Banks and financial institutions in India recover defaulted secured loans mainly through the SARFAESI Act, 2002, which lets them enforce security (like a mortgaged property) without first going to court, and through Debt Recovery Tribunals (DRTs) under the Recovery of Debts and Bankruptcy Act, 1993 for larger claims. Corporate defaults above a threshold can also be pushed into insolvency proceedings under the Insolvency and Bankruptcy Code, 2016.
SARFAESI -- enforcing security without a civil suit
The SARFAESI Act, 2002 allows a secured creditor (typically a bank or NBFC) to enforce its security
interest -- for example, taking possession of a mortgaged property -- after the borrower's account is
classified as a Non-Performing Asset (NPA) and a 60-day demand notice under Section 13(2) goes unanswered.
This bypasses the need for a full civil suit, though the borrower can challenge the action before the DRT
under Section 17, and courts have consistently held that this remedy under Section 17 is the borrower's
correct avenue rather than a separate civil suit or writ petition, absent exceptional circumstances.
Debt Recovery Tribunals -- for claims above the threshold
The Recovery of Debts and Bankruptcy Act, 1993 established Debt Recovery Tribunals as a faster forum than
ordinary civil courts for banks and financial institutions to recover debts above a specified threshold
amount. A DRT's order (a Recovery Certificate) is executed by a Recovery Officer, who has powers similar to
a civil court's execution powers, including attachment and sale of the debtor's property, and appeals from a
DRT's order lie to the Debt Recovery Appellate Tribunal (DRAT), typically subject to a requirement that the
appellant deposit a portion of the disputed amount before the appeal is entertained.
When a corporate default becomes an insolvency matter
Where a corporate debtor defaults on a debt above the threshold set under the Insolvency and Bankruptcy
Code, 2016, a creditor can initiate the Corporate Insolvency Resolution Process (CIRP) before the National
Company Law Tribunal (NCLT), which can lead to the company being restructured under a resolution plan or, if
no viable plan is approved, liquidated. This is a fundamentally different track from SARFAESI/DRT recovery
and shifts control of the company to a resolution professional during the process, with a moratorium under
Section 14 of the Code generally halting other individual recovery actions -- including SARFAESI enforcement
-- against the corporate debtor for the duration of the resolution process.
Can a bank take my mortgaged property without going to court first?
Under SARFAESI, yes, subject to following the required notice procedure -- but the borrower can challenge
the bank's action before the DRT, so it is not entirely outside judicial oversight, just structured to avoid
an upfront civil suit.
What's the difference between DRT recovery and insolvency proceedings?
DRT recovery under the 1993 Act is a creditor pursuing its own specific claim; insolvency under the IBC,
2016 is a collective process affecting all of a company's creditors together and can result in the company
being restructured or liquidated, not just one debt being recovered.
Is there a minimum default amount before SARFAESI can be used?
Yes -- SARFAESI generally cannot be invoked below a specified outstanding-amount threshold, and certain
categories of security (like agricultural land in some contexts) have additional restrictions.
