Debt Recovery Bill, 2016

The Debt Recovery Tribunals (DRT) was primarily set up for the organized and speedy recovery of debts payable to banks and financial institutions. In this article, we review the Debt Recovery Tribunal (DRT), purpose and resultant legislative improvements as well as key features of the Debt Recovery Bill, 2016.

Debt Recovery Tribunal (DRT)

The proposal behind setting up of Debt Recovery Tribunals (DRTs) was to enable the following:

Transfer cases out of the civil courts; and
Offer technical expertise.

To begin with, DRTs were triumphant to a large extent in recovering substantial parts of bad debts. Nevertheless, this speedy legislation had some defects, and their progress began to worsen due to delaying tactics by large and powerful borrowers, limited accountability and insufficient infrastructure.

Debt Recovery Bill

To address these shortcomings, the Union Finance Minister passed the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016 or known as the ‘Debt Recovery Bill’ in the Lok Sabha on May 11, 2016, to reinforce the DRTs and accelerate the resolution of stressed assets.

Purpose of Debt Recovery Bill

The Debt Recovery Bill seeks to make amendments in four laws, namely the following:

Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFESI), 2002
Recovery of Debts due to Banks and Financial Institutions Act (RDDBFI), 1993
Indian Stamp Act, 1899
Depositories Act, 1996

Changes to SARFESI Act

Improvement in the rights of the asset reconstruction companies (ARCs) in the acquirement of assets of the debtor.
Taking account of the debenture trustee as a secured creditor.
Broadening the scope of powers of the RBI in the regulation of ARCs.
Expanding the power of the Central Registry (CERSAI) created under the Act.

Changes to Recovery of Debts due to Banks and Financial Institutions Act, 1993

Authorizing the banks to file cases in tribunals with control over the area of the bank branch where the debt is pending.
The retirement age of Presiding Officers of the DRTs that has been increased from 62 to 65 years and that of the Chairpersons of the Appellate Tribunals from 65 to 67 years.
The Bill enabling definite procedures including presentation of claims by parties and summons issued by tribunals under the Act should be undertaken in electronic form.
The Bill inserting a provision which permits the creditor to take control of collateral security against which the debt was specified.

Changes to Indian Stamp Act

The Debt Recovery Bill is seeking to modify the Indian Stamp Act, 1899 thus exempting the payment of stamp duty related to the transfer of financial assets in favour of ARCs.

Key Features of Debt Recovery Bill, 2016

Following the declaration made in the Union Budget in February 2016, the Government had released the Press Note 4 of 2016 dated May 6, 2016, thereby liberalizing foreign entry norms in asset reconstruction companies (ARCs) that are registered with the Reserve Bank of India (RBI) by permitting 100% foreign direct investment (FDI) through the automatic route in ARCs. It had then planned amendments to bring the Securitization and Reconstruction of Financial Assets, and Enforcement of Security Interest Act, 2002 (SARFAESI) under the dispensations provided under Press Note 4 by the introduction of the Enforcement of Security Interest and Recovery of Debt Laws and Miscellaneous Provisions (Amendment) Bill, 2016 (Proposed Amendment) passed in the Lower House of Parliament.
The Rajya Sabha, in conclusion, passed the Debt Recovery Bill on August 9, 2016, thus strengthening the DRTs and facilitating computerized processing of cases to accelerate the resolution of stressed assets. The renovation is a welcome change which will aid banks to recover over Rs. 8 lakh crore of stressed assets and bad loans quicker. The changes will permit corporate bond and debenture trustees to utilize provisions of the loan foreclosure law.
The Bill is significant for the implementation of the Bankruptcy Code too. The objective of the amendments proposed in the Bill is to advance the ease of doing business and make possible investment leading to superior economic growth and development.
While the Bankruptcy Code enables collective action of creditors, the proposed amendments to the SARFAESI and DRT Acts aim to make more efficient the processes of creditors independently taking action against the defaulting debtor.
The impact of these changes on debt recovery circumstances in the country and the topic of rising NPAs will merely become clear in due course of time. Nevertheless, the effort is admirable as it involves the systematic and appropriate implementation of the provisions.

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Frequently Asked Questions

Common questions about Debt Recovery Bill 2016: Key Features and Amendments.

The primary purpose of the Debt Recovery Tribunals (DRTs) is to facilitate the organized and speedy recovery of debts payable to banks and financial institutions. They were established to transfer cases out of civil courts and offer technical expertise in debt recovery matters.

The Debt Recovery Bill, 2016 was introduced to address the shortcomings of the existing DRT system, such as delaying tactics by large borrowers, limited accountability, and insufficient infrastructure. It aimed to reinforce the DRTs and accelerate the resolution of stressed assets.

The Debt Recovery Bill sought to make amendments to four laws: the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFESI), 2002; the Recovery of Debts due to Banks and Financial Institutions Act (RDDBFI), 1993; the Indian Stamp Act, 1899; and the Depositories Act, 1996.

The Bill improved the rights of ARCs in acquiring assets of the debtor and recognized debenture trustees as secured creditors. It also broadened the scope of powers of the RBI in regulating ARCs and expanded the powers of the Central Registry (CERSAI).

The Bill authorized banks to file cases in tribunals with jurisdiction over the area of the bank branch where the debt is pending. It also increased the retirement age of Presiding Officers and Chairpersons and enabled electronic procedures for presenting claims and issuing summons.

The Bill sought to modify the Indian Stamp Act, 1899, to exempt the payment of stamp duty related to the transfer of financial assets in favor of ARCs.

Allowing 100% FDI through the automatic route in ARCs was a key feature of the Debt Recovery Bill. This move aimed to liberalize foreign entry norms and facilitate investment in ARCs, which play a crucial role in debt recovery.

The Bill was significant for the implementation of the Bankruptcy Code as it aimed to make the processes of creditors independently taking action against defaulting debtors more efficient. This complemented the Bankruptcy Code's provisions for collective action by creditors.

The overall objective of the amendments proposed in the Debt Recovery Bill was to advance the ease of doing business, enable investment, and promote economic growth and development by improving debt recovery processes.

While the impact of the Debt Recovery Bill on debt recovery circumstances and rising NPAs would become clear over time, the effort was commendable as it aimed to systematically and appropriately implement provisions to aid banks in recovering stressed assets and bad loans more efficiently.