide range of cultures and income levels. India's financial sector is hampered by plenty of problems, one of which is the massive amount of non-performing assets on banks' balance sheets (Chitransh, 2022). Numerous businesses in our nation, India, have closed their doors due to cash flow uncertainties. It might have an impact on the business climate as well as India's ranking and bracket in the "Ease of Doing Business Index," which is crucial for the country's influx of foreign investment. The delayed Indian court system forces banks and other financial organisations to use it as a last resort, which causes a significant delay in the final recovery, if it happens at all. (Mr. Deepak Singh and Mr. Samyak Sethi, 2018). A thriving economy requires a healthy financial industry. The collapse of the banking industry might have repercussions across many different sectors. Non-performing assets are currently the main source of concern for the Indian banking system (Vijay Shekhar Jha, 2018). Bank profitability and net worth are negatively impacted by high NPA levels, which increases the probability of multiple loan defaults and diminishes the value of the bank's assets. The usage of provisions is required as a result of NPA growth, which lowers overall profitability and shareholder value  (Gopal Sumathi, 2018).

This article seeks to provide a general summary of India's present debt status, as well as the efforts being taken to ensure quick and efficient debt collection. In this regard, there are two main laws enacted: (1) the SARFAESI Act of 2002, and (2) the RDDB & FI Act of 1993, commonly known as the DRT Act. This research pays special attention to examining the DRT's effectiveness and whether they are genuinely economically beneficial. The authors also give a succinct description of the previous two acts. The writers also go into detail on the RBI's role and the system's impact on debt recovery.

WHAT ARE THE BAD DEBTS?

When the borrower in on fault in repayment of a loan and the account stops making any interest for the bank for more than 90 days (i.e. when the borrower does not pay the amount borrowed + interest for more than 3 months), the account is then categorized as Bad Debt Account/ Non Performing Account. The interest bank charge on the loan is the income of the banks and the difference between the interest charged by the bank and the interest paid by the banks to the depositors is the profit earned by the banks, and hence, the interest rate charged is always more than the interest paid by the banks. Banks give the loans from the deposits in the banks and hence, it is important for the banks to get the loan amount back in time along with interest to pay it back to the depositors and also earn some profit for the running of the banks.

INDIA'S BANKING INDUSTRY AND DEBT CRISIS

Rising Number of bad debts have overburdened the Indian banking system. India has been labeled "Asia's other bad debt headache" [Una Galani, (2016), p.1]. The issue has come to the point where it's impacting the ability of the lender to extend fresh credit, affecting the entire banking system. To put this in context, NPAs in India constitute for approximately 8.6% of the GDP of the country (Tadit Kundu, 2016). A lot of trouble in collecting loans and enforcing securities charges against them is being faced by the banks and financial institutions. The process for recovering debts owed to banks and financial systems was sluggish, resulting in the freezing of a large percentage of the funds. The harsh reality is that DRTs, which are only available to banks, have a dismal success rate of less than 25% (Nidhi Singh and Ritika Rishi, 2016).

The issue at hand is basically with regard to the contract enforcement. Consider the issues with oral contracts- they are really not actually written in any concrete form, leaving no documentation to follow up on and establish their validity in the event of a crisis. And the problem mainly exists in written contracts, when everything is clearly mentioned. The most crucial clause of the loan agreement is its terms and conditions, which many parties neglect to read or discuss. Banks and other financial institutions frequently enter into contracts with clients that are void and have no legal force from the outset of the client-banker relationship, resulting in the dissolution of the entire arrangement and having left with little or no remedy with the banks (Mr. Deepak Singh and Mr. Samyak Sethi, 2018).

There are many other problems being faced by the financial institutions pertaining to the DRTs and the jurisdiction which lead to the slow and inefficient debt recovery.

HOW DOES THE SECURITIZATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND ENFORCEMENT OF SECURITY INTEREST (SARFAESI) ACT, 2002 HELP?

DRTs were developed to hasten the decision-making and debt collection processes. The DRTs have the power to arbitrate bank and financial institution claims totaling at least ten lakh rupees. A bank or other financial institution must file a claim against the defaulter with the tribunal in order to seek restitution under the law. As soon as a case has been decided, the DRT provides an order as well as a recovery certificate. A recovery certificate is then granted for tax recovery under the Income Tax Act of 1961's second schedule. (Mr. Deepak Singh and Mr. Samyak Sethi, 2018).

The recovery of NPAs was portrayed by the RDDBFI Act as being straightforward, The typical civil court system necessitated an enormous expenditure of time, money and effort in comparison as compared to the traditional method of civil litigation, which necessitated a significant commitment of one's time, resources, and energy. This offered the banking industry some hope. This, however, seemed to be a broken promise as banks and financial institutions battled liquidity issues and asset-liability mismatches. A legal framework is also lacking that would let the banks to acquire ownership of securities in order to safeguard their investments and enable financial assets to be restructured through securitization The healing process was not influenced by banks despite the formation of the DRT and they were unable to reach the desired level of recovery capabilities. Banks have not been able to recover their debts to the extent expected despite the creation of special tribunals such as debt recovery tribunals under the RDDBFI Act 1993.  Despite these measures, the number of NPAs gathered in the country continued to rise. As a result, further modifications in the procedure were implemented, reducing adjudication time (Mr. Deepak Singh and Mr. Samyak Sethi, 2018).

The SARFAESI Act was enacted by parliament in support of this. NPAs are defaulted debts that the financial institution can either remove from the defaulter's property or sell at auction. if the defaulter does not pay. However, the only assets that can be recovered are those that were either mortgaged or secured to pay off the obligation (Mr. Deepak Singh and Mr. Samyak Sethi, 2018).

The SARFAESI Act has a great effect on the situation of the debt recovery in India. The main modification made by the act is that it eliminates the lengthy judicial procedures required under Section 13.4 of the SARFAESI Act, allowing banks to seize accounts when they are discovered and classified as non-performing accounts. Secured creditors can either sell or lease the collateral they hold. kept against the loan amount, or nominate a receiver to handle the assets if they are listed as non-performing resources under the act (Chitransh, 2022).

With the Chief Judicial Magistrate's consent, the bank may keep the asset for 60 days after serving the defaulter with the notification. SARFAESI allows the bank's authorised authority to commence the engagement if a credit account has been recognised as a non-performing resource (NPA). However, the bank can still ask for repayment in full even if a borrower has agreed to pay a late fee.  (Chitransh, 2022).

WHAT IS THE BANKS AND FINANCIAL INSTITUTIONS DEBT RECOVERY ACT OF 1993?

In 1991, the Narasimhan Committee agreed with the Tiwari Committee's findings and recommendations. The Recovery of Debts to Banks and Financial Institutions Act was passed in 1993 in response to the Narasimhan Committee's recommendations. It's commonly referred to as the "RDB Act"). The RDB Act stated the duties of the Debt Recovery Tribunal. Article 247 of the Indian Constitution allows for the establishment of the Tribunal by an Act of Parliament. ( Chitransh, 2022).

Banks and financial institutions can recover debts over ten lakh rupees through DRTs under DRT legislation, whereas the SARFAESI operates as a framework for the recovery of secured debts without judicial action under the SARFAESI Act, which simply aids the recovery of secured debts. [“ARCIL v Kumar Metallurgical Corporation Limited, (2005)” 10-A S.A (DRT, CHENNAI)].

EXAMINATION OF THE DEBT COLLECTION SYSTEM AND JUDICIAL DECISIONS

The RDD & FI Act gives the DRTs and DRATs exclusive authority over cases involving the recovery of debts; However, the function of civil courts in the resolution of disputes cannot be completely ignored; the Supreme Court has determined that the DRTs' powers are solely confined to section 17, therefore this is the only area in which they can exercise their authority. [“Standard Chatered Bank v. Harminder Bhohi and Ors., (2013)” 15 SCC 341 (India)]. The DRTs success rates have been estimated to be below 25%, which is concerning. Moreover, DRTs were overburdened with government dues, workmen's dues, and claims regarding unsecured assets, and debtors slowed processes by filing civil lawsuits against lenders.

The case of “Union of India v. Delhi High Court Bar Assoc. & Ors., (2002)” [2 SCR 450 (India)], in which the legitimacy of the RDDB & FI Act 1993 was questioned, is a very important case law in terms of debt recovery. Despite the Delhi High Court's declaration that the law was unconstitutional, the Supreme Court upheld it and ordered some changes. In the case of “Mathew Varghese v. M. Amritha Kumar, (2014)” [5 SCC 610 (India)], the court held that the notice to a defaulter before the sale of a secured asset is a mandatory provision under rules 8 & 9 of SARFAESI Act.

Moreover, the 39 debt recovery tribunals throughout India are poorly equiped to manage the number of cases. Although the legislature has recognised the problem and advocated the establishment of new DRTs, little has happened. Even the DRTs that are already in place are understaffed, with numerous empty positions.

Credit information bureaus were established in accordance with the credit information bureau act of 2005 in response to recent fundamental advancements in debt management. (Rakesh Mohan and Partha Ray, 2017) Credit information about credit worthiness and credit rating is essential in any financial enterprise. With the emergence of numerous credit rating firms, the practise of extending credit based on a rating is now becoming more commonplace.

It is concluded by the regulatory impact assessment that there are insufficient tools to resolve the problems with the DRTs, and that capacity building and transparency are required.

ISSUES ATTACHED WITH THE NPAS SUCH AS BLOCKAGE OF CASH FLOW IN THE ECONOMY WHICH WOULD FURTHER LEAD TO HUGE LOSSES TO BANKS BY REDUCING ITS LIQUIDITY WAS LEAD BY THE FAILURE OF THE DRTS. IMPACT ON BANKS:

The bad debts of big public sector organizations have increased in recent years, and the RBI has taken notice. The Reserve Bank of India (RBI) has identified three categories for non-performing assets (NPAs), often known as bad loans. These categories are "Substandard," "Doubtful," and "Loss Assets." The RBI has also provided advice for dealing with this issue through Asset Reconstruction Companies (Tanya Mehta, 2017). As the recovery volume is 13 percent, banks are unable to lower rates and now they are forced to charge the firms a 6% as a credit risk premium, which raises total interest rates.

It should be underlined that DRTs often do not adhere to the deadlines, which lowers asset prices and renders banks bankrupt. From a business perspective, the DRTs are not concentrating on debt collection; instead, they are putting more of an emphasis on other aspects and veering away from the initial objective. The RBI conducted a routine and thorough analysis of the records of major banks in order to address NPAs in large banks. When it turned out that the volume of bad loans had been underestimated, RBI took action to get a more accurate estimate.

Projection of Bad Debts in Indian Banks (in %)

Source: RBI’s Financial Stability Report

ARE THE DRTS ACTUALLY HELPING THE CAUSE?

According to industry perspectives, the recovery procedure is inefficient, and assets auctioned under DRTs (Mansai Phadnis and N. Prabhala, 2015) frequently see a lack of vigorous participation. Although the DRTs first succeeded in attaining their objective, their development was hindered when sizable and powerful debtors started utilizing evasive tactics. The main problem was a dispute of jurisdiction between the civil courts and the DRTs.

In "Indian Bank v. ABS Marine Products (2006)" [5 SCC 72 (India)], the plaintiff requested that the Calcutta High Court case involving the defendant be moved to the DRT. According to a decision handed down by the Supreme Court, "such an independent complaint initiated by a borrower could not be moved to the DRT without his assent" since it is impossible to take away a borrower's right to participate in a civil action. In the decision of "State Bank of India v. Ranjan Chemicals Ltd. (2007)" [1 SCC 97 (India)], which was decided just one year later, or in the year 2007, the Apex court changed its outlook and stated that There was no requirement that the parties' consent be obtained before a suit could be transferred.

Workmen's remuneration, government remuneration, and unsecured creditors' remuneration would all come to a halt in the face of DRTs, summing to the already mounting cases before the DRT. Another problem with winding up procedures is the conflict of authority between DRT Recovery Officers and Official Liquidators appointed by the High Court (Mr. Deepak Singh and Mr. Samyak Sethi, 2018).

The DRTs were created as a countermeasure to inefficient and protracted debt resolution; however statistics suggest that they are no faster than regular courts at resolving disputes (Prasanth Regy, 2016). For banks, the functioning of the DRTs looks to inflict more harm than good.

DRTs are also envisioned as adjudicating authorities for individuals and partnership firms under the Lok Sabha's insolvency and bankruptcy code, approved in May 2016. When they were first constituted, DRTs were expected to resolve disputes within 180 days. However through the statistics and experiences it is indicated that judicial inefficiencies are a problem in DRTs, just as they are in other types of courts. Aside from dealing with ordinary banking issues, the DRTs will have to deal with the added strain of insolvencies and liquidations (Sayan Ghosal, 2016).

JUDICIAL DELAYS CAUSED IN THE DEBT RECOVERY TRIBUNALS

The current judicial statistics measurement system in India may emphasise the depth of the issue of judicial inefficiencies, but it appears to lack the facts that may assist court management on how to address the issue. We only track pending cases in India: which are based on the overall number of cases that remain unresolved at the end of the year. It is computed by summing the total number of new cases (in a year) to the previous year's pending cases and removing the closed cases. When the number of cases pending increases, we can only assume that the courts are unable to keep up with their job (Prasanth Regy and Shubho Roy, 2017).

Source: blog.theleapjournal.org

Case files are what we actually have in India. These are the formal records of a court case that are retained in the court and with the parties involved. All documents submitted before the court or the tribunal by the parties to the lawsuit, as well as all documents obtained by the court/tribunal, are included in the case files. Interim orders are an important type of document in a court file. Every time a lawsuit is brought before a judge, interim orders are issued. This offers us an idea of what happened during the court session (also known as hearings). Even if no judicial activity is done as a result of the hearing, an interim order is still issued (Prasanth Regy and Shubho Roy, 2017).

CONCLUSION OR SUGGESTIONS

It is now clear that the problem of rising debts day by day is definitely harming the Indian economy. NPAs are rising rapidly and being undervalued by the banks. To ease the problem of debt recovery, the RDDB & FI Act was passed and for more ease the act of SARFAESI was passed.

Given that DRTs have summary processes, it can now be said that their system is superior to that of civil courts and is hence faster but it should be noted that DRTs are incapable of dealing with the complex questions of law. The DRTs are overburdened with number of cases but are understaffed, lack of required tools and infrastructure to deal with the same.. The delay being caused has been badly affecting the banks.

The DRTs have failed to reach the objective for which it was contrasted initially, but yes, the system is somewhat better than the earlier time, that is the civil proceedings. The issue still rising can be resolved by increasing the number of DRTs. Also attempts have been made to address the issue of rising NPAs by the new Bankruptcy Code, hoping a successful implementation of the same for a better life of the Indian Banking sector and the Indian Economy.

REFERENCES

• Chitransh, (2022) ‘Non-Processing Asset (NPA) and Debt Recovery Management in India’ [online] https://www.legalserviceindia.com/legal/article-7030-non-processing-asset-npa-and-debt-recovery-management-in-india.html (Accessed 13 May 2022).

• C.s. Balasubramaniam, balasubramaniam santhanam, (2012) ‘Non Performing Assets And Profitability Of Commercial Banks In India: Assessment And Emerging Issues’ National Monthly Refereed Journal Of Reasearch In Commerce & Management, Vol. 1 No.7.

• Gopal,Sumathi, (2018) ‘NPA’s-A Comparative Analysis on Banks & Financial Institutions and its Implications (Doctoral Thesis)’ [online] http://www.dypatil.edu/schools/management/npas-a-comparative-analysis-on-banks-financial-institutions-and-its-implications/ (Accessed 13 May 2022).  

• Mansai Phadnis and N. Prabhala, (2015) ‘Debt recovery tribunals in india: a short note’ [online] www.cafral.org.in (Accessed 14 May 2022)

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• Prasanth Regy and Shubho Roy, (2017) ‘Understanding judicial delays in debt tribunals’ The Leap Blog [online] 1 May. https://blog.theleapjournal.org/2017/05/understanding-judicial-delays-in-debt.html (Accessed 13 May 2022)

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