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Government considers tweaks to reduce huge backlog at debt recovery tribunals

State Bank of India favours the changes as Yes Bank, where SBI holds a 26% stake, decided to legally challenge the rule.
State Bank of India favours the changes as Yes Bank, where SBI holds a 26% stake, decided to legally challenge the rule.

Summary

The proposed changes would enable banks to resolve outstanding debt cases with borrowers without seeking their consent for withdrawing pending DRT cases

In an effort to expedite the resolution of pending cases in Debts Recovery Tribunals (DRTs), the government is considering amendments to rules, including removing the clause requiring borrower approval when banks decide to withdraw debt recovery proceedings.

The proposed changes would enable banks to resolve outstanding debt cases with borrowers without seeking their consent for withdrawing pending DRT cases, empowering lenders and expediting debt resolution.

These amendments are part of broader DRT reforms aimed at reducing the backlog of tribunal cases, which stood at 160,000 as of February 2022, with claims valued at several trillion rupees, two people familiar with the developments said, requesting anonymity.

The finance ministry’s department of financial services is seeking banks’ opinions on the proposed changes to the DRT (Refund of Court Fee) Rules, 2013 and will proceed after further consultations, one of the two people said.

State Bank of India (SBI), the country’s largest lender, favours the changes as Yes Bank, where SBI holds a 26% stake, decided to legally challenge the government regulation requiring joint applications from borrowers and lenders for case withdrawals and fee refunds.

Currently, the DRT Refund of Fees rule requires joint applications for fee refunds and withdrawal of cases. This is believed to hinder out-of-court settlements, as some borrowers prefer to prolong DRT cases rather than settling. Banks, however, seek prompt debt resolution to maintain smooth lending activity and often settle with borrowers during pending DRT cases. The current regulations, however, can complicate their efforts, particularly if borrowers aim to prolong cases.

Questions emailed to spokespeople for the finance ministry and the financial services secretary remained unanswered till press time. Spokespeople for SBI and Yes Bank also did not respond to questions on the subject, while Indian Banks Association (IBA) did not answer questions mailed to them.

The proposed changes in DRT rules are part of larger reform efforts to reduce the backlog of cases in tribunals. As of February 2022, roughly 160,000 debt recovery cases were pending in DRTs.

While experts have noted that the number of pending cases has decreased in the past year, there are still more than 100,000 pending cases worth trillions of rupees.

Currently, 39 DRTs and 5 Debt Recovery Appellate Tribunals (DRATs) operate across India. The Recovery of Debts and Bankruptcy (RDB) Act, 1993, and the Securitization & Reconstruction of Financial Assets & Enforcement of Security Interest (SARFAESI) Act, 2002, empower DRTs to adjudicate cases involving debts of 20 lakh or more. The RDB Act provides for the establishment of tribunals for the expeditious adjudication and recovery of debts due to banks and financial institutions. The SARFAESI Act regulates securitization and reconstruction of financial assets and the enforcement of security interests.

While the pendency of cases in DRTs is still massive, in the five years to FY22, DRTs disposed of 110,498 cases involving 4.43 trillion filed by banks and financial institutions. The tribunals resolved 35,695 additional cases worth 2.81 trillion filed by borrowers and guarantors under the SARFAESI Act.

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