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Banking Laws and Recovery of Debts

A landmark event which marks the evolution of banking happened in 1934 when a decision to set up Reserve Bank of India was taken. It started functioning in 1935. RBI has since been the central bank of the country and the regulator of the banking sector. It derives its powers from the RBI Act, 1934. The two other major events in the modern banking era are the nationalisation of 14 largest commercial banks in 1969, through the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969. Later another set of 4 banks were merged, taking this count to 20. At this point, more than 90% of all banking business in India was controlled by Government of India.

It is deemed to be one of the most important legal framework for banks. It was initially passed as the Banking Companies Act, 1949 and it was eventually changed to the Banking Regulation Act, 1949 (“The BR Act”). Along with the RBI Act, The BR Act provides a lot of guidelines to the banks.

They cover a wide variety of areas, some of the major provisions are:

  • Banking is defined in Section 5 (i)(b), as acceptance of deposits of money from the public for the purpose of lending and/or investment. Such deposits can be repayable on demand or otherwise withdraw able by means of cheque, drafts, order or otherwise;
  • Section 5 (i)(c) defines a banking company as any company which handles the business of banking;
  • Section 5(i)(f) distinguishes between the demand and time liabilities, as the liabilities which are repayable on demand and time liabilities means which are not demand liabilities;
  • Section 5(i)(h) deals with the meaning of secured loans or advances. Secured loan or advance granted on the security of an asset, the market value of such an asset in not at any time less than the amount of such loan or advances. Whereas unsecured loans are recognized as a loan or advance which is not secured;
  • Section 6(1) deals with the definition of banking business; and
  • Section 7 specifies banking companies doing banking business in India should use at least on work bank, banking, banking company in its name.

Debt Recovery Tribunals: The Debts Recovery Tribunal has been constituted under Section 3 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. The main feature of the DRT is to receive claim applications from Banks and Financial Institutions against their defaulting borrowers. After the enforcement of SARFAESI Act in 2002, it also becomes an adjudicatory authority for that Act.

Now, The DRT now deals with both the SARFAESI act and the DRT act, the aim of both the acts is similar but the way is different. Appeals against orders passed by DRTs lie before Debts Recovery Appellate Tribunal (“DRAT”). DRTs can take cases from banks for disputed loans above Rs 10 Lakhs.

Debt Recovery Procedure: Banks have to file an application for the recovery of a loan taking into consideration the jurisdiction and cause of action. Other banks or financial institutions can also apply jointly. The application is filed with the required fees, documents and evidence. The LI Act is also applicable to the DRT cases, so the bank has to take proper care and file the application well within time. If the defendant has to appeal an order of the DRT, he has to first deposit the 75% or the prescribed amount as decided by the tribunal. Failure of payment would automatically mean a failure of filing application of appeal.

The tribunal also issues a recovery certificate to the applicant. Recovery officers attached to the tribunal have adequate powers for recovery under the act. On the receiving of the recovery certificate, the recovery officer has to proceed by attachment and eventual sale of a movable and immovable property. The defendant is not allowed to dispute the correctness of the amount given in the recovery certificate. Orders of the recovery officer are applicable within thirty days to the tribunal.

Banking Ombudsman:It is a grievance redressal system. The service is available for complaints against a bank’s deficiency of service. A customer of the bank can submit a complaint against the deficiency in the services of the bank. If he does not get a satisfactory response from the ban, he can go ahead and approach the banking ombudsman for further action and investigation. Banking Ombudsman is typically appointed by the RBI under the Banking Ombudsman Scheme, 2006. RBI as per Section 35A of the BR Act, 1949 introduced the Banking Ombudsman Scheme with effect from 1995