Rs1.44 trillion stuck as cases pile up at debt tribunals

In 2009, discount retailer Subhiksha went bust as India’s economic growth slowed in the face of the global financial crisis. Photo: Mint

With bad loans rising sharply and bankers turning tough on company founders, the number of cases being taken to debt tribunals is likely to rise

Vishwanath Nair |  Khushboo Narayan Live mint 22 Aug 14

Mumbai: In 2009, discount retailer Subhiksha Trading Services Ltd went bust as India’s economic growth slowed in the face of the global financial crisis.

The once celebrated retail venture, promoted by R. Subramanian, owed banksRs.750 crore. With the company unable to repay the money and little hope of a revival in its business, creditors approached a debt recovery tribunal (DRT)—the last refuge of banks seeking to recover funds from defaulters.

In 2010, 10 lenders, namely Development Credit Bank, Bank of India, Federal Bank Ltd, HSBC Holdings Plc.’s India unit, HDFC Bank Ltd, Bank of Baroda, Kotak Mahindra Bank Ltd, IndusInd Bank Ltd, Royal Bank of Scotland Plc.’s local arm and Yes Bank Ltd all filed cases with the Chennai DRT.

In the same year, another high-profile case, involving entertainment firm Pyramid Saimira Theatre Ltd, went to the Chennai DRT. In 2009, the Securities and Exchange Board of India (Sebi) found it guilty of inflating profits, forging documents and stock-price manipulation. Once again, lenders were left with no option but to approach the DRT, and IndusInd Bank and UCO Bank filed cases against Pyramid Saimira. The exact amount Pyramid Saimira owed creditors could not be ascertained.

Four years later, not a rupee has been recovered by lenders of either company.

“We have written off the loan and we do not expect much in terms of recovery,” said a lender to Subhiksha, who declined to be identified.

The two cases are among the 42,819 cases pending before the 33 DRTs in the country as of 31 March 2013—the latest data available in the public domain. The amount stuck is Rs.1.44 trillion and could rise further when more recent data is made available.

With bad loans rising sharply across the banking system over the last couple of years and bankers turning tough on company founders, the number of cases being taken to DRTs is likely to rise. As of 30 June, gross non-performing assets (NPAs) of 40 listed banks stood at Rs.2.52 trillion, up 21% from Rs.2.08 trillion a year ago.

But the track record of existing DRTs and the infrastructure provided to them has been anything but encouraging, as is evident from the number of cases still pending before them.

DRTs were first set up under the Recovery Of Debts Due to Banks and Financial Institutions Act, 1993, also known as the DRT Act. The DRT functions as a quasi-judicial body intended specifically for facilitating debt recoveries by banks. Under the existing norms, a DRT is supposed to dispose of a matter referred to it within 180 days of the receipt of an application.

But this rarely happens, said bankers and lawyers that Mint spoke to.

“There are a lot of problems with the DRTs. First, we need additional benches of DRTs to cope with the rising number of cases. Second, the DRT procedures need to be streamlined to prevent delays in disposing of a case”, said Supreme Court advocate and corporate lawyer H.P. Ranina.

Bankers say one of the biggest problems facing DRTs is the lack of sufficient staff. According to a finance ministry letter dated 18 December 2013, addressed to the registrar generals of all the high courts of India, vacancies for a presiding officer exist at DRTs in Chandigarh, Delhi, Jabalpur, Nagpur and Patna.

The letter, written by Rajeev Sharma, under secretary in the department of financial services, advised the registrars to set up a panel for any unforeseen vacancies that may come up by 30 September at a number of other centres including Ahmedabad, Bangalore, Chennai, Ernakulam, Hyderabad and Mumbai. A copy of the letter has been reviewed by Mint.

“How are cases supposed to be heard if there is no presiding officer at the DRT?” asked an official at a public sector bank on condition of anonymity.

The presiding officer hears the cases at DRTs, while all the other officials of the tribunals discharge their functions under the oversight of the presiding officer, according to the DRT Act.

Along with the lack of adequate staff, the heavy backlog of cases means these tribunals find it difficult to dispose of cases within the stipulated 180 days.

The three tribunals in Mumbai, for instance, had 3,632 cases pending as of 31 March 2013, involving loans worth Rs.43,400 crore. Kolkata’s three tribunals had a backlog of 11,212 cases with loans worth more than Rs.20,600 crore pending at the end of FY13.

K.K. Ganguly, a Kolkata-based lawyer who has represented several banks and borrowers at the DRT, said: “The tribunal here is overburdened with cases. Cases have been pending since 2001.”

Allahabad Bank’s case against Purbachal Traders, United Bank of India’s case against Emco Rubber Industries and ANZ Grindlays Bank’s case against Allied Engineers, all filed in 2001, are still being heard at the Kolkata DRT, information available on the tribunal’s website showed.

Ganguly said he has been fighting a case since 2001 involving a claim of Rs.31 lakh made by a public sector bank against a Kolkata-based company. “The case is still pending in the DRT. I won’t give you the name of the bank involved. It will open a can of worms,” he said.

“Borrowers eventually come to us for a one-time settlement after the case drags on for years. Often the settlement is much lower than the loans due to us. So the recovery which eventually happens is not because of the swift action of the tribunals, but because people get tired of waiting,” said a senior official at a Mumbai-based public sector bank on condition of anonymity.

Recognizing the need to strengthen the debt recovery process, the government has announced the setting up on more DRTs and is also working in strengthening debt recovery laws.

In his budget speech on 10 July, finance minister Arun Jaitley announced that six new DRTs would be set up in Chandigarh, Bangalore, Ernakulum, Dehradun, Siliguri and Hyderabad. The finance ministry is also working on improving debt recovery laws such as the Securities and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, so as to give more powers to lenders in dealing with defaults.

A new bankruptcy law may also be in the works. In a speech earlier this month, Reserve Bank of India governor Raghuram Rajan said India needs better laws to deal with companies that have gone bankrupt.

“We need a bankruptcy code. We need equity to be seen as equity and debt to be seen as debt. Today there’s a lot of confusion... We need that confusion to be changed,” Rajan said.