About Sarfaesi and DRT India

About Sarfaesi and DRT India

The SARFAESI Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002) and the Debt Recovery Tribunal (DRT) system are two primary mechanisms in India designed to help banks and financial institutions recover bad loans and non-performing assets (NPAs).

SARFAESI Act, 2002

• Empowers banks and financial institutions to recover secured debts (backed by collateral) without the need to approach a traditional court.

• Allows lenders to seize and sell secured assets if a borrower defaults, bypassing lengthy legal procedures.

• Requires lenders to issue a demand notice to the borrower, who is given 60 days to repay before the assets can be taken over.

• Does not apply to agricultural land.

• Covers debts with a minimum outstanding amount of ₹1 lakh.

Debt Recovery Tribunals (DRTs)

• Established under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (now RDB Act).

• Are quasi-judicial bodies that adjudicate disputes and issue recovery certificates for banks and financial institutions.

• Handle disputes over debts above ₹20 lakhs.

• Serve as the adjudicatory and appellate authority for cases under both debt recovery laws, including appeals and grievances arising out of SARFAESI actions.

• Borrowers can approach the DRT if they believe the SARFAESI process was misused or illegally applied.

Distinctions

How They Work Together

• SARFAESI allows for out-of-court asset seizure for secured loans; DRT acts as the main legal forum for any disputes or appeals around this process.

• Both mechanisms aim to reduce NPAs and speed up debt recovery for lenders, but SARFAESI is designed to be faster and more direct, while DRT provides judicial oversight and borrower protection.

These frameworks work in tandem, giving financial institutions both direct and legal recourse, and providing borrowers with a forum to contest irregular or unjust recovery actions.

What is the SARFAESI Act?

• The full name is the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Enacted on 17 December 2002, it allows banks and financial institutions to seize and auction secured assets of defaulting borrowers—without court intervention—under Section 13 of the Act.

• The Act includes a strong non-obstante clause (Section 35), which ensures its provisions override conflicting laws or agreements.

• It excludes unsecured loans and loans with residual value below ₹1 lakh, and excludes agricultural land from its ambit.

What are Debt Recovery Tribunals (DRTs)?

• DRTs are quasi‑judicial bodies established under the Recovery of Debts Due to Banks and Financial Institutions (RDDBFI) Act, 1993, responsible for adjudicating debt recovery from financial institutions.

• They handle original applications (OAs) filed by banks/FIs and appeals under SARFAESI Act (Section 17) filed by borrowers or guarantors (known as Securitisation Applications or SAs).

• They have jurisdiction over debts exceeding ₹20 lakh, with territorial jurisdiction and specific operational rules under their Act.

• As of the latest data, India has 39 DRTs and 5 DRATs (Debt Recovery Appellate Tribunals).

How do SARFAESI and DRT relate?

• A creditor (bank or FI) can invoke actions under Section 13 of SARFAESI to seize and sell assets if the borrower defaults. If the borrower objects, they can file an appeal to the DRT under Section 17.

• The DRT acts as the judicial forum for reviewing whether the creditor followed due process—such as issuing proper notices, allowing objections, and ensuring transparent valuation. It also has power to stay SARFAESI actions or order restoration of assets to the borrower.

• The Supreme Court clarified in a key judgment that the DRT cannot transfer possession to third-parties who were not in possession before seizure; only civil courts can adjudicate disputes of title or ownership, which fall outside DRT’s domain.

Key borrower protections and timelines

• Banks must issue a 60‑day notice under Section 13(2) before taking possession. The borrower can respond, raise objections, and make a representation to the bank under Section 13(3A), which must be considered by the bank before proceeding to sell.

• If the borrower files a representation on time and the bank ignores it, the DRT may invalidate the SARFAESI action, as compliance is mandatory.

• The DRT is also expected to dispose of a case within 60 days of filing, subject to expeditious handling under the RDDBFI Act.

Appeals and higher courts

• Decisions by a DRT can be appealed to a DRAT (Debt Recovery Appellate Tribunal). Further legal recourse may include civil courts (for title or ownership disputes) and High Courts/Supreme Court via writ petitions or special leave petitions.

• DRT cannot transfer property to third parties; only civil courts can decide ownership disputes—even if a sale deed is challenged.

• Section 11 of SARFAESI mandates mandatory arbitration (even without an explicit agreement) in disputes between financial institutions, asset reconstruction companies, or buyers regarding securitisation or non‑payment. DRT has no jurisdiction over such matters.

Useful Advice for Borrowers & Secured Creditors

Borrowers:

• Respond quickly to any Section 13 notice (within 60 days), and file representation within prescribed timelines.

• File a Section 17 appeal promptly with the DRT if creditor action is improper.

• Know that civil courts can handle disputes involving legal title, fraud, or adverse claimants.

Creditors:

• Follow the notice and objection process carefully under SARFAESI.

• Be ready to substantiate borrower objections before DRT.

• If disputes are related to securitisation or reconstruction, the Section 11 arbitration route must be used.

In India, the recovery of debts due to banks and financial institutions is primarily governed by two key legislations: the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, and the Recovery of Debts and Bankruptcy (RDB) Act, 1993, which led to the establishment of Debt Recovery Tribunals (DRTs).

SARFAESI Act, 2002

The SARFAESI Act is a powerful law that empowers banks and financial institutions to recover their secured debts from defaulting borrowers without the intervention of a court. This significantly expedites the recovery process and helps in reducing Non-Performing Assets (NPAs) in the financial system.

Key Provisions and Features:

• Empowers Secured Creditors: The Act allows secured creditors (banks and financial institutions) to enforce their security interests over secured assets (like residential or commercial properties, movable property, financial assets) without needing a court order.
• Direct Enforcement: If a borrower defaults on a secured loan and their account is classified as an NPA, the lender can take several actions after issuing a 60-day notice:
  • Take possession of the secured assets.
  • Lease, sell, or assign the rights to the collateral.
  • Manage the collateral directly or appoint a designated person for its management.
  • Compel any person who has acquired the borrower’s secured assets to pay the sums required to settle the debt.
• Asset Reconstruction Companies (ARCs): The Act facilitates the creation and regulation of ARCs, which can acquire NPAs from banks and financial institutions and then work on their recovery or reconstruction.
• Central Registry: It provides for a central registry to register security interests created on property rights, ensuring transparency and preventing multiple financing on the same asset.
• Exclusions: The SARFAESI Act generally does not apply to:
  • Unsecured loans.
  • Loans below ₹100,000.
  • Where the remaining debt is below 20% of the original principal.
  • Agricultural land.
• Constitutional Validity: The Supreme Court of India upheld the constitutional validity of the SARFAESI Act in the Mardia Chemicals Ltd. v. ICICI Bank case.

Objective: The primary objective of the SARFAESI Act is to provide a swift and effective mechanism for the recovery of secured debts by banks and financial institutions, thereby promoting financial stability.

Debt Recovery Tribunals (DRTs)

The Debt Recovery Tribunals (DRTs) and Debt Recovery Appellate Tribunals (DRATs) are quasi-judicial bodies established under the Recovery of Debts and Bankruptcy Act, 1993 (formerly Recovery of Debts Due to Banks and Financial Institutions Act). Their main purpose is to provide expeditious adjudication and recovery of debts due to banks and financial institutions.

Powers and Functions:

• Adjudication of Debt Disputes: DRTs are empowered to hear and decide cases related to debt recovery by banks and financial institutions.
• Monetary Threshold: They primarily handle loan default cases where the debt amount is ₹20 lakh or more.
• Enforcement of Security: While SARFAESI allows out-of-court recovery, the DRT acts as a forum for borrowers to challenge the actions taken by secured creditors under the SARFAESI Act. If a borrower feels aggrieved by the recovery measures initiated by a lender under SARFAESI, they can file a Securitisation Application (SA) with the DRT.
• Issuance of Recovery Certificates: If a DRT finds the debt due, it issues a Recovery Certificate, which allows the bank or financial institution to proceed with the recovery of the certified amount.
• Powers of a Civil Court: DRTs have similar powers to a Civil Court for matters before them relating to debt recovery, including summoning witnesses, compelling document production, and receiving evidence.
• Appellate Authority (DRATs): Decisions of the DRTs can be appealed before the Debt Recovery Appellate Tribunals (DRATs).

Objective: The objective of DRTs is to provide a specialized and efficient platform for the resolution of debt recovery cases, reducing the burden on traditional civil courts and speeding up the recovery process for financial institutions.

How SARFAESI and DRT work together:

While SARFAESI empowers lenders to take direct action without court intervention for secured debts, the DRT plays a crucial complementary role:

1. SARFAESI as a direct tool: Banks and financial institutions first attempt to recover secured debts using the provisions of the SARFAESI Act (e.g., taking possession of collateral and selling it).
2. DRT as a recourse for borrowers: If a borrower believes that the actions taken by the lender under SARFAESI are improper, premature, or illegal, they can challenge these actions by filing an appeal (Securitisation Application) with the Debt Recovery Tribunal.
3. DRT for other debt recovery: For unsecured debts or secured debts not covered by SARFAESI, banks and financial institutions can approach the DRT to file an Original Application (OA) for debt recovery.
4. Expedited process: Both mechanisms aim to expedite debt recovery. SARFAESI offers a quicker, non-judicial route for secured debts, while DRTs provide a specialized judicial forum for a broader range of debt recovery cases, including appeals under SARFAESI.

SARFAESI gives lenders more direct power, while DRTs ensure a legal and fair framework for both lenders and borrowers in the debt recovery process in India.

SARFAESI Act, 2002

The SARFAESI Act, enacted in 2002, enables banks and financial institutions to recover dues from defaulting borrowers efficiently without court intervention, addressing rising non-performing assets (NPAs). It focuses on:

• Securitisation: Converting loans into marketable securities for liquidity.
• Asset Reconstruction: Allowing Asset Reconstruction Companies (ARCs) to acquire NPAs for restructuring or recovery.
• Enforcement of Security Interest: Empowering secured creditors to possess and sell defaulters’ secured assets.

Applicability

• Applies to secured loans above ₹1 lakh classified as NPAs.
• Covers banks, financial institutions, and certain Non-Banking Financial Companies (NBFCs) with assets of ₹100 crore or more (notified in 2020).
• Exclusions:
  • Loans below ₹1 lakh.
  • Agricultural land.
  • Cases where 80% of the loan is repaid.
  • Securities under the Indian Contract Act or Sale of Goods Act, 1930.
  • Properties not liable to attachment under Section 60 of the Code of Civil Procedure, 1908.

Key Features

1. Enforcement Process (Section 13):
   • Notice: Creditors issue a notice under Section 13(2) for repayment within 60 days if a loan is an NPA.
   • Possession and Sale: If unpaid, creditors can take possession of secured assets under Section 13(4), transfer by lease, sale, or appoint a manager.
   • Valuation: Assets must be valued by an approved valuer before sale.
2. Central Registry: Registers transactions related to securitisation, reconstruction, and security interests for transparency.
3. Amendments (2016):
   • Allows debt-to-equity conversion, making banks/ARCs equity holders.
   • Permits banks to buy immovable property at auction if no bids are received, adjusting debt against the purchase.

Borrower Rights

• Right to Appeal: Borrowers can challenge actions under Section 17 at a Debt Recovery Tribunal (DRT) within 45 days.
• Redemption: Borrowers can redeem property by paying dues before auction (Section 13(8)).
• Notice Requirement: Mandatory notice before possession or sale, upheld in Mathew Varghese v. M. Amritha Kumar (2014).

Impact

• Enhances financial stability by speeding up NPA recovery.
• Reduces delays compared to civil litigation.
• Concerns about misuse require fair practices.

Debt Recovery Tribunals (DRTs)

Overview

Established under the Recovery of Debts and Bankruptcy Act (RDB Act), 1993, DRTs are quasi-judicial bodies for quick adjudication and recovery of debts due to banks and financial institutions, reducing civil court burdens.

Structure

• Number: 39 DRTs and 5 Debt Recovery Appellate Tribunals (DRATs) across cities like Mumbai, Delhi, Kolkata, Chennai, and Allahabad.
• Composition: DRTs are headed by a Presiding Officer (District Judge level), appointed for 5 years or until age 62. DRATs have a Chairperson.
• Jurisdiction: Handles debts of ₹20 lakh or more, though cases above ₹1 lakh can be directed to DRTs.

Key Functions

1. Adjudication:
   • Handles Original Applications (OAs) by banks for debt recovery.
   • Entertains SARFAESI appeals under Section 17 against creditor actions.
2. Procedure:
   • Banks file applications where the defendant resides, works, or the cause of action arises.
   • Defendants submit defenses within 30 days; counter-claims are allowed initially.
   • DRTs issue recovery certificates, executed by Recovery Officers for attachment, sale, or management.
3. Powers:
   • Similar to civil courts under the Code of Civil Procedure but follow natural justice for speed.
   • Can issue interim orders to prevent asset disposal.
4. Appeals:
   • DRT orders can be appealed to DRATs within 45 days (extendable).
   • Appeals require a 50% (SARFAESI) or 75% (RDB Act) deposit, which can be waived.
   • Further appeals go to High Courts or the Supreme Court under Articles 226/227.

Jurisdictional Clarifications

• Pecuniary Limits: The Delhi High Court in IDFC First Bank Limited v. Union of India (2023) ruled DRTs cannot handle SARFAESI claims below ₹10 lakh, but the Supreme Court in State Bank of Patiala v. Mukesh Jain (2016) allowed SARFAESI appeals for debts above ₹1 lakh, needing legislative clarity.
• NPA Classification: DRTs can review NPA classification or RBI guideline violations, unlike High Courts under Article 226.

Challenges

• Backlog: Overburdened DRTs face delays beyond the 6-month timeline.
• Understaffing: Insufficient staff and resources.
• Inconsistent Procedures: Variations across DRTs affect efficiency.
• Limited Powers: Cannot restrict individuals from leaving India, per the Bombay High Court.

Interconnection Between SARFAESI Act and DRTs

• Complementary Roles: SARFAESI allows direct creditor action, while DRTs handle borrower appeals under Section 17.
• Legal Framework: Both operate under RDB Act and SARFAESI Act for speedy recovery, with DRTs ensuring fairness.
• Jurisdictional Overlap: SARFAESI enables action without courts, but DRTs provide judicial oversight.

Recent Developments

• NPA Reduction: Gross NPAs fell from 9.11% (March 2021) to 2.58% (March 2025), aided by SARFAESI, DRTs, and the Insolvency and Bankruptcy Code.
• 2020 Notification: NBFCs with assets ≥ ₹100 crore can enforce security interests for debts ≥ ₹50 lakh under SARFAESI.
• Judicial Clarifications: Courts continue refining DRT jurisdiction, especially on pecuniary limits and NPA classification.

The SARFAESI Act enables efficient NPA recovery by bypassing initial court intervention, while DRTs and DRATs provide specialized adjudication and appellate mechanisms. They balance creditor efficiency with borrower protections through appeals and notices, though backlogs and staffing issues persist.