DRT & SARFAESI: RBI guidelines on NPA and its interpretation?

It is very important for the Banks to deal with the ‘will defaulters’ and to reduce ‘NPA’ in the interest of the Banking Industry and in the interest of the country too. There were constant efforts to enable the banks to speedily recover the dues from the borrowers. Bank could not recover their dues effectively by approaching Civil Courts and as a result ‘The Recovery of Debts Due to Banks and Financial Institutions Act, 1993” was enacted. Under the RDDBI Act, a Special Tribunal called ‘Debt Recovery Tribunal’ was established and the Banks could file an application under section 19 of RDDBI Act seeking a ‘Certificate of Recovery’ against the borrowers and this ‘Certificate of Recovery’ is like a decree passed by a Civil Court. The DRT need not follow Civil Procedure Code while entertaining the application filed by the Banks under section 19 of RDDBI Act, 1993 and there was a special mechanism for execution of the orders too. Even with this RDDBI Act, 1993, Banks could not achieve considerable results forcing the legislature to think further effective mechanism to recover the dues and as a result and based on the recommendations of the committee ‘The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002’ (SARFAESI Act) was enacted. Under the SARFAESI Act, 2002, the Banks need not approach any Court or Tribunal to get the dues of the borrowers determined and to proceed against the ‘Secured Asset’. Under the SARFAESI Act, 2002, if an account is classified as ‘NPA’, then, the Banks can proceed to recover the dues. Under the said Act, the Banks will give a demand notice to the borrower and guarantor under section 13 (2) of the Act and the they will deal with the objections of the borrowers to the demand notice and if the objections of the borrowers are overruled, then, the Bank will proceed taking symbolic possession of the property, taking physical possession of the property and then will dispose of the same in accordance with the provisions of the Act and connected rules. Under SARFAESI Act, 2002, there is no need for the Banks to approach any Court or Tribunal for recovery of their dues and they may have to get the assistance of the Magistrate Court under Section 14 of the Act while taking physical possession of the property where there is a resistance in taking the possession.

If the borrower is aggrieved at the action initiated by the Bank under SARFAESI Act, 2002, then, he can approach the Debt Recovery Tribunal under Section 17 of the Act by paying the prescribed fee. Many legal issues under SARFAESI Act, 2002 were now settled. The important issues dealt by the Courts under SARFAESI Act, 2002, are, according to me, as follows:

(a). At what stage the borrower can approach the Debt Recovery Tribunal challenging the action initiated by the Bank?

(b). Can the borrower challenge the notice issued by the Bank under section 13 (2) of SARFAESI Act, 2002?

(c). The jurisdiction of High Court under Article 226 of Constitution of India in dealing with SARFAESI matters?

(d). The powers of the DRT and as to whether the DRT can look into the correctness of the ‘outstanding due’ arrived by the Bank?

(e). Can the DRT order the restoration of possession if it is proved that the Bank is not right in proceeding under the provisions of SARFAESI Act, 2002?

(f). Is it right to say that the DRT can only look into the procedural irregularities while entertaining an Appeal filed by the borrower under Section 17 of the Act?

(g). The issue of deposit to be made to the DRAT while preferring an Appeal against the final order of the DRT?

(h). The nature of guidelines issued by Reserve Bank of India?

(i). The jurisdiction of Civil Court in respect of SARFAESI matters?

(j). Can the Bank simply reject the objections raised by the borrowers under section 13 (3A) of the Act?

These are the few important issues, the Constitutional Courts have dealt with so far laudably and all these are, infact, directed towards protecting the interests of the borrowers and without disturbing the object of SARFAESI Act, 2002. There were many complaints from the borrowers that the Bank is unreasonable in proceeding against them under SARFAESI Act, 2002 and many say that they are not the willful defaulters and the action of the Bank affects them severely. It is settled that the RBI guidelines on ‘Asset Classification’ are mandatory and not recommendatory. RBI does frame and update the guidelines dealing with ‘Classification of Assets’ from to time keeping in view of various issues. A reading of the RBI guidelines appears to be very fair and infact, the guidelines enables the Bank to exercise their own fair judgment on many issues. The RBI guidelines on ‘Asset Classification’ are specific on certain issues and on many other issues, it emphasize the need for not troubling the good borrowers or the bonafide borrowers. I have also seen guidelines that the Banks should not rely on technical deficiencies if the record of recovery of Account is good. Likewise, the RBI guidelines on ‘Asset Classification’ appear to be fair and the question is with regard to interpretation of the guidelines. It is now clear that it is mandatory for the Banks to follow the RBI guidelines in classifying an account as ‘NPA’. The Banks are infact, supposed to have their own clear internal mechanism to deal with the ‘Non-performing Assets’. However, most of the Banks may have their own administrative machinery to make use of the provisions of SARFAESI Act, 2002 and they will proceed to classify an account as ‘NPA’ relying on RBI guidelines.

I had to focus on a very specific guideline of the RBI saying that the Bank should proceed ‘borrower-wise’ and not ‘facility-wise’. However, I have came across some incidents where the Banks proceed with ‘borrower-wise’ at times and proceed with ‘facility-wise’ at times. If it is facility-wise, the Banks may have to issue so many demand notices and there is no need in issuing so many demand notices to the same borrower. There is logic behind RBI guideline as I understood. The RBI guidelines appears to be very fair and it has even dealt with the issue as to what happens if the borrower is very good in meeting the commitments in respect of so many facilities and if there is a slight deviation in respect of one facility. If the Bank proceeds ‘borrower-wise’ in these cases, then, the ‘borrower’ will suffer irreparable loss. While emphasizing the object of ‘speedy recovery of dues’, while framing clear guidelines on certain issues, RBI guidelines expects the Banks to exercise their own reasonable judgment on their own.

What if an ‘Account’ is classified as ‘NPA’ wrongfully and what can the borrower do in these cases? I have seen some cases where the High Court did entertain Writ Petitions when the classification of account itself under challenge clearly. But, if the borrower is asked to approach the Debt Recovery Tribunal challenging the action of the Bank at a later point of time and when the Bank issues a notice under section 13 (4), then, the borrower, if he is genuine, may have to suffer irreparable loss. There will be Paper Publication of the factum of taking symbolic possession and it can affect the reputation and credit worthiness of the borrower in the market and the even if the borrower approaches the Debt Recovery Tribunal under section 17, there may not be much emphasis on the issue of exercise of discretion by the Banks in classifying the account as ‘NPA’ and the borrowers, in most of the cases, are forced to make some deposit and the Tribunal says it is to get the ‘bonafides’ proved. The Debt Recovery Tribunals should function effectively and when there is a prima facie case and when it appears that the Banks are unreasonable in proceeding against the borrower, an interim relief can be granted to the borrower and even the borrower can be asked to regularize his account or continue making payments as committed originally. But, what happens normally is that the borrower will be spending huge expenses for paying Court Fee and for paying legal fees and even then, the relief is not guaranteed.

Though the RBI guidelines say that the Banks need not consider the value of ‘Secured Asset’ while classifying the account as ‘NPA’, the DRT can consider many issues while granting interim relief. But, initially, it was settled that the DRT can only look into the irregularities in proceeding against the borrower under the provisions of the Act. Now, the scope of powers of DRT under section 17 was expanded and the DRT can look into various issues and can even look into the correctness of the determination of ‘outstanding due’.

It is true that there can be borrowers who try to delay the payment as committed to the Banks, but, it is also to be noted that the Banks too can be unreasonable to the genuine borrowers at times.

Note: the views expressed are my personal and a view point only.