Following the liberalization of the Indian economy in 1991, Banks and Financial Institutions (BFIs) have been facing substantial difficulties in recovering loans and enforcing securities levied against them. The process for recovering debts due to the Fis and banks, as observed, involved filing a civil suit in a court of law, which resulted in a significant portion of the funds being stopped.
With an aim to accelerate the process and change the NPAs of FIs and Banks, the Parliament has framed the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), which empowers the FIs and Banks to regain their NPAS without the action of the Court.
The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act. 2002, and the Recovery of Debts and Bankruptcy (RDB) Act, 1993, both concern debt recovery but have separate focuses and mechanisms. The SARFAESI Act authorizes lenders to seize and sell secured assets without court intervention in instances of default, while the RDB Act, also termed the DRT Act, establishes Debt Recovery Tribunals (DRTs) to manage disputes related to debts owed to financial institutions and banks, including those linked to secured assets. Primarily, SARFAESI offers a quicker, out-of-court settlement for the recovery of secured debts. At the same time, DRT is a court-oriented system that manages a broader range of debt recovery cases, including those under the SARFAESI Act.
DRT Act
Debt Recovery Tribunals have been set up for the efficient adjudication and recovery of debts due to financial institutions and banks, and they function under the DRT Act. The DRTs were authorized to adjudicate claims of FIs and banks comprising rupees 10 lakhs and more.
Where a FI or bank needs to recover any debt from a person, it tends to tender an application termed the Original Application (OA) to the Tribunal against that person. Following adjudication, the DRT grants an order and a Recovery Certificate, certifying the amount owed by the borrower to the FI or bank. This Recovery Certificate is subsequently completed by Recovery Officers linked to the DRTS in accordance with the process for recovering tax under the Second Schedule of the Income Tax Act, 1961.
SARFAESI Act
The SARFAESI Act offers three optional methods for recovery of NPAs, namely:
- Securitization; 2. Asset Reconstruction, and 3. Enforcement of Security minus the intervention of the Tribunal/Court.
The SARFAESI Act empowers FIs and Banks to issue demand notices to the defaulting guarantor and borrower, asking them to discharge their dues in total within 60 days from the date of the notice. Thereafter, Banks are authorized to obtain possession of the security offered for the loan and assign or sell the right to the security, handle it, or nominate any person to supervise it. Proceedings under the SARFAESI Act cannot be launched if the secured asset is an agricultural property.
Significant Differences Between the DRT Act and SARFAESI Act
| Serial No. | Feature | DRT Act | SARFAESI Act |
| 1. | Objective | It provides for the recovery of debts of FIs and banks through quasi-judicial tribunals termed Debt Recovery Tribunals. | It enables FIs and Banks to recover secured debts directly without the intervention of the judicial process. |
| 2. | Type of Debt Covered | Fis and Banks can recover any debt through DRTs | Only secured debts, i.e., those debts which are acquired through underlying security in the nature of a charge, mortgage, hypothecation, assignment, etc |
| 3. | Monetary Threshold | FIs and Banks can recover any debts of more than Rupees ten lakhs through DRTs | FIs and Banks can take action under the Act to regain secured debts of over one lakh rupees |
| 4. | Appellate Authority | Appeal against the order of DRT to be submitted in the Debt Recovery Appellate Tribunal | The action of FIs and Banks under the SARFAESI Act can be contested before the DRT |
| 5. | Purpose | Adjudication of disputes connected to debt recovery. | Empower financial institutions and banks to implement security interests without court intervention. |
| 6. | Jurisdiction | DRTs have jurisdiction over matters surpassing Rs. 20 lakhs. DRTs have original jurisdiction to listen to applications from financial institutions and banks for debt recovery. | This applies to secured creditors with the least outstanding amount of Rs. 1 lakh. DRTs have appellate jurisdiction under the SARFAESI Act, enabling borrowers to appeal against actions undertaken by lenders under the Act. |
| 7. | Legal Authority | Set up under the Recovery of Debts Owed to Banks and Financial Institutions Act, 1993. | Adopted as the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. |
| 8. | Nature of Proceedings | Adjudicatory proceedings are similar to a civil court. | Entrust banks to obtain possession of assets and sell them without court intervention. |
| 9. | Applicability | Applicable to all financial institutions and banks | Applicable to banks and financial institutions, comprising non-banking financial companies (NBFCs). |
| 10. | Borrower’s Rights | Borrowers have the chance to furnish their case and save themselves. | Borrowers have the right to appeal against the activities adopted by the secured creditor under SARFAESI. |
| 11. | Debt Recovery Process | Includes filing a case before DRT for the recovery of debts. | Allows secured creditor to obtain possession of the secured assets and vend them without court assistance. |
| 12. | Timeframe | Generally, the process in DRTs can take time. | SARFAESI allows a quicker and more streamlined process of recovery of dues. |
| 13. | Limitations | DRTs may encounter delays in disposing of cases due to the complexities of the legal process. | SARFAESI permits secured creditors to take more direct and speedy action in recovering their dues. |
| 14. | Appeals | Appeals against DRT orders can be submitted to the Debt Recovery Appellate Tribunal (DRAT). | Appeals against SARFAESI actions are submitted with the DRT. |
| 15. | Procedure | Financial institutions or banks submit applications to the DRT for debt recovery, which are subsequently adjudicated and, if effective, result in the issuance of a recovery certificate. | Financial institutions or banks can send notices to defaulting borrowers, requiring them to discharge their liabilities within a period provided. In case of default, the lender may go on confiscating and selling the assets. |
Bottom Line
While both laws aim to support the recovery of bad loans, the SARFAESI Act is a non-judicial enforcement tool for secured creditors. In contrast, the RDDBFI Act comprises a judicial route through tribunals. They are complementary, and banks frequently utilize them in tandem based on the case.
