When a borrower fails to repay a loan (i.e., the account becomes an NPA), the bank needs to take legal action to recover its money. Several laws provide special mechanisms for banks to do this quickly and effectively.

1. The SARFAESI Act, 2002

This is one of the most powerful tools available to banks for loan recovery.

Full Form: Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
What it does: It allows banks and financial institutions to recover their dues from defaulters without the intervention of a court.
Applicability: This Act can only be used for secured loans (loans with collateral) where the outstanding amount is more than ₹1 lakh.

How SARFAESI Works: The Process

Account becomes NPA: First, the loan account must be classified as a Non-Performing Asset (NPA).
Demand Notice: The bank sends a demand notice to the defaulting borrower, asking them to pay the entire outstanding amount within 60 days.
Taking Possession: If the borrower fails to pay within 60 days, the bank has the right to:
- Take possession of the secured asset (e.g., the house or factory).
- Sell or lease the asset to recover the money.
- Manage the business of the borrower.

2. Debt Recovery Tribunals (DRTs)

What they are: Special courts (tribunals) established to handle recovery cases filed by banks and financial institutions.
Purpose: To provide a speedy recovery process compared to the regular civil courts, which can take many years.
Monetary Jurisdiction: DRTs can hear cases for the recovery of debts which are ₹20 lakh and above. For cases below this amount, banks have to go to civil courts.

3. The Insolvency and Bankruptcy Code (IBC), 2016

This is a modern law that has completely changed the process of dealing with corporate defaults.

What it is: The IBC provides a time-bound process for resolving the insolvency of corporate debtors.
Main Goal: The primary goal is resolution, not liquidation. The first attempt is always to revive the defaulting company and save it as a going concern.
How it works:
1. When a company defaults, a bank (as a financial creditor) can file a case with the National Company Law Tribunal (NCLT).
2. An Insolvency Resolution Professional (IRP) is appointed to take over the management of the company.
3. The IRP has 180 days (which can be extended) to come up with a resolution plan to revive the company.
4. If a viable plan is approved by the Committee of Creditors, the company is saved. If not, the company is liquidated (its assets are sold off to pay the creditors).

4. Lok Adalats

What they are: An alternative dispute resolution mechanism where disputes are settled through compromise or settlement between the parties.
Role in Banking: Banks often use Lok Adalats to settle smaller loan disputes in an amicable and speedy manner. It is a faster and cheaper option for both the bank and the borrower.

Summary

Banks have several legal channels to recover their dues from defaulting borrowers. For secured loans, the most powerful tool is the SARFAESI Act, which allows banks to seize and sell assets without court intervention. For larger loan amounts (above ₹20 lakh), banks can approach the specialized Debt Recovery Tribunals (DRTs) for a speedy judgment. For corporate defaults, the Insolvency and Bankruptcy Code (IBC) provides a time-bound process for either reviving the company or liquidating it. For smaller cases, Lok Adalats offer a path for a quick and amicable settlement.

Quick Revision Points

SARFAESI Act: Used for secured loans only. Allows banks to seize assets without court intervention. The bank must first send a 60-day demand notice.
DRT (Debt Recovery Tribunal): Special courts for bank recovery cases of ₹20 lakh and above.
IBC (Insolvency and Bankruptcy Code): For corporate defaulters. The case is filed in the NCLT. The process is time-bound (180 days).
Lok Adalat: For speedy and amicable settlement of smaller disputes.

Important Laws Relating to Recovery of Dues