SAM (Stressed Assets Management) is a super-specialized outfit, wherein the SBI migrates high-value NPA accounts for initiating hard recovery action. This includes taking possession & auctioning the mortgaged assets under the SARFAESI Act, Filing recovery suits (OA) in DRT or invoking the jurisdiction of NCLT. Besides this the detective work, the forensic audit exercises are conducted to find out the incidences of fraud. The proceedings are initiated to declare the borrowers as non-cooperative / willful defaulters as per RBI guidelines. Besides this the complaints are filed with police authorities or CBI for investigation from the angle of fraud or misappropriation of stocks and other valuables by the NPA borrowers.
When the default continues in repayment of installment or interest, for the time specified for the category of loan in question, the loan is to be classified by the institutional lender (Bank, NBFC or Financial Institution) as NPA Account.
In other words, an NPA is a credit facility in respect of which the interest or installment of Bond finance principal has remained 'past due' for a period specified by the competent fiscal authority in any country. NPA is used by financial institutions that refer to loans that are in jeopardy of default to reflect its true financial positon in the Balance Sheet.
In India, RBI is Banking Regulator and the NPA guidlines are provided in Prudential Norms Circular of RBI (Reserve Bank of India).
The Prudential Norms classify the loans for the purpose of NPA Classification in the two broad categories-
(A) Agricultural Loans: For short duration crop agriculture loans such as paddy, Jowar, Bajra etc. if the loan (installment / interest) is not paid for 2 crop seasons , it would be termed as a NPA.
For long duration crop the above would be 1 Crop season from the due date.
(B) Non-Agricultural Loans: If customers don’t repay either the interest or part of principal or both, the loan turns into NPA.
NPA in India is goverened by the Prudential NPA Norms of RBI. For non-agricultural sectors an account becomes NPA if it remains irregular on account of non-service of interest or principal continuously for a period of 90 days.
On 8 November 2016, the Government of India announced the demonetisation, which caused imbalance in the business world leading to multifold increase NPA problem in India.
The GST was implemented in India with effect from July 1, 2017. The scheme further intensified the issues in business transactions and cuased liquidity problem leading to more business failures. To give relief to the businesses the RBI relaxed the NPA classification announced 180 days NPA norms vide notifiation dated 07-02-2018.
AUCA means advances under collection account. This is the written Off Loans portfolio of a Bank. AUCA is an off balancesheet head. Any recovery in AUCA is profit for a Bank.
Interest is not applied to NPA Accounts because the recovery of principal in in jeopardy in NPA Accounts and if a Bank books interest by applying the interest in its ledger system, this will artificially increase the taxable income of the Bank. But, this does not relieves the customer from his liability to pay interest on the debit balances in NPA accounts. The interest is charged at the time of calculating final dues in NPA accounts.
SARFAESI Act stands for Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002. This Act confers huge powers to the Banks & Financial Institutions to recover the loans by taking possession of mortgaged assets and selling those to recover the NPA classified loans.
The Banks, after declaring a loan account as NPA, recalls the full amount of loan with interest & costs. Where there are primary or colletral mortgages are there, the Bank also issues a Demand Notice to the Borrower & Mortgagors under section 13(2) of the SARFAESI Act, 2002. In the 13(2) Notice, the demand is raised in a structural manner calling upon the borrowers / mortgagors to repay the full amount of loan with interest & costs, failing which the Bank will proceed to take possession of the mortgaged properties under section 13(4) of Sarfaesi Act.
The Section 13(2) reads as under;
"Section 13(2) in The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
(2) Where any borrower, who is under a liability to a secured creditor under a security agreement, makes any default in repayment of secured debt or any instalment thereof, and his account in respect of such debt is classified by the secured creditor as non-performing asset, then, the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within sixty days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights under sub-section (4)."
The Section 13(4) of Sarfaesi Act reads as under;
Section 13(4) in The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
(4) In case the borrower fails to discharge his liability in full within the period specified in sub-section (2), the secured creditor may take recourse to one or more of the following measures to recover his secured debt, namely:—
(a) take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset; 2[(b) take over the management of the business of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset: 2[(b) take over the management of the business of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset\:" Provided that the right to transfer by way of lease, assignment or sale shall be exercised only where the substantial part of the business of the borrower is held as security for the debt: Provided further that where the management of whole, of the business or part of the business is severable, the secured creditor shall take over the management of such business of the borrower which is relatable to the security or the debt;]
(c) appoint any person (hereafter referred to as the manager), to manage the secured assets the possession of which has been taken over by the secured creditor;
(d) require at any time by notice in writing, any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due to the borrower, to pay the secured creditor, so much of the money as is sufficient to pay the secured debt.
Section 32 in The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
"32. Protection of action taken in good faith.—No suit, prosecution or other legal proceedings shall lie against any secured creditor or any of his officers or manager exercising any of the rights of the secured creditor or borrower for anything done or omitted to be done in good faith under this Act."
The powers of Civil Court are barred in matters relating to SARFAESI Act. Section 34 of the SARFAESI Act, 2002 states bars institution of any suit in respect of any matter which a Debts Recovery Tribunal or the Appellate Tribunal is empowered under the Act.
The disputes relating to Bank's highhandedness or illegalities are heard in DRT (Debt Recovery Tribunal).
The Supreme Court in Authorised Officer v. Allwyn Alloys Pvt Ltd (Allwyn Alloys case) held that in respect of mortgaged property where action is taken under the Securitisation Act, it is only the DRT which can adjudicate all issues concerning the right, title and interest in relation to the said property.
In Sree Anandhakumar Mills Vs. Indian Overseas Bank, the Supreme Court has held that a civil suit would not be maintainable when proceedings under the SARFAESI Act, 2002, are already initiated.
Remedies available to Borrowers under SARFAESI Act-2002
1. Representation/objection to notice u/s 13(2) before banks
I. Representation/objection to notice u/s 13(2) before banks
II. Writ petition challenging notice under section 13(2)
III. Borrowers’ right of appeal
IV. Appeal to DRT
V. The Appellate powers of DRT u/s 17 of the Act
VI. Appeal to Debt Recovery Appellate Tribunal
VII. Interim stay order
VIII. Filing of Writ petition under Article 226 of Constitution
IX. Classification of NPA can be questioned through writ
The most Important section of Sarfaesi Act is section 13(2), which provides that if a borrower who is under a liability to a secured creditor, makes any default in repayment of secured debt and his account in respect of such debt is classified as non-performing asset, then secured creditor may require the borrower by notice in writing to discharge his liability within sixty days from the date of notice with an indication that if he fails to do so, the secured creditor shall be entitled to exercise all or any of its rights in terms of section 13(4) of the Act.
The first opportunity of being heard is provided to the borrower by section 13(3-A) which lays down that the borrower may make a representation in response to the notice issued under section 13(2) and challenge the classification of his account as an NPA as also the quantum of amount specified in the notice. If the banks or FIs come to the conclusion that the representation/objection of the borrower is not acceptable, then the reasons for non-acceptance are required to be communicated within 1 week.
It is worth noting that a proviso Is added to section 13(3-A) which states that reason so communicated shall not confer any right upon the borrower to file an application to the Debt Recovery Tribunal (DRT) u/s. 17 of Act.
Section 13(13) states that, no borrower shall after receipt of notice u/s. 13(2) transfer by way of sale, lease or otherwise any of his secured asset referred to in the notice, without prior written consent of the secured creditor. Thus, section 13(13) shows that the notice u/s. 13(2) in effect operates as an attachment/ injunction restraining the borrower from disposing of the secure asset.
2. Writ petition challenging notice under section 13(2)
The borrower can challenge the notice u/s. 13(2) of Act in the Civil Court as well as in the High Courts by way of writ jurisdiction to defend his case. However, that is hardly sustainable.
In the case of D. Ravichandran V/s Indian Overseas Bank it was held that the notice u/s. 13(2) of Act is really a show cause notice and ordinarily this court does not interfere with show cause notice.
The notice u/s 13(2) of the Act by itself does not affect any right or liability of the borrower. Hence, challenge to the notice u/s. 13(2) of the Act is premature, since it is possible that the secured creditor may be satisfied with the reply of the borrower to the aforesaid notice and may drop proceedings.
Hence, all the wit petitions challenging the notice of u/s. 13(2) of the Act are dismissed on the ground that writ petitions are premature and the petitioners have an alternative remedy of raising all the points which they are raising in these writ petitions in their reply to notice u/s. 13(2) of the Act. It is-clear that borrower cannot approach the court or any other forum at the interlocutory stage of the proceedings that is from the issue of notice u/s. 13(2) till the final action taken u/s. 13(4) of the Act.
3. Borrowers’ right of appeal
If the borrower or any other person who had any tangible grievance against the notice issued u/s. 13(4) or action taken u/s. 14, then he/she could have availed remedy by filing an application u/s. 17(1) within 45 days from the date on which such measures were taken.
The expression ‘any person’ used in section 17(1) is of wide import. It takes within its fold, not only the borrower but also the guarantor or any other person who may be affected by the action taken u/s. 13(4) or u/s. 14. Both, the Tribunal and the Appellate Tribunal are empowered to pass interim orders u/s. 17 and 18 and are required to decide matters within fixed time schedule.
4. Appeal to DRT
On receipt of possession notice u/s. 13(4) the borrower can prefer appeal before DRT u/s. 17, seeking stay of proceedings and to set aside the action initiated. Does the borrower lose right to file appeal if the limitation period of 45 days from the date of the receipt of the notice u/s. 13(4) expires? No, the following cause of actions can be pleaded-
I. The borrower can question all steps initiated by the bank pursuant to section 13(4).
II. Borrower can question sale proceeding.
III. Can challenge order passed by the CMM/DM u/s. 14 of the Act.
IV. The legal preposition is well settled that court protects the rights of the borrower also.
5. The Appellate powers of DRT u/s 17 of the Act
The DRT has elaborate powers and it can even restore the possession back to the borrower, in the event it finds the actions by the bank are illegal or incorrect. The Supreme Court has clearly held in the case of Mardia Chemical Ltd. that the proceeding u/s. 17 is in the nature of original proceeding and that even the amount which is claimed to be due to a bank as stated in the notice u/s. 13(2) can be challenged by the borrower. In an important decision on appellate power of DRT the High Court of Madras has held in the case of M/s Lakshmi Mills Private Ltd. v/s Indian Bank as under :-
I. The right of the bank is not automatically suspended upon filing an application by the borrower u/s. 17 of the Act and secured creditor can proceed further in the matter, where no stay is granted by the Tribunal.
II. The Tribunal has power to impose the condition relating to deposit for grant of stay of auction
III. The Tribunal has no power to pass any Interim mandatory order relating to restoration of possession before finalization of the proceeding u/s. 17 of the Act.
IV. All the grounds, which rendered the action of the bank as illegal, can be raised In the proceeding u/s. 17 at the Act before the DRT.It is for the DRT to decide in each case whether the action of the bank was in accordance with the provisions of the said Act and legally sustainable.
5. Appeal to Debt Recovery Appellate Tribunal
If a person is aggrieved by the order of the DRT,ha can file an appeal to the Appellate Tribunal within 30 day from the date of the receipt of DRT order. If the DRT or Appellate Tribunal holds that possession of asset by the secured creditor was wrongful and directs the secured creditors to return the assets to the borrower, the borrower shall be entitled to the compensation and costs as may be determined by the DRT or Appellate Tribunal. The Tribunal can also direct the return of the assets If the secured creditor had already sold or transferred the asset to a third party.
6. Interim stay order
The Jurisdictions of Civil Court has bean clearly barred under section 34 of the Act, stating that no Injunction shall be granted by any court or other authority In respect of any action taken or to be taken under Sarfaesi Act or the DRT Act.
The decision of the Supreme Court In the case of United Bank of India v/s Satyawati Tandon is a landmark Judgment on the issue of stay orders. It was held that normally the Supreme Court does not Interfere with the discretion exercised by the High Court to pass an interim order In a pending matter but, having carefully examined the matter, an exception have been made, because the order under challenge has the effect of defeating the very object of legislation enacted by the Parliament for ensuring that there are no unwarranted impediments in the recovery of debts due to banks.
The following observations are worth noting:-
I. The Nigh Court will ordinarily not entertain a petition under Article 226 of the Constitution, If an affective alternate remedy is available to the aggrieved person and that this rule applies with greater vigour in matters involving recovery of taxes, cess, fees, other type of public money and dues of the banks and financial institutions.
II. The High Court must insist that before availing remedy under Article 226 of the Constitution a person must exhaust the remedies available under the relevant statutes.
III. It is true that the rule of exhaustion of alternate remedy is rule of discretion and not one of compulsion, but it is difficult to fathom any reason why High Court should entertain a petition under Article 226 and pass interim order ignoring the fact that petitioner can avail effective alternative remedy by filing application, appeal, revision etc. and the particular legislations contain a detailed mechanism of redressal of his grievance.
7. Filing of Writ petition under Article 226 of Constitution
Writ jurisdiction is an extraordinary jurisdiction of the High Court under Article 226 and 227 of the Constitution of India. There is consistency in the decisions that the High Court normally hesitates to entertain writ petition in the matter of Sarfaesi action by banks. This is in view of clear cut alternative remedy provided u/s. 17 and 18 of the Sarfaesi Act. The remedy of appeal to DRTand DRAT is available u/s. 17 and 18 of the Act, against notice for possession and enforcement of security interest.
It is settled legal preposition that a writ petition under Article 226 of the constitution is not maintainable, where there is an efficacious alternative remedy. It is generally pleaded that though alternative remedy is available, it is not efficacious.
The writ petition is however preferred by the borrower for the following reasons:-
a. Writ petition is not a costly affair, as no court fee is payable, whereas court fee has to be paid in case of appeal to DRT depending upon amount involved.
b. Writ petition once admitted takes lot of time in consideration for decision and the petitioner gets the desired breather. In comparison the matter is time bound exercise under DRT.
c. Borrowers feel that the action under the Sarfaesi Act will be automatically restrained if writ is admitted.
8. Classification of NPA can be questioned through writ
Where the Bank is not correct in classifying the account as NPA, which is preliminary to initiate proceeding under the provisions of Sarfaesi Act, the High Court does interfere with the action initiated by the bank as held in Sravan Dal Mill Pvt. Ltd. v/s Central Bank of India1. Further interim relief may be granted to the borrower to regularise the account by continuing making payments.
In Law, the appeal under Sarfaesi Act can be filed by the Borrower or Mortgagor only after the Bank proceeds under section 13(4). Under section 13(4) the Bank takes the possession of the mortgaged property. The SARFAESI Act bars the powers of Civil Court, and the appeal under this Act, lies with DRT (Debt Recovery Tribunal). It is very difficult for a borrower or guarantor to get the Sarfaesi Action stayed.
But, the Sarfaesi Act is a procedural law. Section 32 provides protection to the Bank's Authorised Officer for all the bona-fide acts under the Act. But the immunity is no where granted to the Authorized Officer. This means that the malafide acts or wilful wrongs committed by the Authorised Officer are not condonable under the law.
The ex-bankers who have worked in the recovery outfit of banks or the legal experts who are fully conversant with the actual working of Banks, are the best consultants to guide the path to get the Banks possession action or e-auction under the Sarfaesi Act section 13(4) stayed in the mid-way. This is because, such people know the internal short-comings of the Banks' system and procedure. They may after studying the case file containing loan documentation, ledger entries and corresspondance entertained by the Bank, depending upon merits of the individual case, chalk out the defence strategies for the borrowers. They minutely go through the procedural aspect to see where the Banks have compromised.
The founder of 'NPA Doctor' was an Officer in high value NPA loans recovery outfit of SBI, popularly known as SAM Branch.