This lesson examines the legal and regulatory frameworks governing loan recovery, including key statutes, enforcement mechanisms, and the rights and obligations of lenders.

8.1 Key Recovery Legislation

Several statutes govern loan recovery and debt enforcement:

  • SARFAESI Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act): The primary legislation enabling self-help enforcement by secured creditors . Prerequisites for action include serving proper notice and following prescribed procedures .

  • Recovery of Debts and Bankruptcy Act, 1993: Establishes Debt Recovery Tribunals (DRTs) for expeditious recovery of debts .

  • Insolvency and Bankruptcy Code, 2016: A comprehensive code for insolvency resolution and bankruptcy .

  • Negotiable Instruments Act, 1881: Provides for penalties in case of dishonour of cheques (Section 138) .

8.2 Regulatory Frameworks

  • RBI Guidelines: Supervisory and regulatory directives on asset classification, provisioning, and recovery practices .

  • Banking Regulation Act, 1949: Sets the regulatory framework for banking companies .

  • Basel Standards: Prudential standards affecting capital treatment of non-performing loans .

  • IFRS/Local Standards: Accounting standards for loan impairment classification and provisioning .

8.3 Asset Reconstruction Companies (ARCs)

ARCs purchase non-performing loans from banks and financial institutions . The framework for their operation includes limitations on business, purchase of loans, and law on resolution of loans by ARCs . International practices include examples from Malaysia, Korea, and Thailand .

8.4 Legal Documentation and Evidence

The legal recovery process requires meticulous documentation :

  • Loan Agreements: The primary document establishing the debt obligation.

  • Security Documents: Legal documentation creating a charge on collateral.

  • Guarantees: Third-party support documents.

  • Books of Evidence: The Evidence Act governs the admissibility and proof of documents in recovery proceedings .

  • Notices: Legal notices to be sent to defaulters

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