SARFAESI Act: Courts Must Remember Banks Are Not Always Right and Borrowers Are Not Always Willful Defaulters
An important constitutional and humanitarian concern is increasingly arising in proceedings under the SARFAESI Act, where Debt Recovery Tribunals (DRTs), DRATs, and even constitutional courts are frequently passing heavy interim deposit orders at the initial stage without adequately examining the merits of the borrower’s case. While the objective of the SARFAESI framework is undoubtedly to ensure speedy recovery of public money and protect the banking system from deliberate defaults, courts and tribunals must equally remember that every borrower cannot automatically be presumed to be dishonest, fraudulent, or a “willful defaulter.” Financial distress may arise due to economic slowdown, medical emergencies, business collapse, market failures, policy changes, natural disasters, wrongful bank actions, or even arbitrary classification of accounts as NPAs. The rule of law requires that justice must remain balanced, impartial, and fact-based.
Over the years, Indian courts themselves have repeatedly acknowledged that banks and financial institutions are not infallible and that serious irregularities are possible in loan recovery proceedings. There have been numerous cases involving illegal possession notices, defective service of notices, undervaluation of secured assets, fraudulent auctions, denial of restructuring opportunities, violation of RBI guidelines, forged documentation, arbitrary interest calculations, and even collusion in private treaty sales. In several instances, borrowers have ultimately succeeded after years of litigation, proving that the recovery measures initiated against them were unlawful or procedurally defective. Therefore, mechanically directing huge interim deposits without first considering whether a prima facie case exists may effectively deny access to justice and render the statutory remedy under Section 17 illusory.
The expression “willful defaulter” itself carries serious civil and reputational consequences and cannot be casually presumed merely because a loan has become irregular. Under RBI norms, a willful defaulter is one who deliberately avoids repayment despite having the capacity to pay, diverts funds, siphons money, or disposes of secured assets dishonestly. Every borrower facing financial hardship does not fall within this category. Unfortunately, in many proceedings, borrowers are often treated with suspicion from the very beginning, while bank actions are presumed to be correct unless disproved after prolonged litigation. Such an approach undermines the principle of natural justice, which requires an impartial adjudication process rather than a presumption in favor of one side.
Courts and tribunals must therefore exercise caution while passing interim deposit orders, especially where serious allegations of illegality, fraud, non-service of notices, violation of mandatory Rules 8 and 9 of the Security Interest (Enforcement) Rules, 2002, undervaluation, or denial of hearing are raised. If the borrower demonstrates a strong prima facie case or shows that the bank’s actions may be contrary to law, the tribunal must first examine the legality of the recovery action before imposing crippling financial conditions. Otherwise, economically distressed borrowers may be deprived of their legal remedies solely because they are financially incapable of complying with burdensome deposit directions.
The banking system is undoubtedly vital to the nation’s economy, but justice delivery cannot become one-sided. Tribunals and courts exist not merely to facilitate recovery but also to ensure legality, fairness, accountability, and protection against arbitrary exercise of power. A democratic legal system must maintain equilibrium between the rights of secured creditors and the constitutional rights of citizens. The assumption that “banks are always right” and “borrowers are always defaulters” is contrary to both judicial wisdom and constitutional morality. Every case must be examined on its own facts, with fairness to both sides, before any harsh interim financial burden is imposed.
