DEBT RECOVERY MECHANISMS IN INDIA: ANALYZING LEGAL AND INSTITUTIONAL FRAMEWORKS BY - KARRI MOULENDRA SATYA VENKAT
"DEBT
RECOVERY MECHANISMS IN INDIA: ANALYZING LEGAL AND INSTITUTIONAL FRAMEWORKS”
AUTHORED BY
- KARRI MOULENDRA SATYA VENKAT
(LL.M.
Student at Symbiosis Law School- Hyderabad)
Abstract
The main objective of working on this
Research Paper about “Debt Recovery Mechanism in India” is to get a clear idea
of how financial institutions recover the loans granted by them to the general
public and organizations. This Research discusses the importance of debts, how
are debts granted by Banks, how those loans are recovered back by financial
institutions, what happens in the case of default in repayment of Loans, what
laws govern this process of recovering the loans, and the procedures laid down
in the legislations regulating the Banks and other institutions regarding this
particular process of recovering the loan amounts, challenges faced by the
Banks in this process, and some recommendations to reform the present-day
legislations to improve the recovery of debts and reducing the NPA’s with which
the performance of banks improves and ultimately enhances trust of the people
and the investors.
This paper begins with an
introduction to the concept of Debts or Loans and their importance, followed by
the procedure of granting loans, processes by which loans are recovered, consequences
in the case of default of repayment of loans, NPA’s which means Non-Performing
Assets, laws and provisions that govern the process of recovering the Debt like
Recovery of Debt due to Banks and Financial Institutions Act of 1993, The
Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest Act of 2002 (SARFAESI Act), Establishment of Debt
Reconstruction Tribunals and Debt Reconstruction Appellate Tribunals, National
Company Law Tribunals, The Insolvency and Bankruptcy Code, And Non-Judicial
mechanisms like One Time Settlements scheme, Lok Adalat’s, Special Recovery
Drives and the ways in which different financial institutions, such as public
and private banks, as well as how online instant loan apps operate the loan recovery
processes and will conclude with the challenges involved in Debt Recovery
procedures, and Recommendations for Legal and Structural Reforms to ensure
smooth and effective Recovery Mechanism which helps in improving the
performance of the Banking structure.
Keywords: Debt Recovery Mechanism, Loan
Recovery Laws, Non-Performing Assets, Reforms and Recommendations.
Research
Methodology:
The research method used in writing
this paper is the Doctrinal Method i.e., secondary data was collected from
different commentaries, books, research papers, and websites and it is with
this declared that this paper is of an objective nature rather than subjective.
Personal choices and opinions were not depicted in this paper and only findings
that were mentioned and published in different sources were only used to write
this paper.
Research Questions
Ø What are the key debt recovery
mechanisms used by Indian banks?
Ø How effective are the judicial and
non-judicial recovery mechanisms in reducing NPAs?
Ø What role do Online instant loan
applications play in debt recovery and how are they similar to that of
traditional methods?
Ø What challenges do banks face in recovering
the debts and what are the necessary changes to be done in the practices and
procedures?
Research Objectives
Ø To evaluate the effectiveness of debt
recovery mechanisms in India.
Ø To assess the role of laws like RDB,
SARFAESI, and IBC in shaping debt recovery.
Ø To examine the practices of online
lending platforms and their debt recovery processes.
Ø To analyze the challenges banks face
in recovering the debts.
Hypothesis
Indian Debt Recovery System includes
different Judicial and Non-Judicial mechanisms used by financial institutions
like banks to recover the debts granted by them to the needy. These mechanisms
though help and contribute to some extent in the recovery of unpaid debts, they
require more effective procedures and practices to be included to make the debt
recovery processes more efficient.
Literature
Review
From the study made by Surojit Dey in
the year, it was found that the reason for more NPAs is poor recovery
mechanisms and this study emphasized the need for better monitoring methods and
recovery procedures. In a study by Inderdeep Singh Ahluwalia, it was found that
Debt recovery methods through the DRT Act and SARFAESI Act play a major role in
recovering e debts in India but challenges like delays in proceedings, and
infrastructure make it difficult to bring out the best output. A study done by
Sujata Visara, found the benefits of DRTs' performance in India, like low
interest rates on new loans, reduced delays in judicial institutions, and
upheld the success of DRTs in reducing non-performing loans.
Introduction
Debt or loan, also called credit in
general, means the amount given or granted by one person called the creditor to
the one in need, i.e., the debtor. In simple words, one party borrows money and
is obligated to return the amount with the interest value. These credits or
loans are very important for businesses mainly as they help expand, maintain
working capital, buy fixed assets, manage cash flows, repay other credits, and
other needs. Financial institutions like banks provide these loans in the
present-day scenarios, thus these banks are called the driving forces of the
economy as they are the main players who act as intermediaries who direct the
funds from savers to borrowers and finance the businesses.
These debts are of different kinds
like:
Secured Debts: - Loans that are
backed by collateral (mortgages)
Unsecured Debts: - Loans without
collateral (credit cards, personal loans etc)
Corporate Debts: - Loans to the
companies for operational and capital purposes
Retail Debts: - Loans provided to
individuals (home loans, education loans, etc)
As per the provisions and rules of
the Reserve Bank of India, secured loans are backed by assets as collateral
which range from 1 lakh rupees to 1000 crores or more depending on the collateral
value, and unsecured loans like personal loans and amounts drawn through credit
cards are the loans that do not require any assets as collateral, these ranges
from Rs.10,000 to Rs.50,000 lakhs.
The procedure to be followed by the
Banks before granting loans to individuals as well as to businesses as per the
provisions, rules, and guidelines of different legislations is as follows:
·
Know Your Customer (KYC) compliance: As per Section 35A of the RBI Act of 1934 and RBI KYC
Master Directions, the borrower’s identity and address are verified by
collecting documents like PAN, Aadhar, Passport, utility bills, etc.
·
Creditworthiness and Risk Evaluation: As per Sections 21 and 35A of the Banking Regulation
Act of 1949, the borrower’s credit score is checked and the income will be
assessed using documents like salary slips, tax returns, etc.
·
Collateral Assessment (For Secured Loans): As per Sections 21 and 35A of the
Banking Regulation Act of 1949 and SARFAESI Act of 2002, the value of the
assets (gold or property) that will be pledged as collateral is evaluated and
verified by reviewing the legal ownership documents.
·
Loan Documentation: As per Section 45U of the RBI Act of 1934 and Banking Regulation Act of
1949, necessary documents like income proofs, property deeds, and financial
statements are collected and reviewed.
·
Loan Sanctioning and Credit Approval: As per Section 35A of the Banking Regulation Act of
1949, the credit committee reviews and approves the loan followed by the
issuance of a sanction letter with the terms and conditions of the loan
account.
·
Assessment of Repayment Capacity: As per Section 35A of the Banking Regulation Act of 1949 and
Basel III Guidelines, the borrower’s ability to repay is evaluated based on
income/ cash flow, and the debt-to-income ratio is calculated.
·
Monitoring End-Use of Loan: As per Section 21A of the Banking Regulation Act of 1949 and
Master Circular on Loan Utilization Monitoring of the RBI, it is ensured that
the loan granted is used for the declared purpose only.
·
Execution of Loan Agreement: As per Section 45X of the RBI Act of 1934 and Section 13 of
the SURFAESI Act of 2002, the borrower’s signature is taken on the loan
agreement with terms and the bank creates a charge on collateral.
·
Disbursement of Loan: As per Section 21 of the Banking Regulation Act of 1949 and RBI’s Master
Circular on Disbursement of Loans, the Loan amount is disbursed either in full
or at partial based on the documentation.
·
Post-Disbursement Monitoring: As per the Master Direction on Asset Classification &
Provisioning, Loan repayment is monitored regularly and irregular accounts and
defaults are also followed up.
·
Recovery Process in Case of Default: As per Section 13 of the SARFAESI Act, 2002 and
Section 7 of the Insolvency and Bankruptcy Code (IBC) of 2016, unpaid loans are
recovered through the sale of the collateral under the SARFAESI Act in the case
of Secured loans and legal actions will be taken for Unsecured loans.
·
Prudential Guidelines on Capital Adequacy: As per Section 24 of the Banking
Regulation Act of 1949 and the Basel III Framework, Banks have to maintain
proper capital reserves to cover risky loans.
Consequences of Default
The debtors or the borrowers
sometimes fail to repay the debt amounts to financial institutions like banks
and in such situations, Banks practice Debt recovery which means collecting
unpaid debts from individuals or entities who have failed to repay the loan
amounts. This process of debt recovery involves several procedures like issuing
legal demand notices, and negotiating the terms of repayment. It may also
initiate legal proceedings by filing recovery suits in the courts of law, which
may even result in the declaration of NPAs.
Non-Performing Assets
As per the guidelines of the Master
Circular of the Reserve Bank of India, an asset becomes non-performing when it
does not generate any more income for the bank. A non-performing asset (NPA)
was defined as a loan in respect of which interest amount or instalment of the principal
amount has remained due for more than 90 days in the case of Commercial loans
and 180 days in the case of consumer Loans. NPAs are a serious concern for
banks as they would affect the financial health and stability of the bank and
may also result in losing customer trust.
RBI Guidelines[1]
·
Default Notice:
All the banks are regulated by the RBI to follow certain guidelines in the
process of recovery of loan amounts, among which this is one of the primary
guidelines that have to be followed by any bank, that is the issuance of Notice
of Default, which would inform the borrower about their default in paying the instalment
amount and also the consequences they would face if they failed to repay the
loan in further.
·
Recovery Agents:
RBI regulated the banks regarding the functions of the recovery agents mandated
the training and followed ethical practices by not using foul or abusive
language and physical force with the borrowers or customers in the process of
Debt recovery.
·
Settlement Opportunity: The borrowers have to be allowed to settle the loan payment
issue thorough negotiating the loan structure or by offering a one-time
settlement opportunity to repay the loan.
·
Grievance Resolution: It is directed to all the banks to maintain a grievance resolution
mechanism to help the borrowers i.e., the customers complaining about their
difficulty being faced during or because of the loan recovery process.
These RBI Rules, Regulations, and
Guidelines play a major role and are of great importance as they ensure fair
practices in the process of loan granting and the recovery of loans that
protect the rights of both lenders and borrowers. It also helps maintain the
financial stability of the Banks and the whole financial system.
Need for Debt Recovery Laws
·
Protecting Lender’s Rights and Interests: For Financial Institutions like Banks
to maintain solvency, they need to rely on recovering the loan amounts provided
by them. Thus, these debt recovery laws legally enable them to reclaim the
loans and safeguard their financial stability.
·
Reducing Non-Performing Assets: The More the NPAs, the less the financial stability and
security of the banks, if an asset turns into a liability in the balance sheet
of any bank, it brings an adverse effect on the performance of the Banks. Thus,
the debt recovery laws provide a mechanism for reducing these NPAs and
maintaining financial stability and discipline.
·
Economic Stability: Reducing the NPAs, through loan recovery processes, helps maintain the
health and stability of the banking sector prevents any crisis, and allows
banks to lend loans that are so required for economic growth.
·
Increases Investor Confidence: The regulations and debt recovery laws, help in improving the
investor's and customers' trust and confidence in the banking sector.
Judicial Mechanisms
Some laws govern the debt recovery by
the financial institutions of India, let’s get to know about those laws.
Recovery of Debt Due to Banks and
Financial Institutions Act, 1993[2]
In 1981, the Government of India set
up a committee led by T. Tiwari to evaluate the debt recovery process, and
another committee led by M. Narasimham suggested the creation of a separate
body to handle the debt recovery situations and cases. Based on these
recommendations, the Recovery of Debts Due to Banks and Financial Institutions
Bill of 1993 was introduced in the parliament and the act was passed which led
to the establishment of Debt Recovery Tribunal[3]
(DRT) and Debt Recovery Appellate Tribunals (DRAT) to resolve debt recovery
cases more effectively. After reviewing the provisions of this act in Union of
India Vs. Delhi High Court Bar Association case, the Supreme Court upheld the
act’s constitutionality.
Section 3 of the act allows the
central government to set up one or more tribunals or benches and can define
their jurisdictions. It can also appoint a presiding officer for DRT, who must
be eligible to serve as a district court judge and not more than 62 years of
age with a tenure of 5 years. In the case of DRAT, the presiding officer must
be eligible to serve as a High Court Judge, with at least 3 years of experience
in Grade 1 of the Indian Legal Service, or who had served as a presiding
officer of a tribunal for 3 years.
According to Section 17, DRT handles
cases related to recovering debts owed to banks and other financial
institutions, and Section 17A allows the chairperson to manage and govern the
tribunals under their control and can transfer the cases to speedy resolution.
Section 18 of this act, limits the authority of all other courts (except the
Supreme Court and High Courts) in debt recovery cases.
As per Section 19 of this act, Banks
or financial institutions can apply in a tribunal in situations where the
defendant resides or does business, in case of multiple defendants, if at least
one must reside or do business within the limits of the tribunal’s jurisdiction
or where the cause of action arose. There is a provision that allows other
banks or financial institutions to collaborate on the same case if it involves
the same debtor. After receiving the application, the tribunal sends a notice
to the defendant, requiring a response within 30 days, the tribunal by
executing its powers can issue provisional orders to prevent a defendant from
disposing of assets and can also seize assets or imprison the defendant if they
don’t comply with the orders.
An application filed must be resolved
within 180 days and Appeals can be submitted or filed in the DRAT.[4]
i.e., Debt Recovery Appellate Tribunal within 45 days.
As per Section 25 of the act, the
recovery officer as a part of the due diligence can seize and sell the
properties, arrest the defendants, and appoint a receiver to manage the
defendant’s assets. Section 28 talks about alternative debt recovery methods
and as per Section 31, ongoing cases can be transferred to the tribunal but do
not apply to cases where appeals are pending. As per Section 34, DRT can take
precedence over other Laws but complements some acts like The Industrial
Finance Corporation Act, 1948, The Unit Trust of India Act, 1963, The State
Financial Corporations Act, 1951, The Sick Industrial Companies (Special
Provisions) Act, 1985, The Industrial Reconstruction Bank of India Act, 1984,
The Small Industries Development Bank of India Act, 1989.
The Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act)[5]
This legislation grants substantial
authority to financial institutions like banks to assist in recovering the
debts efficiently and effectively. Whoever had granted secured credits can
enforce security interests like mortgage properties without the intervention of
courts in the case of default of repayment by the borrowers. This enforcement
includes processes like transferring assets, securitization, or enforcing the
collateral or mortgage which have been pledged to the creditor.
As per Section 13(2) of the act, by
ensuring and executing the principles of natural justice and transparency in
legal practices, before taking legal action, the borrower must be served with a
legal notice intimating about their default in repaying the loan, along with
the outstanding amount that has to be paid, other details of the collateral and
the subsequent consequences of non-payment of credit amount. Section 13(3) of
the act provides for the right of the borrower to respond and give an
explanation or provide their view or response and the creditors must reply to
the statements of the borrower within a reasonable time frame.
If the borrowers don’t respond to the
notice given by the creditors, Section 13(4) of the act allows the creditors to
seize the secured assets which can be movable and immovable, and as mentioned
in Sections 14 and 17, the valuation of such assets is done by the registered
valuers. As per Sections 13(8) and 15 of the act, the seized properties or
assets have to be sold by following transparent procedures through competitive
bidding, and to ensure legal clarity in ownership and transfer, the certificate
of sale is given to the buyer after the sale as per Section 14(1). Funds from
the sale proceeds can be first used to cover legal expenses and then can be
used to pay the creditors.
SARFAESI and DRT [6]
Both SARFAESI and DRT Acts i.e.,
Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest Act and Debt Recovery Tribunals Act were brought into
existence to offer better and complementary mechanisms of debt recovery to the
creditors. SARFAESI allows non-judicial methods to recover the debts i.e., it
allows the creditors to recover the debts without the intervention of courts in
the recovery procedure but the DRT Act allows for judicial adjudications or the
judicial methods in which special courts or benches of courts hear the cases
related to the recovery of debts.
Both SARFAESI and DRT can be used
simultaneously by the creditors and the borrowers can also use the provisions
of these legislations to challenge the actions by filing appeals in the DRATs.
Both these operate independently but both of them aim to facilitate the
recovery of debt through a consistent legal framework.
Insolvency and Bankruptcy Code of
2016[7]
This legislation was brought into
existence to resolve insolvency cases and also to facilitate the recovery of
loans. This law helps both lenders and borrowers and frames a path for dispute
resolution. There is a process that is followed as per this law called CIRP
i.e., Corporate Insolvency Resolution Process which is initiated against a
corporate debtor for the act of default in loan repayment. The minimum amount
of default has to be Rs.1 crore for initiating CIRP and once initiated, a
moratorium period is declared and this prevents legal actions against the
debtor. This period would be beneficial for the debtor so that in that period,
it would be easy for them to restructure their loan and it would be better as
there won’t be any legal action taken against them during this period.
NCLT i.e., National Company Law
Tribunal is one of the special courts or benches established as known and this
tribunal appoints an Insolvency professional to manage the affairs of the
debtor during the CIRP, this professional is called a Resolution Professional.
And this professional will be taking control of the assets and operations to
protect the interests of the creditors. And then comes into the picture, the
Committee of Creditors (CoC) which will be formed after the claims of the
creditors are submitted, and then the CoC may approve or reject the plans for
resolution and if required may take the necessary decisions during the
resolution process. Before this, several Resolution Plans are submitted,
evaluated, and approved by the CoC within a specific time and this plan
proposes a process by which the debt is restructured, and if the plan fails
then NCLT will order for liquidation of the debtor. Once this order of
liquidation is passed, the assets of the debtor will be sold off and the
proceeds will be distributed among the creditors (repayment of credit amounts)
as per the priority laid out in the Code.
Till now what we have seen is about
corporate debts and corporate debtors. But IBC also handles the insolvency of
individuals as well as partnership firms. Individuals are categorized into 3
kinds say, personal guarantors to corporate debtors, partnership firms and
proprietorship forms, and other individuals. There is another process that is
followed under IBC is PIRP i.e., the Pre-packaged Insolvency Resolution Process
which is faster and more efficient in which the companies themselves prepare a
resolution plan before the formal insolvency proceedings begin. This is
initiated after obtaining the approval of creditors and the consent of
directors. Though this process is similar to that of PIRP approval, this will
be initiated by the debtor, and this aims to provide structural and smooth
restructuring of loss-making companies.
Non-Judicial Mechanisms[8]
Some other non-judicial mechanisms
are used in the process of debt recovery in India, in these practices or
processes, there won’t be any intervention of the courts of law or any other
judicial authorities, and things happen in an informal way when compared to the
Judicial mechanisms using specific legislations and court procedures, this
helps in speedy resolution of the cases without taking much time and money from
the parties.
Compromise Settlements
This is one of the methods used in
the debt recovery procedures, that is used in most cases. In this mechanism,
both parties will sign an agreement after having some negotiations and agree to
certain conditions and terms about settling the dues with some concessions like
discounts in paying the interest amounts or granting more time to repay the
loans. This non-legal process is supported and backed by financial institutions
like banks themselves, in which both parties have to sacrifice to finish the
deal or to close the loan accounts by paying back the loan amount to the banks
and even banks want to close the accounts with less bad debt instead of NPA’s.
This helps in resolving the issue closely and also avoids lengthy and long
legal procedures and dates.
One-Time Settlement
This is a process in which the borrower
applies to the banks and seeks permission to settle the loan amounts at a discounted
rate and banks accept a lesser amount than that of the original amount which is
payable by the borrower this process is used only for long-term deficient loan
accounts, i.e., those loan accounts in which payments were not been done from a
long period of time. The main reason behind choosing this process is due to the
difficulty in restructuring the loans. This is advantageous as it helps prevent
the liquidation of assets of the borrower and also protects the interests of
lenders by granting the payment of loan amounts by the borrower rather than
creating the NPAs.
Lok Adalat[9]
This is a quasi-judicial body that is
a part of ADR i.e., Alternative Dispute Resolutions which are established for
quick and speedy disposal of cases that also cost less and this is generally
used in settling the recovery cases of small debts. These are organized under
the Legal Services Authority Act of 1987 and the maximum claim amount allowed
by the Lok Adalat is Rs.20 lakhs the orders given by the Lok Adalat are binding
in nature as they are equivalent to the decrees passed by the civil courts and
no appeals are allowed on the orders given by the Lok Adalat. Using Lok Adalat
is helpful as they are inexpensive, and aim to dispose of the cases speedily
and quickly.
Special Recovery Drive
These drives organized by financial
institutions like banks follow a targeted approach i.e., they organize these
drives to achieve a certain target of getting certain amounts of loans repaid
by the debtors by using different recovery tools and methods. These are
organized to strengthen the debt recovery processes when the rates of default
are too high than the usual rate. The main purpose of organizing these drives
is to increase the recovery rate and to cut off the prolonged default loan accounts.
Debt Recovery through Arbitration
and Mediation
One of the methods for debt recovery
is through Arbitration which helps in resolving the issues fast as the dispute
would be resolved out of the court as per the arbitration clause agreed upon by
both parties. An independent arbitrator is appointed jointly by both parties
and this whole process is governed by the Arbitration and Conciliation Act of
1996. Another most used method is Debt Counselling and Mediation which is also
a non-legal method of restructuring debts where a debt counselor assists the
borrower in negotiating the terms with the creditors for better repayment,
monitored by a mediator and this method is used only in cases of smaller debt
when compared. These methods help in resolving the issues in a speedy manner
and also reduce the burden on courts and encourage the settlement through
different modes of Alternative Dispute Resolution.
Online Instant Loan Applications
The online loan applications came
into existence, with the increasing technological advancements and rise in
fintech solutions and digital lending. Due to COVID-19, online banking saw
rapid growth as traditional banking was slow due to situations during the pandemic.
There are some unique characteristics of online banking and online loan
applications like more convenience with online operations and paperless
transactions, these online applications grant loans for short-term periods but
with high interest rates, and they operate only digitally but not physically
i.e., they won’t be any physical branches, it is easy to operate and get a loan
just with the help of mobile phone and the process of disbursement of loan and
such other processes take place without any delay with a high speed.
Along with the NBFC i.e., Non-Banking
Financial Institutions, online loan applications are also regulated by the
Reserve Bank of India and these institutions have to comply with the lending
norms and lending guidelines given by RBI to curb malpractices, Ministry of
Electronics and Information Technology is one of the prime departments that
monitors the actions of these applications and ensures protection of customer’s
data. As per the rules of RBI, banks have to know about the customers with the
help of the process of KYC Compliance, which means Know Your Customer, through
which details of customers by collecting documents like Aadhar and PAN. These
banks also need to obtain permission from their customers to access their phone
data such as contacts, SMS, location, and more. Borrowers must accept app terms
digitally before getting into any deal with online banks.
The process followed by these instant
loan apps begins with an application submitted by the borrower to the
Application followed by KYC verification in which documents like Aadhar and PAN
are submitted online by the borrower and then the interface of banks accesses
alternative data like phone usage, social media behaviour, and UPI
transactions, etc. upon the approval of these details after due verification,
funds will be disbursed and transferred to the borrower’s account instantly.
The loan Recovery process followed by these apps consists of methods like
Automated Reminders in which reminders are sent to the borrowers through SMS,
push notifications, emails, etc., and penalties like High interest and late
fees are also levied in case they miss their payments, followed by initiating
soft recovery calls and then some apps misuse the permissions given by the
borrowers and access their contacts to recover the loan amounts, and there is
another most commonly used method is to send legal notices to warn about the
consequences of non-payment of loan amounts.
Certain challenges have to be faced
by these online application administrators with the customers or the borrowers
including Digital Fraud i.e., borrowers sometimes provide fake addresses and
contact numbers to these apps and after getting the loan they change or block
the application and it would be difficult for the lenders to locate such people
and recover the loan amounts, dealing with Non-Responsive Borrowers is also one
of the biggest challenges for the lenders as they don’t respond for the notices
and calls made to recover the amounts, as everything operates online, and due
to lack of physical branches and operations, it would be difficult to track
down the borrower without proper residence or official addresses, in these
conditions the representatives sometimes become harsh out of frustration and
act vigorously and regulatory bodies like RBI limits such actions.
Illegal
Recovery Methods
Some illegal methods used in recovering the
debts granted are as follows:
·
Harassment:
These loan applications use some aggressive methods in the process of
recovering the loans granted by them. Such methods include making threatening
calls to the borrowers, misusing the contact numbers by calling them, and
defaming and public shaming the borrowers among their relatives through contact
numbers accessed by the app during the registration for application.
·
Overcharging:
In the case of delay in repayment of debts, these apps charge high-interest
amounts and more charges in some or the other heads.
·
Data
Misuse: These apps will have access to the borrower’s contact numbers, photos,
or other personal information available on the mobile, and this information is
used unauthorizedly and misused such information for blackmailing.
Advantages of
Loan Applications[10]
·
Fast
Processing: Loans are granted and disbursed so quickly within minutes after
applying and checking the details, when compared to the physical banks and
processes to grant such loans, using these online instant loan apps is easier and
beneficial in terms of saving time.
·
Paperless:
There is no need to go through the paperwork that is mandatory in the physical
bank loan processes and this saves a lot of time, and loans can be received
with fewer formalities and it saves a lot of costs as well.
·
Wide
Accessibility: The access to avail the loans from these online instant loan
apps is wider when compared to having access to receive loans and credits from
physical banks and other institutions, as the process of getting these loans is
also not so difficult and the process of getting these loans is not lengthy,
there is more access available.
·
Convenience:
It is very convenient for the borrowers to take loans from these lenders as
there is no need for a physical presence in the physical branches or offices of
the banks and loans can be availed using smart mobile phones with an internet
connection and this makes the process so convenient.
Disadvantages
of Loan Applications
·
High-Interest
Rates: The interest rates charged by these online applications are way more
when compared to the interest charged by traditional banks, granting the loans
in an easy and quick manner gives these apps the liberty to charge more
interest.
·
Aggressive
Recovery Tactics: Due to the lack of proper and stricter rules ruling the
recovery of debts by the online apps from the regulators, and though they have
rules they won't follow due to their inconvenience because of the illegible behaviour
of the borrower, these online apps use aggressive practices like pressurizing
the borrowers through continuous calling and such other acts.
·
Short
Loan Tenures: The loans granted by these online apps are only for the short
term and the repayment period is very thus the borrowers may be trapped in the
case of emergency requirements of money they take these loans without thinking
about the consequences of repayment deadline.
·
Data
Privacy Issues: Borrowers are giving access to their contact details, photos,
and other personal data to the lending apps without proper knowledge about the consequences
of such actions, they are facing some problems when these lenders misuse that
data with which their privacy will be violated and infringed.
Some challenges in regulating these
applications are Unregulated Entities or applications which operate without
proper permissions and registration from the regulators as these apps do not
follow the rules and guidelines of the regulators. Protecting the data of
borrowers from getting violated and misused is another challenge for
regulators, some cross-border operations i.e., operations of some banks are
done from other countries in which the regulators won’t have any control to
regulate and govern or take actions.
Examples of some of the popular Loan
applications are EarlySalary, KreditBee, MoneyTap, and CASHe, these all operate
with the same type of loans i.e., short-term lending models, and offer instant
granting of loans with high interest rates.
Challenges in the Debt Recovery Mechanism in India[11]
·
Large
number of pending cases in the debt recovery tribunals leads to slow and
delayed disposal of cases and increased backlog and burden to the judicial
officers.
·
Lack
of enough budget allocated to the Judiciary, results in low performance of the
tribunals because of no proper infrastructure like poor courtrooms and less use
of technological advancements.
·
These
tribunals will have limited jurisdictions, with parties having no proper
knowledge about these jurisdictions, they file cases in multiple places which
ultimately leads to delays in resolving the problems.
·
There
are no specialized judges and judicial officers appointed with special
knowledge and training in the recovery laws and even the staff won’t be aware
of the proceedings that are different from that of other types of cases and
face difficulties in handling the cases and this may result in incorrect and
inefficient judgments.
·
Recovery
mechanisms like asset seizure are time-consuming and are not so efficient as
there will be several procedures to be followed before proceeding to the
seizure of assets, thus it would not really scare the debtor to repay the
loans.
·
Some
borrowers act cunningly by hiding and transferring their properties to others
after defaulting on the repayment to avoid seizure and sale by the authorities
in the process of recovery of debt.
·
Some
borrowers having political contacts may influence the repaying of debt and that
leads to more complications in clearing those loans.
·
Current
legal mechanisms are effective and applicable only to the larger loans but
these laws don’t help in recovering the loans that are of small scale.
·
Lack
of proper adoption of technology makes it difficult to manage cases digitally
and reduces the efficiency and performance of the system.
Recommendations or Way Forward
·
Increasing
the number of courts and benches i.e., tribunals and their jurisdictions can
help in resolving more cases and reduce the backlog.
·
If
the Funding to the judiciary and these tribunals increases, it can help in
improving the infrastructure and also able to adopt more technology that helps
in doing things faster and easier.
·
There
is a requirement for special training for judges and judicial officers
regarding special laws that govern so that it won’t be difficult for them to
take up and resolve cases.
·
There
is a need for a mechanism that helps in liquidating the assets quickly with
stronger enforcement ideas, which helps in increasing awareness about the
consequences of defaults in repaying the loans.
·
Regulations
regarding borrowers and borrowings have to be stricter in such a way that in
the aftermath of granting a loan, there must be a stringent monitoring system
to monitor the activities of the borrower and ensure that the loan taken is
being used for the purpose for which the credit was granted.
·
People
should be made aware of financial discipline and the consequences of being indisciplined
in financial matters.
Conclusion
In this paper, I have referred to
different sources and studied about Debt, its types, values of debts, the
procedure banks follow before granting a loan, and the consequences of default
in repaying the debt amount and non-performing assets. Followed the RBI
guidelines for financial institutions regarding debt recovery and different
Judicial and non-judicial mechanisms for debt recovery followed by online
instant loan applications, their operations, characteristics, advantages, and
disadvantages, along with the types of recovery methods they use. Lastly, I
have mentioned some challenges of the Debt Recovery mechanism in India and some
recommendations for the system.
It was found that the present-day
debt recovery mechanisms in India are working in a well-versed manner but with
the increasing number of cases of default in payments of loan amounts, no
proper financial support from the government, lack of specialized training in
dealing with these cases, insufficient use of technological advancements due to
lack of enough funding, debtors having political influences that are affecting
the debt recovery processes, there is a need to have lot more improvements to
the present system of recovering the debts from the loan takers and such
improvements must focus on overcoming the challenges mentioned in the paper
exclusively and recommendations given can also be taken into consideration to
help in betterment of the debt recovery systems in India.
References
6. Surojit Dey (2018) - Recovery
Mechanisms of Non-Performing Assets in Indian Commercial Banks: An Empirical
Study - NSOU-OPEN JOURNAL Vol.1 No.2 (July 2018) A multidisciplinary Online
Journal of Netaji Subhas Open University, INDIA
7. Inderdeep Singh Ahluwalia (2024) -
Protecting Borrowers and Securing Stability: A Critical View of Debt Recovery
Processes in India- International Journal for Multidisciplinary Research
(IJFMR)
8. Sujata Visaria (2009) - Legal Reform
and Loan Repayment: The Microeconomic Impact of Debt Recovery Tribunals in
India - American Economic Journal: Applied Economics, July 2009, Vol. 1, No. 3
(July 2009), pp. 59-81
[2] Inderdeep Singh Ahluwalia (2024) - Protecting
Borrowers and Securing Stability: A Critical View of Debt Recovery Processes in
India- International Journal for Multidisciplinary Research (IJFMR)
[3] Sujata Visaria (2009) - Legal Reform and Loan
Repayment: The Microeconomic Impact of Debt Recovery Tribunals in India - American
Economic Journal: Applied Economics, July 2009, Vol. 1, No. 3 (July 2009), pp.
59-81
[5] Inderdeep Singh Ahluwalia (2024)
- Protecting Borrowers and Securing Stability: A Critical View of Debt Recovery
Processes in India- International Journal for Multidisciplinary Research
(IJFMR)
[9] Surojit Dey (2018) - Recovery Mechanisms of
Non-Performing Assets in Indian Commercial Banks: An Empirical Study - NSOU-OPEN
JOURNAL Vol.1 No.2 (July 2018) A multidisciplinary Online Journal of Netaji
Subhas Open University, INDIA
[10] https://www.bajajfinserv.in/benefits-of-using-instant-loan-apps
[11] https://kanoonjunction.com/debt-recovery-tribunal-in-india-challenges-and-way-forwards/#:~:text=Debt%20Recovery%20Tribunals%20(DRT)%20in,in%20the%20recovery%20of%20debts.