INTRODUCTION
The banking industry in India has seen substantial changes since the start of liberalisation. Interest rates have been cut dramatically. Over time, the bank’s performance has improved somewhat. The increasing number of non- performing assets has been groaning under a mountain of bad debt. However, the condition has improved in recent years. Bank regulators have recently implemented a variety of steps to tie commercial bank supervision to the risk and financial responsibility of these institutions . Recent legislative changes, such as the SARFAESI Act, provide banks additional options in their fight against non-performing assets.
Only in the case of a mortgage, a mortgagee may take control of mortgaged property and resell it without the participation of a court, according to Section 69 of the Transfer of Property Act. An English mortgage can be obtained by signing a contract in which the mortgagee commits to return the mortgage loan money on a particular date and totally transfer the mortgaged property, subject to the mortgagee consenting to re-transfer the properties to the mortgager after the mortgage loan money has been repaid in full. Additionally, if the mortgage deed includes a specific provision and the mortgaged property is situated in the cities of Kolkata, Chennai, or Mumbai, the mortgagee may be able to take possession of the mortgaged property. It is possible to acquire possession without the aid of a judicial system in other situations. As a consequence, banks and financial organizations have traditionally had to resort to the legal system in order to ensure their security. This was a time-consuming and exhausting process. There was also no provision in any of the existing legislation related to hypothecation, despite the fact that hypothecation is a major security interest held by banks and financial organizations. Taking into account the above and a variety of other factors, the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act was passed on 21-6-2002.
THE ACT DEALS WITH THREE ASPECTS
Bad debts, also known as “Non-Performing Assets” in official language, are one of the most serious issues that Indian banks and financial institutions are confronted with. There are a variety of factors contributing to the current plight, the most significant of which are as follows:
CLASSIFICATION OF ASSETS
As stated by the Reserve Bank of India, categorization of assets flows, the following are listed:
The term “standard asset” refers to assets that do not reveal any problems, or assets that simply bear the usual risk of being classed as standard. The term “sub-standard asset” refers to a financial asset that has been categorized as non-performing for a period of not more than 12 months. Substandard assets are defined as those that have been non- performing for a period of below or equal to a year (12 months) as of the 31st of March, 2005. As a result, the previous term of 18 months was already lowered to 12 months. Assets of questionable quality over a period of 12 months are considered to have dubious quality. A questionable asset was defined as one that has been unsatisfactory for a period of 12 months as of the 31st of March, 2005. As a result, the previous term of 18 months has been shortened to 12 months. Loss assets are those assets that have been verified to have suffered losses or that have been determined to be unrecoverable are classified as loss assets. These are assets in which a loss has been recognised by the bank, external auditors, or Reserve Bank of India inspectors, but the amount has not been written off, either whole or partially.
TOOLS FOR RECOVERING NON-PERFORMING ASSETS
There are a variety of tools available to aid in the recovery of Non-performing assets. The primary goal of these methods is to collect the amount owed by borrowers who have fallen behind on their payments. The quantity under consideration, however, has an impact on the instrument that is chosen.
As a result, the following are the most often utilized methods for recovering non- performing assets from financial institutions.
Debt Recovery Tribunal (DRT’s)
If the situation with loan from bank goes down and is classified in the form of non- performing assets (NPAs), the lending bank must take legal action against the borrower to collect its debt. DRT proceedings are only one of the collection options accessible to the lending bank in order to recover past-due amounts from borrowers. If the lending bank determines that the borrower owes more than Rs. 10 lacs in debt, it may choose to start a recovery action via DRT. There is no monetary limit on the amount of money that may be requested in an application for an interim order with the DRT.
Lok Adalat
Several studies have shown that Lok Adalats are effective in the recovery of minor debts. According to the regulations published by the Reserve Bank of India in 2001, non-performing assets (NPA) are covered by RBI up to Rs. 5 lakhs, and the two of
them the non-suit documented one and the suit recorded assets are protected. Lok Adalats are designed to put away people out from the legal system.
SARFAESI Act, 2002
With the SARFAESI Act, it is possible to enforce a security interest for the purpose of collecting debts without the involvement of tribunals or courts. As a result, SARFAESI is considered to be one of the most successful methods available for the recovery of non-performing assets. SCOs and RCOs are two special purpose entities proposed by the Securitization Act for the purpose of securitizing and reconstructing financial assets. SCOs and RCOs are short for Securitization and Reconstruction Companies, respectively. Aiming to expedite the debt collection process for banks and financial institutions by allowing them to attach their assets without the need for a judgment from a competent Court of Law, the Securitization Ordinance was enacted in 2009. When this Ordinance was promulgated, the commerce and industry had a mixed response. One of the reasons is about the fact that the Ordinance never distinguish among intentional defaulters and the business defaulters of regular nature, which caused them to feel uneasy. They believed that, as a result of a variety of factors such as the country’s economic slowdown and political interference, the vast majority of bank and financial institution loans had become non-performing concerning the reasons that are not in their control. However, according to the Central Government has an estimated value of Rs.4 lac crore in non-performing assets (NPA) with various banks and financial institutions. Committees have proposed such legislation, which would provide lenders with a faster manner of collecting their debts and empower them to not only encash but also attach the assets of defaulters. The existing statute does not provide for such a remedy, and debt collection was taking an extraordinarily long period, which was detrimental to the public interest and negatively impacted national development. which conveyed the appropriate signals not only to the defaulters in question, but also to all other borrowers in the market. It goes without saying that a long-term solution to the issue of non-performing loans can only be accomplished via the implementation of an effective credit evaluation and risk management system . A study is required to determine the efficacy of such a harsh deed in order to recover from the curse, i.e. NPA, in comparison to other mechanisms, such as Lok Adalat and DRTs.
Under the SARFAESI Act of 2002, banking and financial institutions can recover NPA without requiring court involvement. Banks use this as a persuasive tactic for recovering bad debt (NPA). It is conceivable in circumstances where NPA are backed by securities charged to the bank through a method such as hypothecation, a home loan, or a project loan.
CONCLUSION
The banking system needed to be reformed due to the detrimental impact. It is recommended that nonperforming assets (NPAs) be dealt with via the implementation of prudential standards. Simultaneously time, it is critical for the bank to maintain openness in all of its transactions and financial reporting.
Written by-
Ms. Sakshi Kothari is a 5th year BBA., LL.B. (Hons.) student at Amity Law School in Madhya Pradesh
