Sharp rise in debt recovery cases amid slowdown

63,669 cases were pending at debt recovery tribunals till 31 Jan

compared to 37,616 cases till Dec 2010

liveMint:Kian Ganz & Remya Nair:27 Mar 2012

Mumbai/New Delhi: The number of pending cases at India’s debt recovery tribunals (DRT) has increased by almost 70% in about a year, with the economic slowdown affecting the repaying capacity of borrowers and thus worsening the asset quality of banks.

Also, slow clearances of cases in the tribunals is adding to the pendency, say lawyers and analysts.

In response to a question in the Lok Sabha on 23 March, the finance ministry said 63,669 cases were pending in the tribunals as of 31 January. On 31 December 2010, 37,616 cases were pending, according to a Right to Information (RTI) request filed by Prashant Reddy, an intellectual property (IP) lawyer who also blogs on industry blog Spicy IP.

There are 33 DRTs in India, with three each in Chennai, Delhi, Kolkata and Mumbai—the last three having the maximum number of pending cases. The amount locked in as a result was Rs1.57 trillion as on 31 January, against Rs1.13 trillion as on 31 December 2010.

DRTs are semi-judicial authorities that help banks by speeding up the recovery process through steps such as issuance of attachment orders.

An official with the Indian Banks’ Association, who did not want to be identified, cited two reasons for the sharp increase in the number of pending cases at the debt tribunals.

“First is that more banks are approaching the DRTs to recover their bad debts,” this official said. “The second reason is that borrowers are also going to DRTs to challenge actions taken by banks under the Sarfaesi Act.”

The Sarfaesi Act, or Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, allows banks to auction properties of borrowers who fail to repay their loans, or recover their loans through securitization and asset reconstruction.

Of the 63,669 pending cases, 37,654 have been pending for more than a year. The finance ministry said a committee headed by a chairperson of the debt recovery appellate tribunal is examining the “legal, structural, administrative, monitoring and supervisory systems” of DRTs and will recommend measures to make these tribunals more effective and efficient.

“It is often challenging for DRTs to get all the interested parties together at one time. Hence, it becomes a long-drawn process. Banks facing large downside risks (dilution of market value of loan assets) try to settle NPAs (non-performing assets or bad loans) through one-time settlements or corporate debt restructuring,” said Robin Roy, associate director (financial services), at PricewaterhouseCoopers Pvt. Ltd. “Banks do a cost-benefit analysis before taking cases to DRTs as there could be substantial costs attached (long waiting periods) to going to DRTs.”

Banks have three legal options for resolving NPAs—the Sarfaesi Act, DRTs, and Lok Adalats, which are non formal alternative court, he said, adding that while loans above Rs10 lakh go to DRTs there is no sector-specific condition for approaching the tribunals.

Dushyant Kumar Mahant, a lawyer who has represented borrowers in the DRTs several times, said the case load has risen dramatically particularly because of the steep increase in property prices, which has resulted in many borrowers taking loans that they end up not being able to service.

The low disposal rate at the DRTs was caused by infrastructure problems, inadequate staffing also at senior levels, and non-cooperation by borrowers’ lawyers, said Navneet Gupta, Delhi-based partner at law firm SNG & Partners and who often represents banks.

Another lawyer who did not want to be identified blamed the bodies overseeing the DRTs and other tribunals. “The main problem is the appointments. It takes them 6 or 7 months to appoint the presiding officer and then the presiding officer has only a term of five years under the recovery of bad debt Act (Recovery of Debt due to Banks and Financial Institutions Act, 1993,) and they will start looking for a new guy after the old guy retires,” this lawyer said.

“It’s very lacklustre,” said one DRT lawyer about the presiding officers at many DRTs. “You go over there and even if (you) ask to present an argument over there, the matter is adjourned for one reason or another—(the officers) don’t have the bent of mind for disposal rate. It is very difficult for pendency to go down (this way).”