Evolution of Debt Recovery in India

Recovery of dues may be done in three stages-Soft, ADR, and legal.

Soft recovery consists of sending payment requests, foreclosure notices, demand notices, and internal in-person recovery processes that have not changed. We have seen the introduction, development, and growing acceptance of out-of-court alternatives like mediation, negotiation, and arbitration. Hard recovery involves sending legal notices before resorting to litigation at the appropriate court.

Before the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, financial institutions and banks had to resort to instituting a civil suit under order XXXVII of Civil Procedure Code, 1908 which was traditionally time-consuming and tedious. With the establishment of the Debt Recovery Tribunal & Appellate Tribunal, recovery of dues became a more express process with these courts taking on all cases pending before civil courts of disputed amounts above INR 10 lacs. However, this judicial transition led to issues regarding the regulatory inclusion of foreign lenders, consistency of orders, their implementation, and judges specialized in financial/banking law. These new courts were now burdened with the mass dumping of cases early on in their infancy.

However, this was further changed with the passing of the Securitization & Reconstruction of Financial Assets & Enforcement of Security Interest Act, 2002, empowering lenders to issue a 60-day notice against defaulters, failing which, the lenders may either retake possession, sell the collateral security or recovery dues from the borrower’s debtors without the intervention of the court with the continued exclusion of foreign lenders. It introduced the concept of registered entities in the form of Asset Reconstruction Companies to take control and management of illiquid, non-performing assets, underlying collateral assets of defaulting loans, or a group of assets to restructure the borrowing, maximize recovery or minimize loss to the lender through financial ingenuity to convert it/them to securities. Section 12 of this act enables the RBI to dictate policy and periodically publish directions in relation to the act. Section 34 further provides exclusive jurisdiction to the Debt Recovery Tribunal & Appellate Tribunal. In 2016, the Insolvency & Bankruptcy Code was passed to provide specialized legislation for corporates and other entities for the timely recovery of monies due from secured, unsecured, and operational creditors. It involved applying to a new court by the name of a National Company Law Tribunal & Appellate Tribunal by a creditor for all defaults exceeding an amount over the amount of INR 1 lakh. On the approval of this application, the board of the defaulting entity can be suspended and replaced by the appointment of an interim resolution professional. A month after this appointment, a committee of creditors is formed to verify the claims of various creditors.

Art: "The Moneylender and his Wife" by Massysm Quentin.