Debt Recovery Services

Recovery of Debt Due to Banks And Financial Institutions

Origination of RDDBFI Act – An Introduction

Banks and financial institutions that are properly registered by Reserve Bank of India ( RBI) provide legal entities and borrower entities with the loan facility. If the borrower fails in repaying the loan sum or part of it which includes unpaid interest and/or debt which is Non-Performing Asset (NPA), the debt may be recovered by banks and financial institutions in the correct legal forums. Prior to the enactment of Recovery of Debts Due to Banks And Financial Institutions Act, banks, and financial institutions were facing huge challenges in recovering debts from the lenders as the courts were overburdened with large numbers of routine cases due to which courts could not give priority to recovery matters of the banks and financial institutions. The Government of India in 1981 created a committee headed by Mr. T. Tiwari, this committee recommended a quasi-judicial set-up exclusively for banks and financial institutions that, by following a summary procedure, may easily dispose of the recovery of debts cases brought against the lenders by banks and financial institutions.

Again in 1991, under Mr. Narashmam, a committee was set up which endorsed the views of the Mr. T. Tiwari Committee and suggested the formation of quasi-judicial for the speedy recovery of debts. Under which India’s government enacted the RDDBFI Act. The Quasi-Judicial Authorities of the RDDBFI Act have been formed and proceedings for a swift debt recovery have been laid down. The need for the RDDBFI act was felt with time and there were many reasons behind it. It is essential to understand those reasons to get a better understanding.

The Requirement of the RDDBFI Act

We are the world’s fifth-biggest development economy, leaving the UK and France just days ago. In the case of population, we are the second biggest nation in the world. We have the world’s largest young qualified staff. A sound and secure, safe banking system is needed for the sustainable development of a nation. Banks and financial institutions are a country ‘s backbone. A country is evolving very rapidly through a sound banking system. 

In India, we are regulated by the Indian Reserve Bank, a strong and stable banking structure. RBI is the central bank and oversees all banks and non-bank financial institutions. In the growth of mini-, micro, and major industries in India, the banks/ financial institutions or NBFCs play a key role. In order to protect them, we need to safeguard the interests of banking systems and employ over 40 percent of the Indian workforce.

In previous years, we have seen many frauds, where corrupt politicians and banking workers have been manipulating other banks and the general public money for their own benefit. Some of the banks have suffered huge losses, such as the PMC, Yes Bank, State Bank of India, Bank of India, ICICI Bank. They have robbed not only banks, but they also obstruct legitimate investors and the public’s interests. 

In balance sheets of majority banks, there is a significant volume of non-performing assets and in some cases, these assets are not recoverable. The assets that did not perform were finally treated as bad debts. Recovering these debts by banks by regular court proceedings is a long-term Herculean task.

The government has adopted “Recovery of Debts Pursuant to the Banks and Financial Institutions Act, 1993” (RDDBFI Act, 1993) of 24 June 2006 to eradicate these problems and to give bank / financial institution an edge on debtors. In 1995, 2000, 2003, and 2013, the Act was revised. In 2016, the Act was amended.

The Act is retitled as Recovery of Debts due to Banks and Financial Institutions and Bankruptcy Act, 1993”

The Principal Features of the 2016 Act are: 

  1. Financial lease and conditional selling (such as hire purchase) transactions and intangible asset transactions included in the concept of property and security interest
  2. The words “financial institutions” and “Secured Creditors” were described as debenture trustees and asset reconstruction firms.
  3. The DRT Act has been amended to cover debt and security interest liabilities.
  4. An appeal against DRT order before DRAT with a pre-deposit of 50 percent versus 75 percent earlier.
  5. DRT Act presiding officer agreed to also act as adjudicating authority under the Insolvency and Bankruptcy Code, 2016.
  6. The Chairperson of DRAT will also act under the Insolvency Code as an Appellant Authority.
  7. The Act’s main aim is to create tribunals for the speedy adjudication and debt recovery by banks and financial institutions. Now the Act extends to all of India.

Pertinency Of Debt Recovery Act

The Act applies to Banking Companies, SBI, SBI branches, Regional and Rural Banks, and Multistate Co-operative Banks, Financial Institutions, Asset Reconstruction Companies, SEBI registered debenture trustee, and others as defined by the Government. Cooperative Banks are also protected by the DRT Act. 

Greater Bombay Cooperative Bank v. United Yarn Tex(P) Ltd (2007) S.C. 432 (India): It was held that the provisions of Sections 5(c) and 56(a)(i) of the Banking Regulations Act also apply to Cooperative Banks and, consequently, the provisions of the DRT Act also apply to Cooperative Banks and Society Registrars when DRT was established in connection with any dispute relating to cooperative banks.

M Babu v. Rao Dy. Registrar of Cooperative Societies (2005) (4) A.L.D. 582 (India): It was held that disputes relating to the debt recovery of cooperative banks are to be decided by DRT and the Registrar of Cooperative Societies has no jurisdiction to settle the dispute.

Monetary Restraint 

Save as given otherwise, the provisions shall apply where the amount of debt owing to banks or FIs or a group of banks / FIs is ₹ 10 Lakhs or more. By amendment, the Central Government reduces the monetary limit from ₹10 Lakhs to ₹20 Lakhs in 2016.

CONCLUSION

The DRT Act is a system for banks / financial institutions to recover their debts from defective debtors within a short period of time. DRT’s filing of requests and decisions is minimal. The most critical feature of this DRT Act is that it has ultimate impact and Civil Courts are prohibited from hearing any case falling under DRT jurisdiction. The enactment of Recovery of Debts Due to Banks and Financial Institutions Act, 1993 brought many special features with it which have proven to be beneficial to the RBI to get it’s unrecoverable debts back. Such acts and statutes need to be formulated and enacted according to the need of the hour.

Article By : Raksha Arora

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