Debt recovery in India : The 2016 Bill and what it seeks to do

Vatsal Khullar - August 4, 2016

The Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016 is listed for discussion in Rajya Sabha today.^[i] The Bill aims to expeditiously resolve cases of debt recovery by making amendments to four laws, including the (i) Recovery of Debts Due to Banks and Financial Institutions Act, 1993, and (ii) the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Recovery of Debts Due to Banks and Financial Institutions Act, 1993 The 1993 Act created Debt Recovery Tribunals (DRTS) to adjudicated debt recovery cases. This was done to move cases out of civil courts, with the idea of reducing time taken for debt recovery, and for providing technical expertise. This was aimed at assisting banks and financial institutions in recovering outstanding debt from defaulters. Over the years, it has been observed that the DRTs do not comply with the stipulated time frame of resolving disputes within six months. This has resulted in delays in disposal, and a high pendency of cases before the DRTs. Between March 2013 and December 2015, the number of pending cases before the DRTs increased from 43,000 to 70,000. With an average disposal rate of 10,000 cases per year, it is estimated that these DRTs will take about six to seven years to clear the existing backlog of cases.[ii] Experts have also observed that the DRT officers, responsible for debt recovery, lack experience in dealing with such cases. Further, these officers are not adequately trained to adjudicate debt-related matters.[iii] The 2016 Bill proposes to increase the retirement age of Presiding Officers of DRTs, and allows for their reappointment. This will allow the existing DRT officers to serve for longer periods of time. However, such a move may have limited impact in expanding the pool of officers in the DRTs. The 2016 Bill also has a provision which allows Presiding Officers of tribunals, established under other laws, to head DRTs. Currently, there are various specialised tribunals functioning in the country, like the Securities Appellate Tribunal, the National Company Law Tribunal, and theNational Green Tribunal. It remains to be seen if the skills brought in by officers of these tribunals will mirror the specialisation required for adjudicating debt-related matters. Further, the 1993 Act provides that banks and financial institutions must file cases in those DRTs that have jurisdiction over the defendant’s area of residence or business. In addition, the Bill allows cases to be filed in DRTs having jurisdiction over the bank branch where the debt is due. The Bill also provides that certain procedures, such as presentation of claims by parties and issue of summons by DRTs, can now be undertaken in electronic form (such as filing them on the DRT website). Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 The 2002 Act allows secured creditors (lenders whose loans are backed by a security) to take possession over a collateral security if the debtor defaults in repayment. This allows creditors to sell the collateral security and recover the outstanding debt without the intervention of a court or a tribunal. This takeover of collateral security is done with the assistance of the District Magistrate (DM), having jurisdiction over the security. Experts have noted that the absence of a time-limit for the DM to dispose such applications has resulted in delays.[iv] The 2016 Bill proposes to introduce a 30-day time limit within which the DM must pass an order for the takeover of a security. Under certain circumstances, this time-limit may be extended to 60 days. The 2002 Act also regulates the establishment and functioning of Asset Reconstruction Companies (ARCs). ARCs purchase Non-Performing Assets (NPAs) from banks at a discount. This allows banks to recover partial payment for an outstanding loan account, thereby helping them maintain cash flow and liquidity. The functioning of ARCs has been explained in Figure 1. Enforcement of security It has been observed that the setting up of ARCs, along with the use out-of-court systems to take possession of the collateral security, has created an environment conducive to lending.^[iii] However, a few concerns related to the functioning of ARCs have been expressed over the years. These concerns include a limited number of buyers and capital entering the ARC business, and high transaction costs involved in the transfer of assets in favour of these companies due to the levy of stamp duty.^[iii] In this regard, the Bill proposes to exempt the payment of stamp duty on transfer of financial assets in favour of ARCs. This benefit will not be applicable if the asset has been transferred for purposes other than securitisation or reconstruction (such as for the ARCs own use or investment). Consequently, the Bill amends the Indian Stamp Act, 1899. The Bill also provides greater powers to the Reserve Bank of India to regulate ARCs. This includes the power to carry out audits and inspections either on its own, or through specialised agencies. With the passage of the Bankruptcy Code in May 2016, a complete overhaul of the debt recovery proceedings was envisaged. The Code allows creditors to collectively take action against a defaulting debtor, and complete this process within a period of 180 days. During the process, the creditors may choose to revive a company by changing the repayment schedule of outstanding loans, or decide to sell it off for recovering their dues. While the Bankruptcy Code provides for collective action of creditors, the proposed amendments to the SARFAESI and DRT Acts seek to streamline the processes of creditors individually taking action against the defaulting debtor. The impact of these changes on debt recovery scenario in the country, and the issue of rising NPAs will only become clear in due course of time. [i] Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016, http://www.prsindia.org/administrator/uploads/media/Enforcement%20of%20Security/Enforcement%20of%20Security%20Bill,%202016.pdf. [ii] Unstarred Question No. 1570, Lok Sabha, Ministry of Finance, Answered on March 4, 2016. [iii] ‘A Hundred Small Steps’, Report of the Committee on Financial Sector Reforms, Planning Commission, September 2008, http://planningcommission.nic.in/reports/genrep/rep_fr/cfsr_all.pdf. [iv] Financial Sector Legislative Reforms Commission, March 2013, http://finmin.nic.in/fslrc/fslrc_report_vol1.pdf.

States and State Legislatures

Government of Karnataka’s response to the COVID-19 pandemic (Feb 2020–April 14, 2020)

Prachi Kaur - April 15, 2020

As of April 13, 2020, there have been 260 confirmed cases of COVID-19 in Karnataka. Of these, 70 have been discharged and 10 have died.[1] In order to contain the spread of the disease, both, the Central and State governments have come up with a series of policy responses. In this blog, we take a look at the key measures taken by the Government of Karnataka in this regard as of April 14, 2020.

Movement restrictions

To contain the spread of COVID-19 in the state, the Government of Karnataka took the following measures to restrict the movement of people in the state:

On March 13, the Directorate of Health and Family Welfare ordered the closure of various establishments such as theatres, pubs, gyms, malls, swimming pools, and educational institutions until March 21. The order also directed all international passenger arrivals to be mandatorily home quarantined for 14 days.[2]
On March 20, the above order was revised to extend the closure of said establishments until April 1. The order also banned all religious gatherings.[3]
Further, on March 23, all bus services to and from the nine districts that had reported COVID-19 positive cases were completely stopped until April 1.[4]
The central government later announced a 21-day country-wide lockdown starting March 25.[5] This was followed by the announcement of a pass system by the Bengaluru Commissioner of Police on March 25 to regulate the movement of people in Bengaluru City.[6]
On April 6, District Collectors were empowered to issue inter-district transport passes.[7]
On April 14, the Prime Minister announced the extension of the lockdown till May 3, 2020.[8] On April 15, the Ministry of Home Affairs issued guidelines on the measures to be taken by governments until May 3. As per these guidelines, to mitigate hardship to the public, select activities will be permitted from April 20 onwards. These include health services, agriculture and related activities, financial sector, MNREGA works, cargo movement etc. In addition, subject to conditions, commercial and private establishments, industrial establishments, government offices, construction activities etc, will also be permitted.[9]

Essential Goods and Services

The pass system in Bengaluru City facilitated the movement of personnel involved in manufacturing and providing essential goods and services.
On April 2, the government announced that it will distribute the excess stock of milk to poor people for free.[10]
On April 6, the government declared that rations for the month of April will be supplied to people without the usual OTP authentication process.[11]

Health Measures

Karnataka Epidemic Disease COVID-19 Regulations 2020

On March 11, 2020, the government released the Karnataka Epidemic Disease COVID-19 Regulations 2020 to prevent the spread of COVID19 in the state. These regulations specify the protocol for hospitals to follow for screening and treating COVID-19 patients. These regulations are valid for one year.[12]

Preventive measures

On February 5, 2020, the Department of Health & Family Welfare and AYUSH services issued the Terms of Reference for district-level teams to take preventive measures against the spread of COVID-19.[13] The terms relate to various administrative and complementary aspects related to COVID19 management. These include activities of various teams, human resource management, training and awareness generation etc.

Following this, on April 6, 2020, the Department also issued instructions to all districts to prepare a District Level Crisis Management Plan to prevent large outbreaks of COVID-19.[14]

Setting up of fever clinics, isolation centres etc

On March 4, the state government issued guidelines to the district administration to ensure hospitals maintain a 10-bed isolation ward for COVID-19 patients.[15]

On March 31, the government issued orders to establish fever clinics as the first points of contact for COVID-19 suspect patients. These fever clinics would have COVID-19 Rapid Response team of one doctor, two nurses and a health care worker.[16]

Personnel measures

On March 30, the Department of Health & Family Welfare invited applications from doctors for immediate appointment (on contract basis) in Urban Primary Health Centres in Bengaluru City.[17] Subsequently, on April 2, the state government issued orders to extend the tenure of retiring medical professionals from March 31, 2020 to June 30, 2020.[18]

On March 26, all Registered Medical Practitioners were permitted to provide telemedicine services during the lockdown period. Telemedicine services will be available for minor, non-COVID-19 ailments, and existing patients only.[19]

For more information on the spread of COVID-19 and the central and state government response to the pandemic, please see here.

[1] Novel Coronavirus (COVID19) Media Bulletin, Karnataka, Department of Health and Family Welfare, last accessed on April 15, 2020, https://karunadu.karnataka.gov.in/hfw/kannada/nCovDocs/14-04-2020(English).pdf

[2] GOK order No. DD/SSU/COVID-19/17/19-20, Directorate of Health and Family Welfare, Government of Karnataka, March 13, 2020,

https://karunadu.karnataka.gov.in/hfw/kannada/nCovDocs/Notification(Covid-19)-Dir-HFWS.pdf

[3] Revised GOK order No. DD/SSU/COVID-19/17/19-20, Directorate of Health and Family Welfare, Government of Karnataka, March 20, 2020 https://karunadu.karnataka.gov.in/hfw/kannada/nCovDocs/Revised-Order-COVID-19(20-03-2020).pdf

[4] Order No. STA-6/SCP/PR-20/2019-20, Directorate of Transport, Government of Karnataka, March 23, 2020, https://transport.karnataka.gov.in/storage/pdf-files/restrictions.pdf

[5] Order No. 1-29/2020-PP, National Disaster Management Authority, March 24, 2020, https://mha.gov.in/sites/default/files/ndma%20order%20copy.pdf.

[6] Order No.02 / CP-BLR/Covid-19/2020, Commissioner of Police, Bengaluru City, March 25, 2020, https://karnataka.gov.in/storage/pdf-files/covid_rules/Covid_pass.pdf

[7] Order of Chief Secretary, Government of Karnataka, April 6, 2020, https://ksuwssb.karnataka.gov.in/frontend/opt1/images/covid/Orders/IMG-20200406-WA0005.jpg

[8] “PM addresses the nation for 4th time in 4 Weeks in India’s fight against COVID-19” Press Release, Prime Minister’s office, April 14, 2020, https://pib.gov.in/PressReleseDetail.aspx?PRID=1614255

[9] No.40-3/2020-DM-I(A), Ministry of Home Affairs, April 15, 2020, https://www.mha.gov.in/sites/default/files/MHA%20order%20dt%2015.04.2020%2C%20with%20Revised%20Consolidated%20Guidelines_compressed%20%283%29.pdf

[10] Proceedings, Government of Karnataka, April 2, 2020, ,https://ksuwssb.karnataka.gov.in/frontend/opt1/images/covid/Orders/GO%20Free%20Milk%20%20(1).pdf

[11] RD 158 TNR 2020, Government of Karnataka, April 6, 2020, https://ksuwssb.karnataka.gov.in/frontend/opt1/images/covid/Orders/IMG-20200406-WA0015.jpg

[12]Karnataka Epidemic Disease COVID-19 Regulations 2020, Government of Karnataka, March 11, 2020, https://karunadu.karnataka.gov.in/hfw/kannada/nCovDocs/Exercise-of-Powers-COVID-10(11-03-2020).pdf

[13] No. JRO(1A)/148/2019-20, Department of Health & Family Welfare and AYUSH Services Government of Karnataka, February 5, 2020, https://ksuwssb.karnataka.gov.in/frontend/opt1/images/covid/Circulars/%E0%B2%B8%E0%B3%81%E0%B2%A4%E0%B3%8D%E0%B2%A4%E0%B3%8B%E0%B2%B2%E0%B3%86%20%E0%B3%A8%E0%B3%AA.pdf

[14]No. HFW 87 ACS 2020 Department of Health & Family Welfare and Medical Education, April 6, 2020, https://karunadu.karnataka.gov.in/hfw/kannada/nCovDocs/Circular-Preparation%20of%20District%20Level%20Crisis%20Management%20Plan%20for%20COVID-19(06-04-2020).pdf

[15]Circular No. HFW 47 CGM 2020 (P), Government of Karnataka, March 3, 2020, https://karunadu.karnataka.gov.in/hfw/kannada/nCovDocs/Guidelines-Isolation-Ward.pdf

[16]No. HFW 73 ACS 2020, Government of Karnataka, March 31, 2020, https://karunadu.karnataka.gov.in/hfw/kannada/nCovDocs/Circular-Establishment%20of%20Fever%20Clinic%20and%20Movement%20Protocol%20for%20Suspect%20Cases%20of%20COVID-19(31-03-2020).pdf

[17]No. HFW 71 ACS 2020, Department of Health & Family Welfare and Medical Education, March 30, 2020, https://karunadu.karnataka.gov.in/hfw/kannada/nCovDocs/Order%20-%20Immidiate%20Appointment%20of%20Contract%20Doctors%20in%20BBMP%20(30-03-2020).pdf

[18] No. 40 HSH 2020 (B), Government of Karnataka, April 2, 2020, https://ksuwssb.karnataka.gov.in/frontend/opt1/images/covid/Circulars/Extension%20of%20service%20reg_001.pdf

[19]No. HFW 54 CGM 2020, Government of Karnataka, March 26, 2020, https://karunadu.karnataka.gov.in/hfw/kannada/nCovDocs/Order-Registered%20Medical%20Practitioners%20(26-03-2020).pdf