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A STUDY ON LEGAL FRAMEWORK FOR LOAN GRANTING AND RECOVERY ON COMMERCIAL BANKS. BY – SMITA G & SHILPA S
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A STUDY ON LEGAL FRAMEWORK FOR LOAN
GRANTING AND RECOVERY ON COMMERCIAL BANKS.
AUTHORED BY – 1 SMITA G & 2 SHILPA
S
1Student, LL.M, Symbiosis Law School,
Nagpur, Symbiosis International University, India.
2Professor, Symbiosis Law School,
Nagpur, Symbiosis International University, India.
ABSTARCT:
Just about
every other company has a credit relation with a financial institution, most
prominently a bank. Regardless if it is a short-term loan or a long-term loan,
all the credit requests necessitate a thorough evaluation of the borrower's
ability to pay back the loan when due. Although commercial banks vary by states,
the related profit as well as banking intentions are similar. Customers,
employees, and, most importantly, shareholders are all interested in their
activities. A bank's
commercial goal is to maximise profit, though other economic and social
operations tend to divert banks' focus away from profit maximisation. The goals
and objectives of commercial banks have thus prepared the path for their
customers to make and obtain credits in the form of a loan, in which the
researcher wants. Lending has become a critical function in the operation due
to its direct influence and impact on economic development and corporate
development. In a market-oriented economy, the two main participants that drive
economic growth are the undetectable funds supplier and the users of a funds
for productive purposes. These two participants are spread across the economy
and may have no direct relationship with one another. As a result, an
intermediary is required to connect them. One of the primary goals of credit
analysis is to evaluate the risks of lending to bank customers. This study was
carried out to assess commercial banks' loan granting and recovery issues. The
study sought to identify the various issues associated with loan recovery, the
effects of loan default on commercial banks, and the guidelines that will be
implemented to reduce occurrence of loan non repayment.
KEYWORDS: banks, loan, default, economy,
lending, recovery.
INTRODUCTION:
The banking industry has existed in
India since the dawn of civilisation. Modern banking in India dates back to the
mid-eighteenth century. Banking transactions that are genuine are beneficial to
the global economy. Money lending is one of the most important functions of
banks, and the universal rule is "What is owed, must be repaid."
However, over the last two decades, banks have faced difficulties in loan
recovery and fluctuating NPA levels, resulting in a decline in commercial
sector bank profitability. If bank money is locked up with a few defaulters, it
prevents it from being used by thousands of others who could put it to better
use. As a result, loan recovery becomes critical for the banking sector. Until
the mid-1980s, banks and auditors were in charge of managing NPAs in India. In 1965,
the first asset classification system for the Indian Banking System was
introduced in response to the need for restructuring to deal with the changing
risk profile of banking. The system is known as the "HEALTH CODE"
system, and it involves categorising advances into eight categories (Bad and
Doubtful Debts). A strong recovery and legal framework, as well as an efficient
credit data system, can provide an important role in making sure that banks'
asset adequacy remains in good health. As a result, the Indian Government and
the Reserve Bank of India have issued a plethora of guidelines, master
circulars, provisions, legal and criminal legislations to assist banks in
combating the banking sector's devil. The research study examined the
provisions issued by the Government of India and the Reserve Bank of India,
beginning with the Lok Adalats and ending with the PARA (Public Sector Asset
Rehabilitation Agency) quick fix. The statutory status of Lok Adalats under the
Legal Services Authority Act, 1987, is the first satisfying step toward
reducing bank indebtedness. Debt recovery tribunals and the SARFAESI Act, 2002
were then enacted. On the other end of the spectrum, there is the Corporate
Debt Restructuring mechanism, which aims to rehabilitate viable but temporarily
distressed corporate advances. Furthermore, Asset Reconstruction Companies help
banks improve their credit risk management by selling problem loans and
creating a secondary market for such loans. Apart from these proceedings, the
Government and RBI have recently taken Strategic Debt Restructuring and
Insolvency and Bankruptcy Code 2016. Many developing countries' financial
systems are under threat from debt default and debt accumulation. They can also
cause failure of the system in specific banking markets as well as the global
financial system. As a result, this article investigates the factors that
contribute to debt default and debt accumulation, such as lending to incapable
borrowers, loaning just above regulatory credit risk exposure cap, a lack of
financial reporting clarity, lending without adequate collateral security,
overvaluation of security, lending to long-term projects, informational
asymmetrical, willfully default by the borrower, fraud by bank officials, and
inefficient financial systems. The research work is entirely based on secondary
data, with the primary goal of analysing the available loan recovery provisions
to assist banks in increasing their liquidity and profitability.
HYPOTHESIS:
H0: Banks' measures do not
reduce the occurrence of the loan default.
H1: Banks' efforts to
reduce the occurrence of loan default.
RESEARCH METHODOLOGY:
Two methods of research will be
adopted in this study
• Doctrinal method:
The main question here is 'what is
the law?' on a specific issue. It focuses on locating the law, critically
examining it, and developing logical arguments to back it up. As a result, it
significantly contributes to the law's continuity, uniformity, and certainty.
The core can be found in both the statutory and secondary material.
• Comparative Legal Research:
This entitles us to compare legal
concepts and legislation to foreign laws. It emphasizes the cultural and
social nature of laws, as well as how they work in various contexts. As a
result, it is useful in drafting, revising, and changing legislation. However,
it is prudent not to adopt the rule of another social environment as an ideal
because it may not work in a different situation.
RESEARCH QUESTIONS:
1. What impact do loan defaults have on
commercial banks?
2. What are the various problems faced
during the loan recovery?
3. What are the steps that will aid to minimise
the occurrence of loan default?
REVIEW OF LITERATURE:
Many Scholars, Researchers,
Banks/Groups of Banks, and Organizations, among others, have studied and analysed
in a limited sense the issue of provisions or strategies available for Loan
Recovery or Control of Non-Performing Assets in the context of the Banking
Sector. A number of advisory boards appointed by the India Government the
Reserve Bank of India have also investigated the NPA recovery issues in the
Indian banking sector.
The following are systematic reviews
of such available literature:
According to Vivek Rajbahadur Singh
(2016) "A Study On the Non-Performing Assets Of the Commercial Banks And Their Recovery In India,
"credit appraisal and post loan monitoring are critical steps that all
public sector banks must emphasis on. Managers in the credit monitoring and
recovery department should be able to work quickly. Many executives claim that
"we do not fear negotiating, but we do not negotiate out of fear."
Fear leads to arbitrary bargaining, which fails. Furthermore, if the
delinquencies are caused by factors beyond the debtor's control, such as
draughts, floods, or other catastrophic events, the banker must restructure the
loans appropriately, taking into consideration the genuine difficulty faced by
the borrowers.
In their study
"The Impact Of SARFAESI ACT 2002
In Recovering The
Non-Performing Assets In Public Sector Banks: A
Study On Recovery In SBI, CBI, CB, BOB, AND PNB 2008 TO
2014," Mrs. Chandra Shaarda AND Dr. Ajay Jain (2016)
compare the number of cases of NPAs referred with Lok Adalat, Debt Recovery The
research paper also shows the results of ANOVA analysis (ANOVA is an acronym
for Analysis of the Variance, which is a set of statistical developed by
statistician and evolutionary biologist Ronald Fisher to analyse differences
between group means and their related processes) and whether there is a
statistically remarkable difference between both the cases referred to DRT, Lok
Adalat and SARFAESI Act 2002.
According to the findings of the
study, latest recovery proceedings against Kingfisher Airlines, Mr. Vijay
Mallya, towards recovery of total outstanding Rs. 10,000 crores NPA, DRT
restrained from getting Rs. 515 crores that he acquired from the selling of the
spirits business to Diageo Plc says that the government is very eager to
recover the NPAs by utilizing existing recovery channels such as DRT and
SARFAESI Act 2002.
According to Ayub Ahamed KS
and Vishwanath Panwar (2016) in their Research Paper "A
Comparative Study Of NPA
In Private Sector Banks And Public Sector
Banks In India," market diversion decisions cannot be made in real
time due to inadequate technology and management information systems. Some
banks do not have a proper financial accounting system in place, which renders
to the poor credit collection and, as a result, NPA. To address this issue, all
banks should be computerised. Bankers must take corrective precautions to stop
default, such as data processing at regular intervals to predict defaulters and
take necessary action on predicted defaulters beforehand.
Rachita Ota And Purnima Sarkar (2016)
Studied how financial inclusion is
important in rural economies in their study "Priority Sector Lending Of Commercial Banks And Its Impact On The Development Of The Rural Economic Status Of India."
It stated that this is due to commercial banks' exposure to interest rate risk,
credit risk, and market risk, they
consider several credit appraisal criteria before loan disbursement because
there is always a risk of loan assets becoming nonperforming assets. It was
concluded, however, that the priority sector lending mechanism is to be a great
support of growth and development, particularly in agricultural, micro and
small enterprises, and even exports, but the cost is quite high. If NPA levels
in this bracket continue to rise, such high costs result in severe economic
losses for banks. As a result, many economic experts advocated for banks to be
given discretionary authority over loan approval in order to minimize NPAs.
In research paper "A
Comparative Study Of NPA In India In The Global Context –
Similarities And Dissimilarities And Remedial Measures,"
Prashanth K. Reddy (2002) found that the economic sector restructuring in India
has continued to move quickly in areas such as interest rate deregulation,
reserve requirement reductions, entry barriers, prudential norms, and
uncertain guidance. According to the study, in order to stay successful,
changes to address the NPA problem must span the entire spectrum of the
judiciary, politics, and bureaucracy. The paper investigates the impact of changes
on the level of NPAs and suggests solutions to problems. It was recommended
that the Economic Value of Equity and the Economic Value of Equity at Risk are
useful mechanisms for dealing with the negative impact on ROE, asset growth,
and NPA Ratios
INDIAN BANKING SYSTEM:
·
Historical
Background:
Previously, when there was no common
medium of exchange, a system known as the "Barter System" existed. A
barter system is a type of trade in which one good or service is exchanged for
another good or service. In Adam Smith’s (Father of Modern Economics) "The
Wealth of Nations," barter is described as "higgling, haggling,
swapping, dickering." As the scope of transactions and trade expanded,
there was a need to develop a common medium of exchange and a common measure of
value, namely "money." Money, according to Keynes, is that by which
debts and contracts are discharged and a store of general purchasing power is
held. Although "money loaned," also known as credit, existed in the
barter system, its importance grew with the development of money. As a result,
the need for "Bank" arises. Bank is a legal entity that accepts
deposits that can be withdrawn on demand. It also makes loans to individuals
and businesses. The word Bank is derived from the Greek word “Banque”,
which means "bench." Banking, in its most basic form, is as old as
authentic history. In the ancient world, the first merchant banks made grain
loans to farmers and traders who transported goods between cities. This began
in Assyria and Babylonia around 2000 BC. Later, in the ancient Greece and the
Roman Empire, temple-based lenders made loans while also introducing two significant
innovations: the deposits were accepted and changed money. Archaeology from
this time period in ancient China and India reveals evidence of money lending
activity as well. The Bank Of Venice, established in 1157 in Italy,
was the first public banking institution. The oldest bank which is still in
operation is Banca Monte Dei Paschi Di Siena,
headquarter being situated Siena, Italy, and has been in operation since 1472.
·
History
Of Banking In India:
The first Indian bank was the Bank Of
Hindustan, which was founded in 1770 (Alexander & Co.) and was
headquartered in Kolkata. Allahabad Bank, founded in 1865 and headquartered in
Kolkata, was the oldest commercial bank. Oudh Commercial Bank,
founded in 1881 and headquartered in Faizabad, Uttar Pradesh, was the first
bank of limited liability managed by Indians. Punjab National Bank,
founded in 1894 in Lahore, is now headquartered in New Delhi. PNB was India's
solely owned bank. Bank of Calcutta (renamed as Bank of Bengal in 1809), Bank
of Madras (1843) and Bank of Bombay (1840), were all renamed Imperial
Bank in 1921. In 1955, Imperial Bank was renamed State Bank Of
India . SBI had eight associate banks in 1959, including the SB of
Bikaner, the SB of Jaipur, the SB of Travancore, the SB of Hyderabad, the SB of
Mysore, the SB of Patiala, the SB of Saurashtra, and the SB of Indore. SB of
Bikaner and Jaipur merged with SBI in 1963, SB of Saurashtra which merged with
SBI in the year 2008, and SB of Indore which merged with SBI in the year 2010.
The State Bank group grew to become India's largest bank, serving 90 million
customers through a network of over 9000 branches spread across the country. To
regulate the operations of these banks, in 1935 the Reserve Bank was foundedin
accordance with the provisions of the Reserve Bank of India Act, 1934. It was
founded in Calcutta which was permanently relocated to a place Mumbai in 1937.
Similarly, RBI established the Banking Regulation Act of 1949, which
established a legal framework for the regulation of the banking system.
·
Nationalisation
Of Banks:
As previously stated, the modern
banking history of India can be followed back to the nineteenth century.
While that time, the primary goal of most banks were to meet the economical
needs of local industry and business. However, the banking services became
exclusive domain of large corporations and wealthy individual. The general
public was not granted easy banking and credit services. Rural small-scale
industries and agriculture lacked access to the banking and credit services. To
fund their activities, they relied on village money lenders and other private
financiers. These local financial exploiters preyed on the rural population by
charging exorbitant interest rates and dificult repayment terms. By that time,
India's banks had been nationalised. Indira Gandhi, India's Prime
Minister, wrote a new chapter in the history of Indian banking. As part of
their social responsibility, India's nationalised banks were compelled to focus
on rural and agricultural sectors. As previously stated, the first phase of
nationalisation concerned the State Bank of India. The second stage of
nationalisation began in the year 1969, with the nationalisation of 14 of the
major banks, each with a minimum deposit of Rs. 50 crore. Six more banks were
nationalised in 1980, with a minimum deposit of Rs. 200 crores.
·
Definition
Of Bank:
According to Section 5(b) of the
Banking Regulation Act of 1949, "banking" means accepting deposits of
money from the public for the purpose of lending or investment, repayable on
demand or otherwise, and withdrawal by cheque, draught, order, or otherwise; in
other words, a bank can be said as financial institution that accepts deposit
from the public and creates credit[1]. Lending
can be done directly or indirectly through capital markets. Because of their
importance to a country's financial stability, banks are heavily regulated in
most countries. Banks are regarded as development leaders in a modern economy,
as well as Dealers in money.
LOAN SYSTEM IN INDIA:
A loan can be said to be the giving
of money from a person, organisation, or entity to some another person,
organisation, or entity in finance. A loan can be called as a debt given by one
entity (organisation or individual) to another entity at an interest rate, and
it is attached by a promissory note that classifies, among other things, the principal
amount of money being borrowed, the interest rate charged by the lender, and
the date of repayment.
·
Definition
Of Loan:
Secured Loans and Advances are
defined in Section 5(n) of the Banking Regulation Act 1949 as "a loan or
advance made on the security of assets the market value of which is not at any
time less than the amount of such loan or advance" and Unsecured Loans and
Advances are defined as "a loan or advance not so secured."[2]
The term "loans" is not
defined anywhere in the Companies Act of 2013. However, in common parlance, a
loan is any transaction in which money is given with the intention of being
returned, with or without interest. According to the RBI Act of 1934, a
"loan company" is any company that is a financial institution that provides
finance as its primary business, whether through loans, advances, or otherwise,
for any activity other than its own, but excludes an equipment leasing company
or a hire-purchase finance company.[3]
·
Nature
Of Loans Granted By The Banks:
Bank loans can be classified in many
ways based on the type of person to whom the loan is granted. Thus, loans can
be classified based on their intended use, namely:
1. Personal loans
2. Agricultural loans
3. Bridging loans
4. Industrial loans
5. Probate loans
Loans can also be classified based on
their maturity date. As a result, we have loans for the short, medium, and long
term. The term of the short-term loan is one year. The term of a medium-term
loan is only two to three years. Long-term loans typically have a five-year
term.
·
Problems
Of Loan Default:
When loans are unable to be repaid,
they are classified as problem credits. Problem loans and losses essentially
reflect the risk that a borrower's ability and wilfulness to pay back all
obligations entails. By definition, the lending process is flawed. Credit
analysis could be not be complete or derived from incorrect data. Loan officers with strong
personal ties to the bank may ignore the true condition of borrowing, and a debtor's
ability to repay may simply change after the loan is approved. If management is
only concerned with minimising losses, a
bank will make no loans, profit will be reduced, and genuiene credit needs of
customers will not be met. Lenders cannot remove all risks, so more loan losses
are to be expected.
The goal is to handed losses
effectively so that the bank can manage its risk and return targets. Loan
defaults occur as a result of debts owed to creditors, but full or partial
recovery is thought to be impossible due to some inherent weakness. Loan
default (bad debt) are aspects of accounts receivable or credit granted to the
bank's customers that cannot be recovered within the given specified period for some reason or
another.
·
Causes
Of Loan Default:
Loan defaults are caused by a many of
factors, some of which are under our control and others which are not. Controllable
factors include those indicating overall bank credit policy, as well as
inadequate credit assessment, loan strutting, and loan documentation.
Uncontrollable factors are typically characterized by tough economic
conditions, negative regulatory reforms, ecological factors in the borrower's
processes, and natural catastrophes. While there is little that can be done to
avoid uncontrollable variables other sources of loss can be significantly
reduced by an effective credit granting procedure.
The following factors influence loan
defaults:
1. Factors related to banks
2. Customer-related aspects
3. Uncontrollable variables
·
Effect
Of Loan Default:
The lending of money deposits with
banks to those in need implied a risk that the lending credit would not
materialise as planned. Depositors may make lending institution demands. If
this takes place, the lending financial institution will be unable to meet the
goals that have been set for them. The overall result would be a loss of trust
in the banking system. Other negative consequences of loan repayment default
include:
1. Bank losses: The
unrecovered loans represent a significant loss for the banks. When debts are
not repaid, banks are forced to write them off, which can have serious
consequences for the bank's operations.
2. Revenue decline: The
bank's main source of revenue suffers as a result of the interest loss. Banks'
primary activity is to make the provision of loans and credit to customers.
They charge interest on loans, which is a significant source of revenue for
them. If there is failure to pay interest on loans then it means that banks
will lose a significant amount of money.
3. Distress: When bad
debts accumulate to such an extent that the bank is unable to write them off,
the bank may become illiquid. If the situation does not improve after this
point, the affected banks may become distressed and eventually go out of
business.
4. Increased overhead: If
the debtors fail to pay, the bank may resort to legal action to recover a
portion or the entire debt. In most cases, the legal fees involved are
exorbitant. Regrettably, after spending so much money on litigation, they may
lose the case.
5. Limited Credit
Creation Capacity: As bad debt increases, the bank's capital decreases and the
money available for lending decreases, limiting the bank's ability to create
credit.
·
Non-Performing
Assets:
Any amount becomes due on the
specified payment date. If it is not paid by the due date, it becomes overdue.
Similarly, in customer-banker relationships, any amount owed to the bank under
any credit facility that is not paid by the due date set by the bank becomes
past due. As a result, in accordance with international practises and the
recommendations of the Financial System Committee, the Reserve Bank of India
has introduced Prudential Norms On Income Recognition, Asset Classification And
Provisioning.
·
Identification
Of NPA:
1. In the case of a term loan, the
interest and/or principal instalments remain overdue for more than 90 days; in
the case of an Overdraft/Cash Credit (OD/CC), the account remains "out of
order" for more than 90 days.
2. In the case of bills purchased and
discounted, the bill is overdue for more than 90 days.
3. Interest and/or principal payments
are overdue for two crop seasons for short duration crops and one crop season
for long duration crops.
4. The liquidity facility amount has
been outstanding for more than 90 days in relation to a securitization
transaction completed in accordance with securitization guidelines dated
February 1, 2006.
5. In the case of derivative
transactions, overdue receivables representing a positive mark-to-market value
of a derivative contract if they remain unpaid for 90 days after the specified
due date of payment.
·
Credit
Policy:
Before beginning a proper analytical
study of various provisions regarding loan recovery in the Indian Banking
Sector, it is necessary to understand credit policy and its importance Lending
is an essential component of banking, and a banker earns the majority of his
income through lending. A bank will be able to earn spreads to sustain
profitability by lending the funds mobilised. This will be achieved if the bank
is able to accept and manage credit risk arising from the borrower's quality,
as well as liquidity risk arising from borrowing short and lending long in
order to achieve higher spreads. A bank's lending decisions are guided by its Loan
Policy or Credit Policy. Credit is a never-ending process. The repayment of one
credit results in the creation of another credit.As a result, it presupposes
proper borrower selection, which necessitates a thorough and comprehensive
investigation of all facts. To make a decision on which borrower to select, the
banker must first gather a long chain of information about the borrower. Typical
loan application forms filled out by the applicant provide the banker with
nearly all of the necessary details pertaining to the advance. The banker is responsible
for verifying and correlating those statements, as well as preparing credit
reports. Credit investigation is thus a sacred and obligatory job of a lending
banker in order to successfully manage his lending operations.
·
Need
For Credit Policy:
The credit policy document is a
document that identifies the dos and don'ts when sanctioning loan proposals.
Loan proposals differ greatly from one another. A strict methodology for
accepting or rejecting proposals cannot exist. The top management establishes
exposure limits for individuals/companies/industries, borrower credit
quality, lending rate, and risk level, among other things, and allows lower
level functionaries to make decentralised decisions. Before granting a loan, a
bank should perform due diligence by determining the purpose of the loan,
identifying the primary and secondary sources of repayment, assessing the
business and industry risks that could impede repayment, and analysing the
applicant's financial statements.[4]
LEGAL PROVISIONS FOR LOAN RECOVERY:
There are some legal provisions for
loan recovery, which are as follows:
·
LOK
ADALAT:
LOK ADALAT is an alternative dispute
resolution mechanism; it is a forum where disputes/cases pending in a court of
law or in the pre-litigation stage are amicably settled or compromised. The Legal
Services Authority Act, 1987, established it as a statutory body. On March 14,
1982, the first Lok Adalat was held in Junagarh, Gujarat. The award made by the
Lok Adalats is consdered to be a civil court decree and is final and binding on
all parties under this act, and no appeal against such an order lies before any
court of law. When a case is filed in Lok Adalats, there are no court fees.
There are four levels of Lok Adalats
(a) at the State Authority level
(b) at High Court level
(c) at District level
(d) at Taluka level.
The Indian Banks Association (IBA)
has issued guidelines to member institutions on how to take up cases for
settlement through Lok Adalats. There are some benefits to banks and financial
institutions using this forum to reach a compromise settlement of their NPAs.
Lok Adalats can hear cases involving amounts up to Rs. 5 lakh. It may be
increased up to Rs. 20 lakh, which has been discussed with the appropriate
authorities. It shall have the authority to (a) summon and compel the
attendance of any witness and to examine him under oath; (b) discover and
produce documents; and (c) receive evidence. on affidavits; (d) request
for a public record or a copy of a public record.
This mechanism is mainly useful for
speedy justice and recovery of small loans
·
Debt
Recovery Tribunals (DRT):
The Debt Recovery
Tribunals (DRTs) And debt Recovery Appellate Tribunals (DRATs) both were
established under The Recovery Of Debts Due To Banks And Financial Institutions
Act (RDDBFI Act), 1993 (Act 51 of 1993) with the specific goal of
providing expeditious adjudication and recovery of debts due to banks and
financial institutions. In India, there are currently 39 DRTs and 5 DRATs in
operation. If the lender bank's dues from the borrower exceed Rs. 10 Lakhs, the
lender bank can recover them through DRT. There is no monetary limit for filing
an interim order application with DRT. It was discovered that DRTs could not
produce the desired results in less than a decade, so the SARFAESI Act 2002 was
enacted. Following the enactment of the SARFAESI Act, any aggrieved person can
now approach the DRT, whereas previously only banks were eligible. Appeals
against DRT orders are heard by DRAT.
·
Corporate
Debt Recovery Council/Restructuring:
The need to develop an proper
mechanism for corporate debt restructuring in the country, along the lines of
similar mechanisms in countries such as the United Kingdom, Thailand, Korea,
Malaysia, and others, was capturing the government's attention of India, the
Reserve Bank of India, and banking institutions. As a result, the CDR scheme
has been completed. The RBI issued detailed guidelines on AUGUST 23, 2001[5]. The
goal was to ensure a timely manner mechanism for lending restructuring for
viable entities facing problems outside the purview of BIFR (Bureau of
Industrial Finance & Restructuring), DRT, and other legal proceedings such
as SICA (Sick Industrial Companies Act). The CDR mechanism is a non-statutory,
voluntary system based on Debtor-Creditor Agreements (DCAs) and Inter-Creditor
Agreements (ICAs) (ICA). It only applies to numerous banking accounts,
syndicate/consortium accounts, where all financial institutions and
organisations have an outstanding aggregate exposure of Rs. 100 million or
more, whereas RBI guidelines required a minimum outstanding exposure of Rs. 20
crores.
·
SARFAESI
ACT, 2002:
As previously stated, the Recovery of
Debts Due to Banks and Financial Institutions Act, 1993 contains some loopholes
that have been exploited by both debtors and lawyers. The legal framework
governing commercial transactions had not evolved in tandem with changing
business practises and financial sector reforms. This had contributed in a slow
rate of loan recovery and rising levels of NPAs.
As a result, THE NARSIMHAM COMMITTEE
I AND II, AS WELL AS THE ANDHYARUJINA COMMITTEE, were formed to investigate
banking sector reforms. This committee suggested that a new legislation be
enacted to allow the formation of securitization and reconstruction
companies, as well as to allow banks and FIs to seize NPAs without the
intervention of a court.[6]
As per section 13 of the Act,
If a borrower fails to pay back the
loan or an instalment and his account is classified as a non-performing asset
(NPA) by a secured creditor, the secured creditor may issue a written notice to
the borrower requiring full repayment of dues within 60 days before a period of
limitation expires. In the event of a default in repayment in less then 60
days, the secured creditor may take possession (including sale, lease, or
assignment) of the secured asset or take over management of the borrower's
business or appoint a manager for the secured asset, or even without taking any
of these actions, may continue against the guarantor or sell the pledged asset,
if any.
·
ASSET
RECONSTRUCTURE COMPANY:
As per sec 2(1) The Enforcement Of Security Interest And Recovery Of Debts Laws And
Miscellaneous Provisions (Amendment) Act, 2016, an Asset
Reconstruction Company is a corporate body with the Reserve Bank under Section
3 for the intent of carrying on business of asset reconstruction,
securitization, or both; a company is one that is registered under Section 2
Clause 20 of the Companies Act, 2013.[7]
CONCLUSION:
The primary function of any bank is
to lend money in exchange for deposits, thereby facilitating a better flow of
cash and credit in the market. And the bank that lends must recover the same
for payment or repayment within a certain time frame. The best indicator of the
health of the Indian banking industry is not only the level of non-performing
assets (NPAs), but also the rate of recovery. NPAs have a significant impact on
bank profitability and, as a result, overall operations and performance. The
Indian banking sector was facing massive NPA problems, banks' eagerness to
increase lending resulted in asset quality compromise, and banks were losing
money due to provisions. As a result of the large amount of money locked up in
NPAs, i.e. interest and principle, which is the primary source of income for
the bank. After the liberalisation, privatisation, and globalisation of the
Indian banking system in 1991, we can still say that there were revolutionary
changes. Following 1991, there appears to have been a sudden increase in the
legal civil proceedings to recover the risky debts. It aids in obtaining
consistent solutions for loan recovery well before the specific asset becomes
NPA. The inclusion of DRT in the statutory provisions of recovery procedures
was the first great leap toward the reinforcing of the banking system. DRT
recovered 81.1 percent of the amount involved in NPA in 2008-2009. This is the
primary reason why commercial banks approach DRT rather than Lok Adalats, which
are primarily used for small loan amounts. The SARFAESI Act, 2002, on the other
hand, has been a model reform in the Indian banking sector. The statistical
information analysis of the study shows that, while there is a decline in loan
recovery trends in 2015-2016, the SARFAESI Act proves to be a significant and
effective mechanism for the recovery of NPAs. After going through all of these
channels, we can conclude that there are effective loan recovery provisions in
the Indian economy. And these provisions are constantly attempting to assist
banks in improving the flow of operations. According to the above study, even
after all of the legal proceedings such as DRT, SARFAESI, SDR, CDR, and so on,
the government and RBI appear to be constantly throwing a variety of
time-tested ideas at bank bad loans (recently PARA) in the last three years. It
initially permitted banks to restructure loans. When that failed, asset quality
reviews were conducted in order to force banks to clean up their balance
sheets. After the bank's management was given the authority to take over
defaulting firms and evict promoters. As a result, even though the provisions
are more or less effective, there are some gaps that must be addressed and
closed.
SUGGESTIONS:
The researches believe that
banks should speed up and strengthen their internal control systems in order to
reduce the burden of bankruptcy. Compliance with Accounting Standards and
Auditing Standards, data analysis at regular intervals for defaulter
prediction, and so on will aid in the timely recognition of errors, allowing
management to take appropriate actions against bad loans by making appropriate
decisions. Banks should strictly adhere to credit policy in order to protect
lenders' interests during legal proceedings. It is necessary for bankers to
monitor the movement of borrowers' stocks and assets in order to train bankers
to recover loans in a systematic manner before they become NPAs. Banks should
also consider supporting the efforts of the government and the RBI through
mechanisms such as ARC resolution, SDR conversion of loans, CIBIL data analysis
records, and so on. There must be a single, consolidated framework for loan
recovery in the Indian banking sector, which had 9.1 percent NPAs on all bank
loans in 2017. Many advanced technologies, such as MIS, are available to assist
banks in automating the loan origination process. This system assists in
performing all necessary business functions, such as account information, new
loan setup, credit, and recovery. Banks must use these techniques to increase
their financial position and liquidity.
[1]
Banking Regulation Act, 1949.
[2]
Banking Regulation Act, 1949.
[3]
Reserve Bank Of India Act, 1934.
[4]
Special reference of “Indian Financial System” by Dr. V. K. Jain and Dr.
Parizad P. Dungore
[5]
https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=440&Mode=0
[6]
https://www.drt.gov.in/pdf/Act-s/SARFAESI%20Act.pdf
[7]
http://financialservices.gov.in/Banking/LAWS.pdf
Article Information
A STUDY ON LEGAL FRAMEWORK FOR LOAN GRANTING AND RECOVERY ON COMMERCIAL BANKS. BY – SMITA G & SHILPA S
Authors: SMITA G, SHILPA S
- Journal IJLRA
- ISSN 2582-6433
- Published 2023/07/17
- Issue 7
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
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