The Author, Aman Meena, is a 2nd year BA.LLB. (Hons.) student of National University of Study and Research in Law (NUSRL), Ranchi. He is currently interning with LatestLaws.com.
Introduction
India is facing a growing problem of non-performing assets (NPA) which is dangerous because it may be a symptom of an ailing banking sector which in-turn affects the economy of India likewise. within the year of 2017 the worth of Non- performing assets for the private sector banks stood at approximately 940 billion rupees. This figure almost doubled in 2018 because the value of NPA's was at approximately 1.86 trillion rupees and within the year of 2019 this figure stood at approximately 1.84 trillion rupees. In 2020 the matter is ready to induce even worse as a report of the RBI revealed that the gross non-performing assets ratio (which is that the figure acquired by dividing net NPA by the full advances given by the bank) of economic banks could worsen to as high as 14.7 per cent at the top of monetary year 2020-21, from 8.5 per cent in March 2020, if the economic impact of the pandemic is severe. The gross non-performing assets ratio could be a measure of the quality of a bank's loan book and this report clearly shows that the banks could get even more stressed leading to more problems and hardships for the banking sector. the rise within the NPAs has many adverse effects on the banking institutions because it impacts the bank's profitability, return on assets, net interest margins etc. and it also has a bearing on the flow of credit in addition because the growth of the economy as an entire. Therefore, it's important to grasp what exactly a Non-Performing Asset is, how it works, the impact it's and therefore the steps taken by the govt. to unravel this problem.
What Is A Non-Performing Asset?
The Non-performing assets better called NPA's are broadly defined as a classification for loans or advances that are in default or in arrears. To further understand this definition, it's pertinent to grasp what's meant by a loan behindhand and a loan in default. A loan is behind when interest payment or principal is late or missed and a loan is in default when the lender considers the agreement of loan to be broken and it's impractical for the debtor to satisfy his obligations.
This is the overall definition of a non-performing asset over the planet; however each country has its own procedure and requirements to declare an asset as non-performing. In India for an asset to be classified as an NPA the borrower should have the principal or interest on the loan or advance given by the lender overdue for a period of 90 days.
The NPAs are further classified into three categories reckoning on the amount that the asset has remained non-performing and also the reasonability of the dues.
The three categories into which NPAs are classified are as follows:
1. Sub-Standard Assets:
A sub-standard asset was first defined together which was classified as NPA for a period not exceeding two years. However, on 31 March 2005 the RBI changed the duration to 12 months and so a sub-standard asset now was that which has remained an NPA for a period but or capable 12 months. In such cases, an asset will have well defined credit weaknesses which suggests that the borrower is unable to hide his total liabilities/exposure which is able to jeopardize the liquidation of the debt and there's a definite possibility that the banks will sustain some loss if the shortcomings aren't corrected.
2. Doubtful Assets:
A doubtful asset was first defined together which remained as an NPA for a period exceeding two years. However, on 31 March 2005 the RBI changed the duration to 12 months and so a doubtful asset was that which remained an NPA for a period exceeding 12 months. When a loan is classed as doubtful, the assets have all the identical weaknesses that were found in assets classified as sub-standard but also with the added aspect that the weaknesses make collection or liquidation fully of the borrower on the idea of the present facts, conditions and values highly uncertain and improbable.
3. Loss Assets:
A loss asset is one where a loss has been identified by the bank or by the inner or external auditors or by the RBI inspection but the number has not been written off completely. In other words, such an asset is taken into account uncollectible and of such little value that its continuance as a bankable asset isn't warranted although there is also some salvage or recovery value.
These are the three categories within which NPAs are classified as. The RBI has provided guidelines to banks to efficiently and fairly classify assets as non-performing. These guidelines in a very nut shell state that classification of assets into above categories should be done by considering the degree of well-defined credit weaknesses and therefore the extent of dependence on collateral security (for example promoter guarantee, shares, land etc.) for realization of dues.
The guidelines also state that for efficient classification banks may:
establish appropriate internal systems to eliminate the tendency of delay or postponement within the identification of NPAs, especially in respect of high value accounts.
o fix a minimum bring to an end point to make your mind up what would constitute a high value account depending upon their respective business levels. The cut-off point should be valid for the whole accounting year.
Fix Responsibility and validation levels for ensuring proper asset classification.
The guidelines also state that the system established by the banks should make sure that doubts in asset classification because of any reason are settled through specified internal channels within one month from the date on which the account would are classified as NPA as per existing guidelines. Therefore, this describes briefly what an NPA is and the way they must be classified by the banks. Now it shall be discussed on what's to be done once an asset has been classified as an NPA by the bank.
Recovery Mechanisms
Recovery mechanism could be a process of finishing up the recovery procedures and mechanisms required to revive the financial assets within the event of failure to repay by the borrower. An NPA as explained above is an asset that has ceased to get income and returns which if not forbidden correctly and promptly is detrimental to the bank and thus the recovery of NPAs plays a crucial role to sustain the banking system.
Mainly recovery is finished through the subsequent aspects:
1. Lok Adalats
The Lok Adalats is one among the choice dispute redressed mechanisms founded by the govt. It’s a forum where disputes or cases pending within the court of law or at pre-litigation stage are settled mutually. Lok Adalats are given statutory status under the Legal Services Authorities Act, 1987. Under the said Act, the choice made by the Lok Adalats is deemed to be a decree of a civil court and is final and binding on all parties and no appeal against such a souvenir lies before any court of law.
If the parties don't seem to be satisfied with the award of the Lok Adalat though there's no provision for an appeal against such a bequest, however they will initiate litigation by approaching the suitable court by filing a case by following the desired procedure exercising their right to litigation. The jurisdiction of the Lok Adalats is in cases/disputes of but 10 lakh rupees in value.
The persons deciding the cases within the Lok Adalats are called the Members of the Lok Adalats and that they have the role of statutory conciliators only and don't have any judicial role. Therefore, they'll only persuade the parties to come back to a conclusion for settling the dispute outside the court within the Lok Adalat and shall not pressurize or coerce any of the parties to compromise or settle cases or matters either directly or indirectly.
The Lok Adalat cannot decide the matter brought up it on its own but instead it's to be selected the premise of the compromise or settlement between the parties. The members shall assist the parties in an independent and impartial manner in their try and reach amicable settlement of their dispute. Mobile Lok Adalats are organized in various parts of the country which travel from one location to a different to resolve disputes so as to facilitate the resolution of disputes through this mechanism.
As on 30.09.2015, quite 15.14 lakhs Lok Adalats are organized within the country since its inception. over 8.25 crore cases are settled by this mechanism up to now.[6]
2. Debt Recovery Tribunals (DRTs)
The Recovery of Debts because of Banks and Financial Institutions Act,1993 (RDDBFI Act) made provisions for quick redressed to lenders and borrowers through filing of Original Applications also referred to as OAs within the Debt Recovery Tribunals (DRTs) and appeals in Debts Recovery Appellate Tribunals (DRATs). Therefore, under the RDDBFI Act the DRTs and DRATs are established to assist provide for the necessity of speedy redressed for banks against NPAs.
The DRT also has the ability to make your mind up upon the applications filed against the secured creditors by the borrower or mortgager for the action taken by them under the Securitization Act. As of today, the govt. has established 39 DRTs and 5 DRATs, which are single Member Tribunals. the matter plaguing the DRTs like several other debt recovery mechanisms is that they're slow to figure out on pending disputes because the process is incredibly long which ends up in an exceedingly high number of pending cases.
3. Sarfaesi Act
The Securitization and Reconstruction of monetary Assets and Enforcement of interest Act, 2002 better referred to as the SARFAESI Act was formed after the considerations dispensed by committees constituted by the govt. to look at the reforms and changes that are needed within the banking and legal systems for better functioning of the debt recovery mechanisms.
The main purpose of this Act is to produce speedy recovery of defaulted loans and help reduce the mounting stress on the banks because of the rise in NPAs. The act provides the banks and financial institutions with a mechanism to higher recovery of assets by enabling them to require possession of securities and sell them to scale back the burden of the Non-Performing Asset.
The Act aims to realize recovery of NPAs through three major ways which are the following:
i. Securitization:
The Section 7 of the SARFAESI Act gives an outlook of what exactly happens in securitization, it states that any securitization company or reconstruction company, may, after acquisition of any financial asset offer security receipts to qualified institutional buyers, (other than by offer to public) who are people who have expertise and sound knowledge to guage and make their investment within the Capital Markets, for subscription in accordance with the provisions of these Acts.
A securitization company or reconstruction company may raise funds from the qualified institutional buyers by formulating schemes for acquiring financial assets and shall keep and maintain separate and distinct accounts in respect of every such scheme for each financial asset acquired out of investments made by a certified institutional buyer and make sure that realizations of such financial asset is held and applied towards redemption of investments and payment of returns assured on such investments under the relevant scheme. the most advantage of securitization is that it allows the institutions to boost finances by selling assets or income streams.
ii. Asset Reconstruction:
In Asset Reconstruction the Securitization companies or Reconstruction Companies buy the NPAs from the banks and take measures to recover the bad loans from the borrower by carrying certain functions in step with the powers vested in them by the Act.A. pursuance of this section shall be called in question in any court or before any authority
Insolvency and Bankruptcy Code (IBC)
Before the Insolvency and Bankruptcy Code, 2016 came into force there have been multiple laws and institutions that were overlapping in jurisdiction and functioning which result in lots of confusion in addressing the insolvency and bankruptcy proceedings against individuals and corporations. There was no legal framework which provided an efficient procedure to assist the debt recovery process in India which was hurting the banks and other financial institutions and affecting the flow of credit. to beat these hurdles the govt introduced the Insolvency and Bankruptcy Code Bill in 2015 which was then passed in 2016 and came into force.
There were first 4 forums which prohibited matters of insolvency and bankruptcy which were the supreme court, Board for Industrial and Financial Reconstruction (BIFR), Debt Recovery Tribunal (DRT) and Company Law Board (CLB), upon the enforcement of the IBC the burden of those forums was reduced as now all the matters in relevancy the code were to be filed within the National Company Law Tribunal (NCLT). the most purposes of the IBC is to supply speedy remedies for the banks against NPAs and also to scale back the burden of the long pending cases in courts.
The IBC has made a provision for the formation of the Insolvency and Bankruptcy Board of India which is liable for implementation of the Code that consolidates and amends the laws regarding reorganization and insolvency resolution of corporate persons, partnership firms and individuals in an exceedingly time bound manner for maximization of the worth of assets of such persons, to push entrepreneurship, availability of credit and balance the interests of all the stakeholders. The IBC also makes provisions to create a proper Insolvency Resolution Process (IRP).
The IRP may be initiated by a company debtor who has defaulted on dues or by the creditors. When the IRP is initiated the creditors' claim should be handled within 180 days[7], during which era they'll hear proposals for revival and judge on the long run course of action. Within those 180 days, 75% of economic creditors must conform to a revival plan.
If this minimum threshold isn't met, the firm automatically goes into liquidation. The resolution professional shall file an application to the Adjudicating Authority to increase the amount of the company insolvency resolution process beyond 100 and eighty days, if instructed to try to to so by a resolution passed at a gathering of the committee of creditors by a vote of 75% of the voting shares.
The Government issued an ordinance which is that the Insolvency and Bankruptcy Code ordinance of 2020 within which the govt suspended the operation of sections 7, 9 and 10 of the code to stop defaulting corporate that are under stress thanks to the disruptions caused by the coronavirus pandemic and keep them from being pushed into insolvency. The Insolvency and Bankruptcy code basically helps within the dealing of debt recovery from the NPAs which helps the banks to efficiently recover their debt and be free from the burden of the NPA which keeps the banks and financial institutions healthy and free from excessive stress.
Judgments:
D. Krishnan vs The Branch Manager
(Order of the Court was made by S. MANIKUMAR, J.) Challenge during this writ petition, is to the notice, dated 20.10.2014, issued under Section 13(2) of the SARFAESI Act, 2002, by issuance of a writ of Certiorarified Mandamus, to quash the identical and consequently, looked for a direction to the Federal Bank, to disburse the petitioners, the balance loan amount of Rs.30, 56,100/-, as per the Term Loan Agreement, dated 30.01.2014.
2. because the principal borrower, the first petitioner has availed the term loan of Rs.50,00,000/- on 30.01.2014, from Federal Bank Ltd., for the aim of repair and renovation of building. Petitioners 2 and three, being son and wife, are the co-borrowers. Property has been mortgaged. First installment fell due on 30.05.2014 which the petitioners were speculated to pay the monthly installment of Rs.1,00,074.03. After satisfaction of the work carried on, as per the quotations submitted by the first petitioner, the Bank had initially released a sum of Rs.11,51,900/-, on 08.02.2014 and also released a sum of Rs.6,92,000/- on 07.02.2014, for the aim of buying the building materials and altogether, disbursed a complete sum of Rs.19,43,900/-.
3. The petitioners have further contended that the said amount was utilised for renovation of building and buy of building materials. The petitioner has requested to disburse the remaining loan amount of Rs.30,56,100/-. However, the Bank has refused to disburse the identical, in time and so, the whole renovation and construction works, couldn't be continued.
4. The petitioners have further contended that had the Federal Bank complied with the terms and conditions, they might have remitted the primary intallment, which fell due on 30.05.2014 and continued to form future installments promptly. Having did not disburse the balance amount of Rs.30,56,100/-, even before the day of the month of payment of the primary installment, ie., on 30.05.2014, the Bank has issued a letter, dated 04.04.2014, stating that payment wouldn't be made. within the said letter, the rationale assigned by the Bank was that there was a monetary rival claim, between the first petitioner and one Mr.Loganathan, towards starting of guest house, which is subject material of mortgage and during this regard, the Bank perceived to have received a legal notice from the said Mr.Loganathan, calling upon the petitioner to first settle the difficulty between themselves, and for that reason, the Bank had didn't fulfill the obligations.
5. it's the further case of the petitioners that the above litigation, between the first petitioner and Mr.Loganathan, was pending before the civil Court and it's nothing to try and do with the Bank, to disabuse the remaining loan amount. Within the above said circumstances, payments couldn't be made. The respondents-Bank has issued a notice, dated 20.10.2014, under Section 13(2) of SARFAESI Act, 2002, demanding the petitioners to pay a sum of Rs.21,23,386/-, as on 30.09.2014, with costs and other charges together with further interest thereon, at the speed of 13.95% every year, with monthly rests and penal interest, at the speed of twenty-two each year, from 30.09.2014, till the date of payment and costs/other charges, within 60 days from the date of receipt of the said notice, failing which, the bank would take recourse, under Section 14 of the SARFAESI Act, 2002. On the above facts and circumstances, the petitioners have filed the moment writ petition, for the relief, as stated supra.
6. Supporting the prayer probe for, Dr.R.Gouri, learned counsel for the petitioners submitted that the Bank has did not discharge their obligations, by making payment of remaining loan amount of Rs.30,56,100/- and thanks to such breach, the petitioners couldn't pay the monthly installments. She further submitted that the explanation assigned by the Bank is untenable and therefore the dispute between the petitioner and Mr.Loganathan is in no way connected to the loan borrowed.
7. Placing reliance on the choice of this Court reported in 2010 (5) CTC 337 [Signal Apparels Pvt. Ltd., v. Canara Bank], learned counsel for the petitioners submitted that as per the rules of the banking concern of India, dated 01.07.2009, the bank has got to classify a debt, as 'Non-Performing Asset' (In short "NPA"), before issuing notice, under Section 13(2) of the SARFAESI Act, 2002. She further submitted that within the instant case, the Bank has not followed the above guidelines, while classifying the debt as NPA, within the manner, as provided therefor and so, the writ petition, challenging the notice, under Section 13(2) of SARFAESI Act, 2002, is maintainable.
8. Supporting the above submission, learned counsel for the petitioners drew the eye of this Court in Signal Apparels' case (cited supra), wherein, a Hon'ble Division Bench of this Court has considered the definition of "Non-Performing Asset" and also the decisions made in Mardia Chemicals Ltd., v. Union of India reported in (2004) 4 SCC 311 and M/s.Transcore v. Union of India reported in AIR 2007 SC 712 and discussed as hereunder:
"11. Section 2(0) defines "non-performing asset" as hereunder:
"non-performing asset" means an asset or account of a borrower, which has been classified by a bank or establishment as sub-standard, doubtful or loss asset, -
(a)in case such bank of monetary institution is run or regulated by any authority or body established, constituted or appointed by any law for the present in effect, in accordance with the directions or guidelines referring to assets classifications issued by such authority or body;
(b)in the other case, in accordance with the directions or guidelines regarding assets classifications issued by the banking company.
"Non-performing Asset" implies that an asset or account of a borrower, which doesn't either generate income from the bank on actual realisation basis or ceases to get the said income. In another sense, non-performing asset means an asset or account of a borrower which has been classified by a bank or financial organization as sub-standard, doubtful or loss asset. so as to declare an asset or account to be a non-performing asset, the secured creditor must satisfy itself that such asset isn't effectively producing income on actual realisation and consequentially, such asset or account might be declared as sub-standard, doubtful or loss asset. Though the provisions of Section 2(o) defines non-performing asset, no set of procedures are contemplated there under provision or under the other provisions of the Act enabling the banks or financial institutions to follow the identical before declaring such asset or account as non-performing asset. However, that provision contemplates that just in case, a bank or establishment is run or regulated by any authority or body established, constituted or appointed by any law, then the declaration must be in accordance with the directions or guidelines referring to assets classifications issued by such authority or body. Altogether other cases, the bank or establishment should follow the directions or guidelines referring to the assets classifications issued by the banking concern.
19. Within the result, the writ petition is dismissed. No costs. Consequently, connected Miscellaneous Petition is additionally closed.
Deccan Chronicles Holdings Limited v. Union of India
Prayer: Writ Petition in W.P.Nos.5897 and 7654 of 2014 are filed under Article 226 of the Constitution of India seeking for the relief of issuance of a Writ of Declaration to declare that the provisions of Section 2(1)(o) of the Securitization and Reconstruction of economic Assets and Enforcement of Securities Act, 2002 as arbitrary, unconstitutional and against public policy, null and void and also the same being ultra vires the Constitution of India.
Writ Petition in W.P.No.5898 of 2014 is filed under Article 226 of the Constitution of India seeking for the relief of issuance of a Writ of Declaration declaring the rules No.DBOD.No.BP.BC.9/ 21.04.048/2012-13 dt. 2.7.2012 qua classification of account as Non-performing asset as arbitrary, unconstitutional and against public policy, null and void and also the same being ultra vires the Constitution of India.
Writ Petition in W.P.Nos.7296, 7298, 8746 and 12508 of 2014 are filed under Article 226 of the Constitution of India seeking for the relief of issuance of writ of declaration to declare that the provisions of Section 2(1)(o) of the Securitization and Reconstruction of economic Assets and Enforcement of Securities Act, 2002 as being ultra vires the provisions of the Constitution of India and thus null and void.
Writ Petition in W.P.Nos.7297 and 8747 of 2014 are filed under Article 226 of the Constitution of India seeking for the relief of issuance of a Writ of Declaration to declare the circular/guideline No.DBOD.No.BP.BC.9/ 21.04.048/2012-13 issued by the banking concern of India dt. 2.7.2012 qua classification of accounts as a Non-performing asset as being arbitrary, unconstitutional and null and void.
Writ Petition in W.P.No.7390 of 2014 is filed under Article 226 of the Constitution of India seeking for the relief of issuance of writ of declaration declaring that Section 2(o) of the Securitization and Reconstruction of economic Assets and Enforcement of stake Act, 2002 and Clause 2.1 of prudential norms on income Recognition, Asset Classification and provisioning per Advances issued by the 6th respondent as ultra vires the Constitution of India, void at first, illegal and unconstitutional and consequently forbear the 2nd and 3rd respondents from continuing the proceedings initiated under the provisions of Securitization and Reconstruction of economic Assets and Enforcement of interest Act, 2002 as against the petitioner herein with relevancy the topic property more specifically launched within the petition schedule.
Writ Petition in W.P.Nos.7653 and 8595 of 2014 are filed under Article 226 of the Constitution of India seeking for the relief of issuance of a Writ of Declaration declaring the rules bearing No.DBOD.No.BP.BC.9/ 21.04.048/2012-13 dt. 2.7.2012 issued by the banking concern of India regarding the classification of accounts as Non-performing assets as arbitrary, unconstitutional, opposition public policy, null and void and ultra vires the Constitution of India.
Writ Petition in W.P.No.7806 of 2014 is filed under Article 226 of the Constitution of India seeking for the relief of issuance of writ of declaration declaring that Section 2(o) of the Securitization and Reconstruction of economic Assets and Enforcement of stake Act, 2002 and Clause 2.1 of prudential norms on income Recognition, Asset Classification and provisioning regarding Advances issued by the 2nd respondent as ultra vires the Constitution of India, void initially, illegal and unconstitutional and consequently forbear the 3rd respondent from continuing the proceedings initiated under the provisions of Securitization and Reconstruction of economic Assets and Enforcement of stake Act, 2002 as against the petitioner herein with respect to the topic property more specifically taken off within the petition schedule.
Writ Petitions in W.P.Nos.8090 and 8091 of 2014 are filed under Article 226 of the Constitution of India seeking for the relief of issuance of writ of declaration declaring that Section 2(o) of the Securitization and Reconstruction of monetary Assets and Enforcement of stake Act, 2002 and Clause 2.1 of prudential norms on income Recognition, Asset Classification and provisioning regarding Advances issued by the 3rd respondent banking concern of India as ultra vires the Constitution of India, void at first and consequently forbear the 2nd respondent from continuing the proceedings initiated under the provisions of Securitization and Reconstruction of monetary Assets and Enforcement of interest Act, 2002 as against the petitioner herein with relevance the property at No.37, Arcot Road, Kodambakkam, Chennai 24.
Writ Petition in W.P.No.8457 of 2014 is filed under Article 226 of the Constitution of India seeking for the relief of issuance of a Writ of Declaration to declare that Section 2(1)(o) of the Securitization and Reconstruction of economic Assets and Enforcement of Securities Act is ultra vires and null and void.
Writ Petition in W.P.No.8458 and 8593 of 2014 are filed under Article 226 of the Constitution of India seeking for the relief of issuance of a Writ of Declaration declaring the rules bearing DBOD.No.BP.BC.9/ 21.04.048/2012-13 dt. 2.7.2012 issued by the bank of India referring to the classification of accounts as Non-performing assets as arbitrary, unconstitutional, against public policy, null and void and ultra vires the provisions of the Constitution of India.
Writ Petition in W.P.Nos.8594 and 8596 of 2014 are filed under Article 226 of the Constitution of India seeking for the relief of issuance of a Writ of Declaration to declare that the Section 2(1)(o) of the Securitization and Reconstruction of economic Assets and Enforcement of Securities Act, 2002 as arbitrary, unconstitutional, critical public policy, null and void and ultra vires the provisions of the Constitution of India.
Writ Petition in W.P.No.8766 of 2014 is filed under Article 226 of the Constitution of India seeking for the relief of issuance of a Writ of Declaration declaring the rules issued by the depository financial institution of India vide DBOD.No.BP.BC.9/ 21.04.048/2012-13 dt. 2.7.2012 regarding the classification of accounts as Non-performing assets (NPA) as arbitrary, unconstitutional and null and void and critical public policy.
Conclusion
There is a growing problem of NPAs in India which is hurting the banking sector and also the economy of India as a full because it affects the provision of credit and India is witnessing more and more of its banks crumbling under the pressure. the govt. has realized this problem and has taken steps to confirm that the banks can continue and also the economy has credit available.
However, the steps taken by the govt. haven't completely proscribed this problem and then the govt. must keep pushing for reforms within the banking sector and within the legal systems governing the arena to assist the economy in India not only to survive but thrive and grow over time.
The courts are still facing the matter of increase in number of pending cases because the current founded of courts made to cope with the matter of debt recovery isn't efficient and also doesn't have enough man power available to pander to the high influx of debt recovery cases.
This problem goes to urge much worse in 2020 as due to the coronavirus pandemic the country was in lockdown and then were the courts and thus the cases had kept piling up because the courts weren't functioning and also because plenty of the Micro Small and Medium enterprises (MSMEs) haven't been ready to survive the cash crunch during the pandemic and hence there'll be more cases of debt recovery filed than the standard average. However, as mentioned above the govt. has taken certain steps to combat this problem but still the answer is simply temporary.
The government not only must support the banking system but also the MSMEs and other companies to forestall them from being pushed into insolvency as this too will help control the matter. If India aspires to take care of the healthy and fast-growing economy it had before the pandemic the govt must take more drastic and long-lasting steps to stay the expansion sustainable.
