FinMin urges PSBs to settle small debt defaults by taking haircuts

Says this would enable in reduction of pending cases at DRTs and enhance recovery for banks

To reduce the burden on debt recovery tribunals (DRTs), the finance ministry has asked public sector banks (PSBs) to go for one time settlement (OTS) of loan default cases ranging between Rs 20 lakh and Rs one crore, with the mutual consent of borrowers.

“The move will enable the reduction of cases as they constitute about 72-74 per cent of the pending cases at DRTs and also expedite the recovery of non-performing Assets (NPAs) by the banks. In these settlement cases, the board of the concerned banks decides on the haircut and there is no average haircut for the banks,” a senior Finance ministry official said.

Earlier this year, the ministry informed the Lok Sabha that about 158,000 cases were pending with DRTs on February 2023. While the pendency of cases in DRTs is huge, in the five years to FY22, they have disposed of 110,498 cases involving Rs 4.43 trillion filed by banks and financial institutions.

The Recovery of Debts and Bankruptcy Act (RDB Act), 1993 aims to safeguard the interest of banks and financial institutions as lenders. The Act applies to default cases by individuals and partnership firms where the money owed to a bank or financial institution is Rs 20 lakh or more.

For accounts in which there has been no recovery for three years, the bank files a case with the DRT for an amount above the specified limit of Rs 20 Lakh. “In those cases, where the bank has filed a case at DRT and opts for OTS, there has to be mutual consent between the parties,” a second official said.

The haircuts in these settlement cases depend upon a case-by-case basis and are decided by the board of the concerned banks, the second official added. “It depends upon various factors such as the value of the primary security, net worth of the guarantor, besides others.”

The delay in the disposal of cases is due to the fact that there is not generally a haircut in DRTs as is the case with National Company Law Tribunal (NCLT).

Last November, a Supreme Court ruling held that high courts can't interfere in an OTS mutually agreed upon by parties and extend the time granted for repayment of debt. The judgment laid out in the Bijnor Urban Coop Bank case said the borrowers can’t claim OTS as a matter of right.

The country currently has 39 Debts Recovery Tribunals (DRTs) and five Debt Recovery Appellate Tribunals (DRATs). The Finance ministry is also aiming to appoint presiding officers at all DRTs as there are 4-5 vacancies at this moment. The department of financial services is also imparting training to these officials to expedite the disposal of cases,” the first official said.

The government, however, isn't inclined to increase the number of DRTs to deal with cases of above Rs 100 crore and also does not intend to tweak the limit of 180 days to complete the case since the filing of the application.

The decision to open new DRTs is taken after an assessment of various factors, such as, number of cases, territorial jurisdiction, and convenience for litigants. Six new DRTs were opened in FY17.