ROLE OF DEBT RECOVERY MECHANISM IN INDIA
ABSTRACT
The government sector being the backbone of the economy representing the national growth is also suffering the issue of increasing NPAs and needs to be analysed as to the issues that are being faced causing difficulty in the smooth functioning. The increasing number of NPAs in the banking sector of India has led to a question the working of the banks. A proper check needs to be maintained if the debtor can repay the amount so lent back at the time of lending.
Keywords: Defaulter, Financial Assistance, NPA (non- performing assets), Securitisation.
1.1 INTRODUCTION:
The Banking Act, 1987 of England defined a ‘bank’ as a body corporate or a non corporate that was recognised by the Bank of England to accept deposits as defined by that Act[1]. A banking company has been defined under the Indian Act as any company which transacts the business of “banking” in India[2]. Whereas the term ‘banking’ means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise[3]. The section is a quick to warn that any company which is engaged in the manufacture of goods or carries on any trade and which accepts deposits or money from the public merely for the purpose of financing its business, such manufacturer or trader shall not be deemed to transact the business of banking[4].
Banks are the backbone of a nation and if they are maintained with a regulatory mechanism it shall flourish the nation’s development. The Banks are the ones who provide for necessary funds to people as well as the government of the country. It further reflects the economic status of a country. In the past decade, a major issue in the financial arena of the Indian economy has been the accumulation of non-performing assets (“NPAs”)/ non performing loans (“NPLs”) ‘on the balance sheets of banks’[5]. Hence, it is important to understand the relevance of the recovery laws.
1.2 UNDERSTANDING NON- PERFORMING ASSETS (NPAs):
Every now and then one encounters that the banks are facing the issue of unpaid debts. The term ‘unpaid debt’ is also known as Non- Performing Assets. In general, a non performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days[6]. Under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002, non-performing Asset (NPA)[7] means an asset or account of a borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset,-
(a) in case such bank or financial institution is administered or regulated by any authority or body established, constituted or appointed by any law for the time being in force, in accordance with the directions or guidelines relating to assets classifications issued by such authority or body;
(b) in any other case, in accordance with the directions or guidelines relating to assets classifications issued by the Reserve Bank
Non- performing loans are a big drain on the system. In most cases, the amount sunk in bad loans had eventually affected the public at large either in terms of being funded out of taxes, or leading to failure of banks and the public losing its savings. In either case, non- performing loans are a social cost which cannot be justified[8].
It is important to understand as to how the issue of NPA took place in India. Lenders, especially the state-run banks, were engaged in volume game to balloon their balance sheets and appease their promoter (the government). That has been so ever since nationalisation of these banks happened in two stages (beginning 1969). Government often treated these banks as their extended arms and used them for populist measures. There used to be competition among government banks to flag their total business number on front-pages of national newspapers but very little attention was paid to the quality of assets. Thus, this resulted into alarming number of increase in the NPAs[9].
The following chart represents the government owned banks majorly facing the problem of non- performing assets as on September 2015[10]:
The above chart clearly depicts the increasing amount of NPAs in the governmental banks consistently. It is to be noted that as per the RBI data it has been found that NPAs of the Public Sector Banks amounted to Rs 7.34 lakh crore as on September 30, 2017[11]. There are various reasons for an increase in NPAs. Some of them are as follows[12]:
1. Funds borrowed for a particular purpose but not use for the said purpose.
2. Poor recovery of receivables.
3. Business failures.
4. Wilful defaults, siphoning of funds, fraud, disputes, management disputes, mis-appropriation
5. Deficiencies on the part of the banks viz. in credit appraisal, monitoring and follow-ups, delay in settlement of payments\ subsidiaries by government bodies
Thus, there has been a constant rise in NPA in the economy and since the public sector banks are backed by the government it becomes even more important to look into the reasons and the legal position for the same.
1.3 CLASSIFICATION OF NPAs:
NPAs can be broadly classified into four categories. These have been explained as below[13]:-
1. Standard Assets: A standard asset is a performing asset. Standard assets generate continuous income and repayments as and when they fall due. Such assets carry a normal risk and are not NPA in the real sense. So, no special provisions are required for Standard Assets.
2. Sub-Standard Assets: All those assets (loans and advances) which are considered as non-performing for a period of 12 months are called as Sub-Standard assets.
3. Doubtful Assets: All those assets which are considered as non-performing for period of more than 12 months are called as Doubtful Assets.
4. Loss Assets: All those assets which cannot be recovered are called as Loss Assets.
There are basically two types of NPAs namely Gross NPA and Net NPA. Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI Guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans made by banks. It consists of all the non- standard assets like as sub-standard, doubtful, and loss assets. It can be calculated with the help of following ratio[14]:
Gross NPAs Ratio = Gross NPAs / Gross Advances
Whereas Net NPAs are those types of NPAs in which the bank has deducted the provision regarding NPAs. Net NPA shows the actual burden of banks. Since in India, bank balance sheets contain a huge amount of NPAs and the process of recovery and write off of loans is very time consuming, the banks have to make certain provisions against the NPAs according to the central bank guidelines. It can be calculated by following[15]:
Net NPAs = Gross NPAs – Provisions / Gross Advances – Provisions
1.4 LEGAL POSITION OF INSOLVENCY LAWS IN INDIA:
The parliament of India has enforced various enactments and its development took place over the years for the sole purpose of reducing NPAs existing in the Indian economy.
On the recommendations of Tiwari Committee, in the year 1985, the Sick Industrial Companies Act was passed as the number of sick industries increased leading to industrial sickness. The Board of Industrial and Financial Reconstruction (BIFR- later dissolved in December 2016) and Appellate Authority for Industrial and Financial Reconstruction (AAIFR) were set up. There were two major drawbacks of the Sick Industrial Companies Act. Firstly the scope of the Act was limited only to ‘industrial companies’ which were deemed sick. Secondly, if BIFR recommended for winding up of an industry, the High Court having jurisdiction would re- open the case and later decide whether to wound up or not[16]. There were numerous shortcomings into the Indian Banking Industry during the pre- liberalisation period causing deterioration in the asset quality and increase of debt or non- performing assets (NPAs) of the banks. The need was felt to address the shortcomings and improve the efficiency of banking system. Accordingly Narasimham Committee I was set up under the chairmanship of former RBI Governor M. Narasimham in the month of August 1991. On the recommendations of the Narasimham Committee, the Recovery of Debt due to Banks and Financial Institutions Act of 1993 was enacted and indeed was harbinger of banking reforms in ensuring speedy recovery of bank dues. The rationale behind the Act is contained in the Tiwari Committee Report, which states[17]:
‘The civil courts are burdened with diverse types of cases. Recovery of dues due to banks and financial institutions is not given any priority by the civil courts. The banks and financial institutions like any other litigants have to go through a process of pursuing the cases for recovery through civil courts for unduly long periods.’
Eventually in the year 1998 under the head Narasimham Committee on Banking Sector Reforms (1998), Narasimham Committee II was set up with the objective of reviewing the implementation of the reforms as suggested under the Narasimham Committee Report I. Narasimham Committee II recommended for the creation of Asset Reconstruction Funds or Asset Reconstruction Companies to take over the bad debts of banks, allowing them to start on a clean-slate[18]. In the year 1999, Andhyarujina Committee comprising of ten members (headed by Sri T.R. Andhyarujina, former Solicitor General of India) was established to implement the recommendations of Narasimham Committee II. The report of this Committee was submitted in May, 2000 which led Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 with the following features[19]:
i. Banks must be vested with power of taking possession and sale of securities without intervention of court as regards mortgaged properties.
ii. The existing Recovery of Debt due to Banks and Financial Institutions Act, 1993 should be amended to make its provisions more effective; and
iii. Amendment should also be made in the Contract Act, 1872, by making provision of giving more time to Banks and Financial Institutions to enforce their claims under Guarantee.
A key feature of the Act is that secured creditors are given the power to take possession of the securities in the event of default and sell such securities for the purpose of recovery of debt. The Act provides for enforcement ofsecurity interest by a secured creditor without intervention of the court, in cases of default in repayment of installments and non-compliance with the notice period of 60 days after the declaration ofthe loan as a non-performing asset. The Act constitutes Debts Recovery Tribunals for recovery of debts due to banks and financial institutions and also sets up Debts Recovery Appellate Tribunals to exercise the jurisdiction, powers and authority conferred on such Tribunal by or under this Act[20]. It is important to note that if there is money owed backed by a security interest, it can be enforced under the SARFAESI Act as well as DRT Act, but if there is money owed for which there is no security interest, it can be enforced only under the DRT Act.[21]
Despite the enactment of SARFAESI Act, 2002, NPAs of various banks continued to rise in an alarming manner. The estimated value of NPAs of public and private sector banks in 2016 was approximately Rs 6 lakh crores out of which Rs 1.54 lakh crores was of Public Sector Banks only[22]. Recently the Bankruptcy and Insolvency Code was introduced to clean up bad- loan mess and enforced on May 28, 2016. The Code proposes two independent stages[23]:
1. Insolvency Resolution Process- during which financial creditors assess whether the debtor's business is viable to continue and the options for its rescue and revival.
2. Liquidation- if the insolvency resolution process fails or financial creditors decide to wind down and distribute the assets of the debtor.
1.5 INSOLVENCY LAW IN USA:
Earlier in USA district courts were responsible for the supervision of bankruptcy courts through their powers of appointment and removal of bankruptcy judges, reviewing bankruptcy court decisions on appeal, and strictly control the contempt and injunctive powers of bankruptcy courts. Due to reasons the district courts have discharged itself from such supervision such as the demand for high degree of specialization for bankruptcy law caused district judges to feel uncomfortable when dealing with bankruptcy matters and an explosive increase in the number of bankruptcy proceedings, which led to piling of cases existing in the district courts. As a result, the district courts allowed and encouraged the bankruptcy court’s evolution toward independence. Through the Bankruptcy Reform Act, 1978 both procedural and substantive innovations secured the independence of the bankruptcy system while retaining the protections inherent in an adjunctive relationship with the federal district courts[24].
The Reform Act has provided for appeals from final orders of the bankruptcy court directly to the appropriate circuit court of appeals only if the parties agree. The new system of appellate review not only accomplishes elimination of the litigant's unnecessary financial burden by either an appellate panel of three bankruptcy judges or a single district court judge reviewing a bankruptcy judge's order. Under the Reform Act, judges are appointed for a fourteen year term and their removal must be by a majority of the circuit judicial council for reasons of ‘incompetency, misconduct, neglect of duty, or physical or mental disability’. The jurisdiction of these courts extends to following[25]: