Important Laws Relating to Recovery Of Dues | PAPER II – PRINCIPLES & PRACTICES OF BANKING | MODULE B: FUNCTIONS OF BANKS

Important Laws Relating to Recovery Of Dues

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Introduction

In the banking sector, timely recovery of dues is essential to maintain liquidity and financial health. Several legislations have been enacted to streamline and strengthen the process of debt recovery from defaulting borrowers.

1. Recovery of Debts and Bankruptcy Act, 1993 (DRB)

The DRB Act was enacted to provide a speedy mechanism for the recovery of debts owed to banks and financial institutions. Debt Recovery Tribunals (DRTs) and Debt Recovery Appellate Tribunals (DRATs) were set up under this act.

Key Features:

• Applies to debts above ₹20 lakhs.
• DRTs have powers equivalent to a district court.
• Reduces the burden on civil courts.

2. Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002

SARFAESI allows banks to enforce their security interests without court intervention in case of secured loans. It empowers banks to take possession of assets and sell them to recover dues.

Example: If a borrower defaults on a housing loan, the bank can issue a 60-day notice. If dues remain unpaid, the bank can auction the property.

3. Insolvency and Bankruptcy Code (IBC), 2016

IBC consolidates and amends laws relating to insolvency resolution of companies, partnerships, and individuals. It provides a time-bound process to resolve insolvency.

Mathematical Illustration:

If a company has total liabilities of ₹10 crores and assets worth ₹6 crores, the insolvency resolution process ensures either repayment from assets or liquidation. The creditors may get:

Recovery Rate = (Assets / Liabilities) × 100 = (6 / 10) × 100 = 60%

4. Legal Services Authorities Act, 1987

This act provides for free legal services to weaker sections and the establishment of Lok Adalats. Lok Adalats offer a platform for out-of-court settlements, including banking disputes.

Example: Banks use Lok Adalats to settle small loan defaults amicably with the borrower through mutual agreement.

5. Law of Limitation

The Limitation Act, 1963 prescribes time limits for filing suits. In banking, a loan recovery suit must be filed within 3 years from the date the loan becomes due or from the last payment.

Example: If a borrower last paid EMI on 01-Apr-2020, the bank must file a recovery suit by 01-Apr-2023.

Multiple Choice Questions (MCQs)

1. What is the primary purpose of the DRB Act, 1993?
   a) To provide free legal aid
   b) To recover small loans
   c) To expedite recovery of large debts
   d) To liquidate companies
2. Under the SARFAESI Act, how many days' notice must be given before taking possession?
   a) 30 days
   b) 60 days
   c) 90 days
   d) 120 days
3. IBC provides a time-bound process for:
   a) Loan disbursement
   b) Legal counseling
   c) Insolvency resolution
   d) Tax planning
4. DRTs were established under which act?
   a) SARFAESI Act
   b) DRB Act
   c) IBC
   d) Companies Act
5. Lok Adalats function under which legislation?
   a) Legal Services Authorities Act
   b) SARFAESI Act
   c) Companies Act
   d) IBC
6. What is the minimum debt threshold for DRT jurisdiction?
   a) ₹10 lakhs
   b) ₹5 lakhs
   c) ₹20 lakhs
   d) ₹50 lakhs
7. What is the limitation period for filing a recovery suit?
   a) 5 years
   b) 2 years
   c) 3 years
   d) 4 years
8. Under IBC, what is the first step in insolvency proceedings?
   a) Filing application to NCLT
   b) Seizure of property
   c) Appeal to DRT
   d) Legal notice
9. SARFAESI Act applies only to:
   a) Secured loans
   b) Unsecured loans
   c) Government grants
   d) Deposits
10. Which tribunal handles appeals against DRT orders?
    a) NCLAT
    b) DRB Board
    c) Lok Adalat
    d) DRAT

Author: Bank Theory