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Recovery and Resolution of Bad Loans

Recovery and Resolution of Bad Loans - (A)

The recovery mechanism is a process of implementing the recovery procedures and mechanisms necessary to restore financial assets in the event that the borrower does not repay them. An APN, as explained above, is an asset that no longer generates income and income which, if not handled properly and in a timely manner, can cause damage to the bank. Therefore, the APN recovery plays an important role in supporting the banking sector.

The restoration is carried out mainly from the following points of view:

Lok Adalats

The Lok Adalat is one of the alternative rectal litigation mechanisms introduced by the government. It is a forum where disputes or cases that are pending in court or in the pre-litigation phase are mutually resolved. The Lok Adalats were granted legal status under the Legal Services Authorities Act of 1987. Under this law, the Lok Adalats’ decision is a decree of a civil court and is final and binding on all parties. Such a sentence is before all the courts.

However, if the parties are not satisfied with the Lok Adalat award, although there is no provision to appeal against such award, they may initiate a dispute by contacting the competent court by filing a case for litigation that takes precedence in the exercise of their right due to the process. The jurisdiction of Lok Adalats is in cases/disputes with a value of less than Rs 10 lakh.

The people who rule in the affairs of the Lok Adalats are called members of the Lok Adalats and have only the role of legal arbitrator and not the judicial role. Therefore, they can only convince the parties to reach a conclusion in order to resolve the dispute outside the Lok Adalat court and must not pressure or compel either party to directly or indirectly resolve any case or issue.

The Lok Adalat cannot decide on its own the question put to it, but rather must be decided on the basis of a compromise or agreement between the parties. The members support the parties independently and impartially in their efforts to find an amicable solution to their disputes. The Mobile Lok Adalats are also organized in different parts of the country moving from place to place to resolve disputes and facilitate dispute resolution through this mechanism.

As of 30/09/2015, more than 15.14 lakhs of Lok Adalats have been organized in the country since its inception. So far, more than Rs 8.25 million have been billed through this mechanism.

Debt Recovery Tribunals (DRT)

The 1993 Act on the Recovery of Claims Against Banks and Financial Institutions (RDDBFI Act) provided for a speedy rectal process for lenders and borrowers by filing original claims, also called OA, with debt collection courts (DRT) and appealing to the courts of appeal for debt collection. (Dammit). Therefore, DRT and DRAT were created under the RDDBFI Act to meet the need for banks to correct NPAs quickly.

The DRT is also authorized to decide on claims against creditors that have been guaranteed by the borrower or mortgage lender for the measures provided for in the Securitization Law. So far, the government has created 39 DRTs and 5 DRATs, which are single-member courts. The problem that affects DRTs, like many other collection mechanisms, is that they are slow to resolve pending disputes as the process is very long, resulting in a large number of pending cases.

The law aims to achieve the recovery of the APN through three main routes:


Article 7 of the SARFAESI law provides an overview of what exactly happens during securitization. It states that any securitization or reconstruction company can offer a guaranteed income to buyers after acquiring a financial asset. Qualified institutes (except by public offering) who have solid experience and knowledge to evaluate and make their investments in the capital markets in order to subscribe to them in accordance with the provisions of these laws.

A securitization or reconstruction company can raise funds from qualified institutional buyers by formulating financial asset acquisition programs and, for each of these systems, must maintain and maintain separate and segregated accounts for each financial asset acquired from investments made by a qualified institutional buyer. and ensure that the realizations of that financial asset are maintained and applied to the reimbursement of investments and the payment of guaranteed returns on those investments in accordance with the pertinent regulations. The main benefit of securitization is that institutions can obtain funds by selling assets or sources of income.

Asset reconstruction:

When rebuilding assets, securitization, or rebuilding companies purchase NPAs from banks and take steps to collect bad debts from the borrower by performing certain functions in accordance with their legal powers.

Article 9 of the SARFAESI law establishes asset recovery measures such as:

  • Good management of the borrower’s affairs;
  • Change or take control of the borrower’s management;
  • The sale or rental of part or all of the borrower’s business;
  • Borrower debt rescheduling;
  • Execution of guarantees in accordance with the provisions of the SARFAESI law;
  • Settlement of debts contracted by the borrower;
  • Taking possession of assets guaranteed under the provisions of the SARFAESI law.

Asset rebuilding, therefore, helps banks reduce the burden of NPAs on banks, because if a securitization or reconstruction company takes control of the NPA, banks and financial institutions can generate returns for the bank. . NPA, which reduces the stress of bad debts for banks and other institutions.

Enforcement of Security Interests :

Article 13 of the SARFAESI law establishes provisions on the realization of real guarantees. It establishes that, without prejudice to any of the provisions of article 69 or article 69A of the Law of Transfer of Assets of 1882, said creditor may execute any guarantee in favor of a secured creditor in accordance with the provisions of that law without the intervention of a court.

If a borrower who is liable under a security agreement to a secured party defaults on a secured debt or part of it and his account under that debt is classified as a distressed asset by the secured party, it is considered a secured asset. of the borrowers, in writing, that they fulfill their obligations to the secured creditor in full within sixty days from the date of notification. Otherwise, the secured party may take one or more of the following steps to collect on your secured debt namely:

  • take possession of the secured property of the borrower, including the right to transfer it through rent, assignment or sale for the purpose of realizing the secured asset;
  • Assume the management of the borrower’s business, including the right to lease, assign or sell the property to realize the guaranteed asset;
  • appointing a person (hereinafter the administrator) to manage the secured property that has been assumed by the secured party
  • You must require at all times in writing that anyone who has acquired the borrower’s secured property and from whom an amount is owed or owed to the borrower must pay the secured creditor as much money as possible, enough to cover the secured debt due.

Another provision to assist secured creditors is Article 14 of the SARFAESI Act, which requires the Chief Metropolitan Magistrate or the District Magistrate to assist the secured creditor to take possession of the secured asset.

The secured obligee may submit a written request to the Chief Metropolitan Magistrate or District Magistrate for the purpose of taking possession or control of the secured property in whose jurisdiction the secured property is or may be or other documents related to the secured property. To take possession of said property or documents and the Chief Metropolitan Magistrate or District Magistrate, upon request, must:

  • take possession of the property and attached documents;
  • forward these assets and documents to the secured creditor.

The section goes on to state that to ensure compliance, the Metropolitan Chief Magistrate or the District Magistrate may take or take such action and may use or cause violence to be used as they believe they may need. It is also established that no act of the Metropolitan Chief Magistrate or the District Magistrate took in accordance with this article may be challenged in any court or authority.

Bankruptcy and bankruptcy code (IBC)

Before the Bankruptcy and Bankruptcy Act of 2016 came into effect, various laws and institutions overlapped in terms of jurisdiction and operation, creating great confusion in handling bankruptcy and bankruptcy proceedings. Competitions for individuals and companies. There was no legal framework that provided an efficient process to facilitate the debt collection process in India, which hurt banks and other financial institutions and hampered the flow of credit. To overcome these obstacles, the government introduced the Bankruptcy and Bankruptcy Law in 2015, which was passed and went into effect in 2016.

There were 4 initial forums that dealt with bankruptcy and bankruptcy matters, namely the Superior Court, the Board of Industrial and Financial Reconstruction (BIFR), the Debt Recovery Court (DRT), and the Board of Company Law (CLB ) during the implementation of the CIR The burden on these forums has been eased as all issues related to the Code must now be brought before the National Court of Company Law (NCLT). The main objective of the CIB is to provide banks with rapid corrective action against NPAs and reduce the burden of lengthy court cases. The BAC has arranged for the formation of the Bankruptcy and Bankruptcy Committee of India, which is responsible for the implementation of the Code consolidating and amending laws to reorganize and resolve corporate, partnership, and individual bankruptcies within a limited period of time. To maximize the value of these people’s wealth, promote entrepreneurship and the availability of credit, and balance the interests of all parties, the IBC is also arranging to establish a formal bankruptcy process (PIR).

The IRP can be initiated by a company in arrears or by creditors. Once the IRP starts, the creditors’ claim must be processed within 180 days. During this time, they will listen to the acquisition proposals and decide how to proceed. Within these 180 days, 75% of financial creditors have to accept an economic stimulus package.

If this minimum threshold is not reached, the company automatically goes into liquidation. The resolution professional must submit a request to the arbitration authority to extend the duration of the liquidation process of the company beyond one hundred and eighty days if requested by a resolution approved at a meeting of the creditors’ committee with a vote of 75 % of creditors. committee voting shares.

The government has enacted an ordinance that is the Bankruptcy Ordinance of 2020, where the government suspended the application of articles 7, 9, and 10 of the Code to prevent companies from interrupting the disruption caused by the coronavirus pandemic by putting themselves under stress to avoid being pushed into bankruptcy. The bankruptcy and bankruptcy code essentially helps handle the collection of NPAs, allowing banks to collect their debts efficiently and freeing themselves from the burden of NPAs that keep banks and financial institutions in business. Good health and free from undue stress.



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