Debt Recovery in Banking – UPSC GS3

Steps taken to reform Debt Recovery Process:
  • In 1962, after the Palai Central Bank failed, an amended RBI Act provided for a credit information bureau. It would have strengthened information sharing among bankers but it became dysfunctional soon.
  • In 1971, a study group recommended setting up a Credit Information Trust. The entire system was discontinued in 1995.
  • The Debt Recovery Tribunal was introduced in 1993 following the Narasimham Committee recommendations of 1991.
  • The SARFAESI Act was passed later, intended to speed up recovery and strengthen the hands of bankers. But, the system, over the years, became compromised in different ways. This included the non-appointment of judges, failed auctions, delayed payments, and so on.
  • The IBC (Insolvency and Bankruptcy Code) is the most effective system to date to secure the interests of the lender.
Recent Important Case:
  • A former SBI chairman was arrested in a case related to a hotel project in Jaisalmer, that was financed by the bank.
  • The hotel availed a loan of ₹25 crores from the SBI in 2007. It became a non-performing asset in June 2010. The bank later assigned the loan, which was valued at ₹40 crores, to the Asset Reconstruction Company(ARC) which pursued the matter in the DRT (Debt Recovery Tribunal) and under the SARFAESI Act.
  • It also approached the National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code (IBC).
  • The bank recovered ₹25 crores out of dues of ₹40 crores. Recovering over 60% is excellent, when globally, such sales yield only around 30% or less. In India, recoveries average only 23.2% across various channels.
  • Why do banks settle for less payment?
    • It depends on a banker’s judgment that recovering an even smaller amount today is better than recovering an uncertain amount in the distant future, given the time value of money and delays in our judicial processes.
    • Investing people and money in messy recovery processes distracts a bank from its core business.
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