When a borrower stops paying, banks have several legal tools to recover money. These laws, SARFAESI, the RDB Act (DRTs) and the IBC, are core topics for RBI Grade B, NABARD, SBI PO and IBPS PO interviews and mains. This guide explains each one with the key numbers.
The recovery toolkit at a glance
| Tool | Year | Used for | Goes to court? |
|---|---|---|---|
| Lok Adalat | 1987 (Legal Services Authorities Act) | Small loans, settlement by compromise | No (conciliation) |
| Debt Recovery Tribunals (DRTs) | 1993 | Loans of ₹20 lakh and above | Special tribunal |
| SARFAESI Act | 2002 | Secured loans; seize and sell the security | No court needed |
| IBC | 2016 | Time-bound insolvency resolution of companies and individuals | NCLT / DRT |
SARFAESI Act, 2002
Full name: Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. It was based on the Narasimham Committee II and Andhyarujina Committee recommendations.
Why it matters: banks can take possession of the security and sell it without going to court.
Steps under SARFAESI
| Step | Section | What happens |
|---|---|---|
| 1 | – | Loan is classified as an NPA |
| 2 | 13(2) | Bank sends a demand notice giving the borrower 60 days to pay |
| 3 | 13(3A) | Bank must reply to the borrower’s objections within 15 days |
| 4 | 13(4) | If unpaid, bank takes possession of the asset, takes over management or sells it |
| 5 | 14 | Bank can seek help of the District Magistrate / CMM to take physical possession |
| 6 | 17 | Borrower can appeal to the DRT within 45 days |
| 7 | 18 | Further appeal to the DRAT within 30 days, after depositing 50% of the dues (can be reduced to 25%) |
SARFAESI thresholds and exclusions
- Applies only when the outstanding is ₹1 lakh or more and the dues are at least 20% of principal plus interest.
- Agricultural land cannot be taken under SARFAESI.
- NBFCs with assets of ₹100 crore and above can use SARFAESI for loans of ₹20 lakh and above (from 2021).
- CERSAI (Central Registry of Securitisation Asset Reconstruction and Security Interest of India), set up in 2011, keeps a record of all security interests to prevent multiple loans on the same property.
Asset Reconstruction Companies (ARCs)
- Registered with RBI under Section 3 of SARFAESI.
- Buy bad loans from banks at a discount and try to recover them.
- Minimum net owned fund: ₹300 crore (raised from ₹100 crore in 2022, approx).
- First ARC: ARCIL (Asset Reconstruction Company (India) Ltd), 2003 (approx).
- NARCL (National Asset Reconstruction Company Ltd), set up in 2021, is the “bad bank” for large stressed loans.
Debt Recovery Tribunals (DRTs)
| Point | Detail |
|---|---|
| Law | Recovery of Debts and Bankruptcy Act, 1993 (earlier the RDDBFI Act) |
| Recommended by | Narasimham Committee I (1991) |
| Minimum claim | ₹20 lakh (raised from ₹10 lakh in 2018) |
| Appeal | Debt Recovery Appellate Tribunal (DRAT) |
| Number | About 39 DRTs and 5 DRATs (approx) |
| Role under IBC | Adjudicating authority for individuals and partnership firms |
Insolvency and Bankruptcy Code (IBC), 2016
| Point | Detail |
|---|---|
| Recommended by | Bankruptcy Law Reforms Committee chaired by T.K. Viswanathan |
| Regulator | Insolvency and Bankruptcy Board of India (IBBI), set up 1 October 2016 |
| Adjudicating authority (companies, LLPs) | NCLT (National Company Law Tribunal) |
| Adjudicating authority (individuals, firms) | DRT |
| Appeals | NCLAT → Supreme Court |
| Minimum default to start insolvency | ₹1 crore (raised from ₹1 lakh in March 2020) |
Who can start insolvency (CIRP)?
| Section | Applicant |
|---|---|
| 7 | Financial creditor (bank, bondholder) |
| 9 | Operational creditor (supplier, employee), after a 10-day demand notice |
| 10 | Corporate debtor itself |
CIRP key rules
- Moratorium (Section 14): once admitted, no new suits or recovery actions against the company.
- An Interim Resolution Professional (IRP) takes over management; the Committee of Creditors (CoC), made up of financial creditors, decides the company’s future.
- A resolution plan needs 66% of the CoC’s voting share.
- Timeline: 180 days, extendable by 90 days; overall cap of 330 days including litigation (2019 amendment).
- If no plan is approved, the company goes into liquidation.
- Section 29A bars wilful defaulters and promoters of NPA accounts (among others) from bidding.
- Pre-packaged insolvency (PPIRP) for MSMEs was added in 2021 (default of ₹10 lakh and above).
Liquidation waterfall (Section 53), simplified
- Insolvency process costs and liquidation costs
- Workmen’s dues (24 months) and secured creditors
- Other employees’ dues (12 months)
- Unsecured financial creditors
- Government dues and remaining secured creditors
- Other debts, then preference and equity shareholders
SARFAESI vs IBC vs DRT
| Point | SARFAESI | DRT | IBC |
|---|---|---|---|
| Purpose | Enforce security | Recover debt | Resolve insolvency (revive or liquidate) |
| Court needed | No | Tribunal | NCLT/DRT |
| Threshold | ₹1 lakh | ₹20 lakh | ₹1 crore (companies) |
| Unsecured loans | No | Yes | Yes |
Exam-ready one-liners
- SARFAESI Act: 2002; demand notice under Section 13(2) gives 60 days.
- Borrower can appeal to the DRT within 45 days under Section 17 of SARFAESI.
- SARFAESI does not apply to agricultural land or loans below ₹1 lakh.
- DRTs were set up under the 1993 Act; minimum claim ₹20 lakh.
- IBC: 2016; regulator IBBI; adjudicating authority NCLT for companies.
- CIRP: 180 + 90 days, overall cap 330 days; CoC approval 66%.
- Minimum default under IBC: ₹1 crore (since March 2020).
- NARCL (2021) is India’s bad bank; ARCs need ₹300 crore NOF.
Related reading
Quiz: test yourself
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Based on the SARFAESI Act, the RDB Act, the IBC and RBI rules as reported. Thresholds can change; check the latest notifications.
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