It is not very easy to default to defraud the banks and financial institution by the defaulting borrower since various statutory protections are provided to the lending banks and financial institutions. The activities of borrowing and lending are inseparable activities and there is a change from savings based economy to credit based economy not only in individual’s budget but also in the budget of a country.
When a person borrows money, a duty is cast on him not only to repay the money borrowed but also to pay interest in time at the agreed rate on the amount borrowed. Therefore so long as the amount due is not repaid there remains a liability on the borrower. A duty is cast on the lender also to realize the money lent with interest. In spite of the fact that the lending institution take precautions and take sufficient security for the money lent, some debts become bad and irrecoverable in the ordinary course of business. Bad debt or non-performing asset would mean an asset or account of a borrower which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset in accordance with the direction or guidelines relating to asset classification issued by the Reserve Bank of India.
DRT Act, 1993 and SRFAESI Act 2002
Recovery of debts has become a very difficult task for the banks and financial institutions and their bad debts or non-performing assets are on the rise. The process of realization or Recovery of non-performing assets (NPA) through the normal process is time consuming. To hasten or speed up the recovery process and keeping in view the alarming increase in NPAs, the Government of India has enacted the Recovery Debts Due to Banks and Financial instructions Act 1993 Popularly known as DRT Act. The DRT Act had some deficiencies inasmuch as it did not provide for assignment of debt to securitization companies and the secured assets could not be liquidated in time. Therefore, the union Government has brought in a legislation called the Securitization and Reconstruction of Financial Assets and Enforcement of security Interest Act 2002 to remedy the deficiency. It is generally referred to as SRFAESI Act. The SRFAESIA Act is not in derogation of The DRT Act. The purpose of DRT Act as well as SRFAESI Act is recovery of debt through non-adjudicatory process and to provide cumulative remedies to the secured creditors.
The SRFAESI Act provides for setting up of asset reconstruction companies, special purpose vehicles, asset management companies etc. by removing all fetters on the rights of the secured creditor, he is given rights of the secured creditor; he is given a right to choose one or more of the cumulative remedies. To give more teeth to the Act, the SRFAESI Act, 2002 has been amended in the year 2004 under the enforcement of security interest and Recovery of Debts Laws (Amendment) Act, 2004 Where under certain changes have been introduced in the act by insertion of amendment or addition to the exestuation sections. It is made specific in the preamble that the Act undertakes to regulate (1) securitization: (2) reconstruction of financial assets and (iii) enforcement of security interest all these three concepts are independent of each other.