Debt Recovery in India – At a Glance

Introduction to Debt Recovery in India

India’s Sick Industrial Companies Act, 1985 (“SICA”) put in place a debtor friendly regime in which defaulting borrowers could delay resolution for long periods of time and strip assets of value. This created a huge problem for economy at a macro level as Non-Performing Assets of banks with respect to the debts due kept perennially increasing. The debt recovery tribunals (DRTs created under the RDDBFI Act) in the 1990s attempted to create a more creditor friendly regime but their effectiveness is limited by restrictions on their scope. The SARFAESI Act, enacted in 2002, supplemented the DRTs in regulating an efficient recovery process. SARFAESI permits seizure of secured assets and has been the most effective means of recovery out of all the legislations.

The Recovery of Debts due to Banks and Financial Institutions Act, 1993 (RDDBFI Act), extends to the whole of India except Jammu and Kashmir. This act came into force on 24th June 1993.The provision of the act shall not apply to any bank or financial institutions where the amount of debt due is less than Rs 10 Lakh. The “Debt Recovery Appellate Tribunal” (DRAT) was established under sub section(1) of section 8. The Central Government of India has the power to notify the establishment of one or more tribunals in a state, which are known as Debts Recovery Tribunal, to work under the broad jurisdiction, powers and authority prescribed under this act.

Debt Recovery Routes in India: Which Method Applies When

India has four primary legal routes for debt recovery. The right one depends on the nature of the debt, the type of creditor, and the amount involved.

Key Legislations Governing Debt Recovery in India

When borrowers cannot pay promised interest or principal on time, creditors can initiate steps to recover the debt. Debt recovery laws determine the process by which recovery proceeds. the Debts Recovery Tribunals (DRTs) were set up under the Recovery of Debts Due to Banks and Financial Institutions (RDDBFI) Act, 1993 to help banks and financial institutions recover their dues speedily without being subject to the lengthy procedures of usual civil courts. The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act, 2002 went a step further by enabling banks and some financial institutions to enforce their security interest and recover dues even without approaching the DRTs.

Therefore there are 2 crucial legislations which deal with the debt recovery by banks and financial institutions from borrowers or people who have taken loans from these institutions and fail to pay back the principal amount with interest or falter with the instalments-

1.RDDBFI Act:

This piece of legislation is responsible for the creation of DRTs and DRATs. These tribunals are the primary courts of law responsible for the management of cases where debts are to be recovered and provide a forum which in essence claims to be much faster than the normal litigation route through civil courts.

2. SARFAESI Act:

This Act provides for out of Court remedies that the banks and financial institutions can undertake, It gives the mandate to these organisations to treat the security provided for any loan which has now become a non performing asset to be treated in multiple ways thereby recovering their dues and releasing any extra monies back to the borrower (i.e not making any profit but mitigating their rightful dues). The various ways in which a Bank can deal with these securities are provided in the Act being inter alia -Taking over the property and selling it off, taking over that part of the business of the borrower which has been used to secure their loans and either taking control of the management or selling the same to recover dues etc.

The SARFAESI Enforcement Process Step by Step

The SARFAESI Act allows secured creditors to recover dues without approaching a court at the first stage. Here is how the process works in practice.

Step 1: NPA classification The loan account must first be classified as a Non-Performing Asset (NPA). This happens when the borrower fails to pay interest or principal for more than 90 consecutive days.

Step 2: Section 13(2) notice Once the account is classified as NPA, the secured creditor issues a written notice to the borrower under Section 13(2) of the SARFAESI Act. This notice demands repayment of the full outstanding amount within 60 days.

Step 3: Borrower’s right to respond Under Section 13(3A), the borrower can file a representation or objection to the secured creditor within the 60-day period. The creditor must respond to this objection within 15 days, providing reasons if it is rejecting the borrower’s case.

Step 4: Enforcement actions under Section 13(4) If the borrower does not repay within 60 days, the secured creditor can exercise one or more of the following rights without court intervention:

• Take possession of the secured asset
• Transfer the asset by sale, lease, or assignment
• Take over the management of the borrower’s business
• Appoint a manager to manage the secured asset

Step 5: Sale of secured asset The creditor can sell the secured asset to recover the outstanding dues. If the sale proceeds are insufficient to cover the full amount owed, the creditor can then approach the DRT for recovery of the remaining balance.

Step 6: Borrower’s right to appeal The borrower can challenge the creditor’s enforcement actions by filing a Securitisation Application (SA) before the DRT under Section 17 of the SARFAESI Act.

Hence, RDDBFI Act provides for the framework or the specialised forums, and SARFAESI Act provides for remedies or reliefs which the bank can undertake before taking up the matter before the DRT (created by RDDBFI Act) to recover their rightful dues from borrowers.

Recovery Through Cheque Bounce Cases: Section 138 of the Negotiable Instruments Act

Section 138 of the Negotiable Instruments Act, 1881 is one of the most widely used debt recovery tools in India, particularly for trade creditors, small businesses, and individuals recovering money paid through cheques.

When a cheque is dishonoured due to insufficient funds or because the account has been closed, the payee can initiate criminal proceedings against the drawer of the cheque. Unlike the DRT route, Section 138 is available to any creditor, not just banks or financial institutions, and there is no minimum amount threshold.

The Section 138 process

• The cheque must have been issued for a legally enforceable debt or liability, not as a gift or donation
• The payee must present the cheque to their bank within three months of the date on the cheque
• If the cheque bounces, the bank issues a memo of return
• The payee must then send a demand notice to the drawer within 30 days of receiving the bank’s memo, demanding payment within 15 days
• If the drawer does not pay within 15 days of receiving the notice, the payee can file a criminal complaint before the appropriate Magistrate court within 30 days

Penalty A person found guilty under Section 138 can face imprisonment of up to two years, a fine of up to twice the cheque amount, or both. The threat of criminal liability makes this one of the more effective recovery tools for smaller commercial disputes.

Limitation Section 138 cases are heard in Magistrate courts and have faced significant backlogs. In 2023, over 35 lakh cheque bounce cases were pending across India. That said, many cases settle before trial once the criminal complaint is filed, because the reputational and criminal exposure creates strong pressure on the defaulting party.

Recovery Through the Insolvency and Bankruptcy Code (IBC), 2016

The Insolvency and Bankruptcy Code, 2016 is designed for situations where a corporate debtor is unable to pay its debts, not just unwilling. It is the appropriate route when the outstanding amount is large and the debtor company may be insolvent.

Who can use it Both financial creditors (banks, NBFCs, bondholders) and operational creditors (suppliers, employees, service providers) can initiate insolvency proceedings under the IBC. However, the minimum default amount for initiating proceedings against a corporate debtor is Rs. 1 crore.

Where cases are filed IBC cases are filed before the National Company Law Tribunal (NCLT). Appeals go to the National Company Law Appellate Tribunal (NCLAT) and then to the Supreme Court.

How it works Once an application is admitted by the NCLT, the Corporate Insolvency Resolution Process (CIRP) begins. An Insolvency Resolution Professional (IRP) takes over the management of the debtor company. Creditors form a Committee of Creditors (CoC) and vote on resolution plans submitted by interested buyers or investors. The process is meant to be completed within 180 days, extendable to 330 days.

If no viable resolution plan is approved, the company goes into liquidation and the assets are distributed to creditors in the order of priority established under the IBC’s waterfall mechanism.

Key distinction from DRT The DRT route is about recovering a specific debt. The IBC route is about resolving the insolvency of a debtor company. The two routes are not mutually exclusive but serve different purposes. Creditors sometimes use the threat of IBC proceedings as leverage to accelerate repayment, since the prospect of losing control of the company is a powerful motivator for debtor promoters.

2025 context India’s gross NPA ratio reached a historic low of 2.15% as of September 2025, the lowest since 2010-11, according to the RBI’s Trends and Progress of Banking in India report released in December 2025. However, the absolute NPA stock still stood at approximately Rs. 4.32 lakh crore, reflecting that recovery infrastructure continues to be under significant pressure despite improvements in headline numbers.

Types of Bank Debtors in Debt Recovery

While taking care of the accounts of customers from whom debt may be due to banks, it is important to understand the reason for non-payment by the customer. Knowing why the customer cannot pay or are not willing to pay can help to take better actions regarding the recovery of the debt.

It is important to indentify the type of debtor the bank or financial institution might be dealing with. There can be 4 scenarios with respect to Debtors of a Bank, these are as follows:

1. Willing and able

the first category of the debtor is willing and able which means the debtor has the funds to payback and has the intention to pay back the debt. The customer is very confident to repay the debt amount and makes all the efforts possible to repay the debt.

The following get classified as Non Performing Assets by the banks in different categories with different percentage of expected return on the credit given to the borrowers:

2. Unwilling but able

This category of debtor involves the people who have the resources to pay back the debt amount but refuse to pay it back to the creditor. The reason for the non-payment can be anything like if he/she is not happy the with services provided or he/she has mismanaged the accounts and has no records of the balance amount left to be paid.

3. Willing but unable

This person wants to repay the debt but is unable to do so as he/ she has no resources. The are aware of the complete amount which needs to be paid off and may have made some efforts to earn resources but are unable to take care of the whole amount. So they are able to pay the amount partially.

4. Unwilling and unable

This type of debtors are the ones who refuse to pay nor can they afford to pay the debt to the creditor. These types of debtors are the most difficult type to deal with.

Indentifying the customer type is the essential step of the recovery of the debt. Once the bank understands where the customer is coming from, it can try and settle the problem of the debtor on an internal level without moving the DRT in a bid to skip any litigation.

Debt Recovery Tribunals (DRTs) in India: Composition and Jurisdiction

Formally, an application for recovery of debt can be made to the DRTs for all debts valued at more than INR 1 million.1 For lesser amounts, the banks and financial institutions can avail normal remedy process such as the Civil Courts. The Act further authorizes the Central Government to specify such other amount, being not less than INR 1 lakh, that can be assigned to DRTs.

The composition of the Tribunal – “DRT”

The tribunal consists of only one person only who is known as the chairperson who is appointed by the Central Government. No person shall be qualified for the post of chairperson unless the person is qualified to be a district judge. The maximum age bar for being a chairperson in DRT is 65 years. The chairperson can hold the office for the term of 5 years or till he attains the age of 65 years and is eligible to be re-appointed.

Jurisdiction of Tribunal

A Tribunal shall work on jurisdiction, power and authority to entertain and decide appilcations from banks and financial institutions for recovery of debts due to such banks and financial institutions and can also entertain appeals against any order made by a Tribunal under this act.

Section 17 of the RDDBFI Act vests in the DRT the authority to entertain applications from banks and financial institutions for recovery of debts due to such banks and financial institutions.

The DRAT has the power to address appeals made against any order made, or deemed to have been made, by the DRT.

Only the High Court has the authority to deal with cases which are appealed from DRAT followed by the Supreme Court.

Debt Recovery Process in India

1. Application Route – Directly Applying to DRT

The recovery procedure under this route is invoked by making an application to (and not filing a suit with) the DRT and paying the prescribed fees. What DRT location is chosen under this route is a good question. There are currently 39 DRTs in India in 22 unique locations. Some cities have multiple DRTs to deal with the inflow of a large number of filings of applications.

1. Section 19 RDDBFI Act: Application to DRT may be made by a bank/financial institution where defendant resides, carries business, or where cause of action wholly/partly arises.
2. Time limit: Recommended completion within 180 days of receipt of application (Sec. 19(4)).
3. On submission, summons issued to defendant to show cause within 30 days.
4. Defendant must file a written statement; Tribunal may allow extra time.
5. Defendant can plead a set-off (ascertained sum legally recoverable) at first hearing; later only with Tribunal’s permission.
6. Defendant can also file a counter-claim against applicant before delivering defence.
7. Based on DRT’s order, Presiding Officer issues certificate to Recovery Officer for recovery of specified debt.
8. Recovery Officer powers: recover dues by attachment, sale, or appointing receiver for management of defendant’s property.
9. DRT may also obtain a police warrant to arrest the defendant for recovery.

2. SARFAESI Route

An application can also be made to the DRT under the Securitisation and Reconstruction for Enforcement of Security Interest Act (SARFAESI), 2002.

1. Under Section 13(2) SARFAESI Act, once loan is classified as NPA, creditor issues a notice to borrower to repay the full pending amount within next 60 days.
2. On failure, creditor can exercise rights under Section 13(4) – attachment/sale of property, takeover of business, appointment of manager, etc.
3. Initially no appeal right, but Sub-section 3A allows borrower to appeal against 13(2) notice to the secured creditor (not Court).
4. Bank must respond to borrower’s appeal within 15 days.
5. If liabilities not discharged, creditor may take possession of secured asset, transfer by lease/assignment/sale, take over management, appoint manager.
6. If collateral sale proceeds insufficient, creditor may apply to DRT for recovery of balance; borrower can also appeal to DRT.
7. DRT must dispose cases within 60 days, with outer limit of 4 months.
8. If delayed beyond 4 months, under Section 17(6), either party may approach DRAT to direct disposal of pending case.

Appeals under the Debt Recovery Framework

An appeal against the order of the DRT can be made to the DRAT within whose jurisdiction the DRT falls. There are currently 5 DRATs in Mumbai, Delhi, Kolkata, Chennai, and Allahabad.

The appeal has to be made within a period of 45 days from the order of the DRT, which may be extended by DRAT.

Additionally, the DRAT can be approached for interim relief on interim applications (IA) or miscellaneous applications (MA) which are sub-sections of the original applications.

Appeals to DRAT can be expensive. The aggrieved party that owes the debt must deposit 75% of the amount determined by the order of the DRT. This amount can be 9 reduced or waived by the DRAT. For appeals to DRAT that originate in the SARFAESI Act actions, the deposit is 50% of the amount which is claimed by the secured creditor or the amount as determined in the order of DRT or the, whichever is less. However, an important point is that unlike applications under RDDBFI, the deposits cannot be fully waived but only be reduced to 25% of the amount.

Powers of DRTs and DRATs

The powers of the tribunal are quite substantial. Section 19 (12) of the RDDBFI Act empowers the DRT to make an interim order against the defendant to debar him from disposing or transferring any property and assets belonging to him without prior permission of the Tribunal.

It also has the power to detain the defendant for a maximum of three months for disobedience of an order or breach of any terms of an order issued under sections 19(12), 19(13) and 19(18) of the SARFAESI Act.

Digital Solutions for Debt Recovery in India

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