NPA Recovery Channels

When a loan becomes an NPA, banks have several channels to recover dues or resolve the bad asset. In India, the major recovery mechanisms include legal and quasi-legal avenues as well as negotiated settlements. The key channels are:

SARFAESI Act (2002) – Enforcement of Security Interests

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) is a key legal mechanism that empowers banks and financial institutions to recover non-performing assets (NPAs) without prior court intervention.

Once a borrower defaults and the account is classified as an NPA, the secured creditor can directly enforce its security interest by issuing a 60-day demand notice. If the borrower fails to regularise the dues, the bank may take possession of the secured asset, take over management, or sell or auction the asset to recover outstanding amounts.

This framework significantly accelerates recovery compared to traditional civil litigation, which is often time-consuming.

SARFAESI applies only to secured loans; unsecured loans are excluded. Certain safeguards and thresholds apply:

• agricultural land is exempt
• loans below ₹1 lakh are not covered, and
• NBFCs can invoke SARFAESI only if they meet prescribed asset-size and loan-size criteria (assets of at least ₹100 crore and loan amount of ₹20 lakh or more).

While banks can act without court approval, borrowers retain the right to appeal to the Debt Recovery Tribunal (DRT) against unlawful action, subject to a mandatory pre-deposit (normally 50 per cent of dues, reducible to a minimum of 25 per cent). The Act also enabled the establishment of Asset Reconstruction Companies (ARCs) and a central registry (CERSAI) to record security interests and prevent multiple lending against the same asset.

Debt Recovery Tribunals (DRTs)

Debt Recovery Tribunals (DRTs) are specialised quasi-judicial bodies established under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, now renamed the Recovery of Debts and Bankruptcy Act, to provide a faster and expert forum for recovery of large loan dues by banks and financial institutions.

DRTs were created to reduce dependence on ordinary civil courts, which are time-consuming and procedurally complex.

• Each DRT is headed by a Presiding Officer and follows simplified procedures, not strictly bound by the Civil Procedure Code, enabling relatively quicker adjudication.
• DRTs have jurisdiction over cases where the amount due is ₹20 lakh or more, ensuring focus on significant defaults, while smaller claims remain with civil courts.

Banks file applications before DRTs seeking recovery certificates, which, once issued, are executed by Recovery Officers empowered to attach, seize, and sell borrower assets. Appeals against DRT orders lie with Debt Recovery Appellate Tribunals (DRATs), subject to a mandatory pre-deposit of 50% of the outstanding amount, reducible to 25% at the tribunal’s discretion, to prevent frivolous appeals.

DRTs also play a key role under the SARFAESI framework, acting as the appellate forum for borrower grievances against enforcement actions. Although DRTs have improved recovery speed compared to civil courts, their effectiveness has been constrained by limited capacity and large backlogs—over 1.6 lakh pending cases as of 2022—with average recovery rates remaining modest. Despite these challenges, DRTs remain a crucial pillar of India’s NPA recovery mechanism, particularly for unsecured loans and cases where direct enforcement is not available.

Insolvency and Bankruptcy Code (IBC, 2016)

The Insolvency and Bankruptcy Code, 2016 (IBC) is a comprehensive and time-bound framework for resolving insolvency of corporate entities (and, in later phases, individuals).

Unlike mechanisms such as SARFAESI or DRTs, which focus on recovery of specific loan dues, IBC addresses the entire debt of a defaulting company as a single unit, with the objective of value maximisation through resolution rather than piecemeal recovery. It replaced multiple slow and fragmented regimes such as BIFR and winding-up proceedings and has emerged as the central pillar of NPA resolution for medium and large corporate borrowers.

• Under IBC, when a corporate borrower defaults on debt of ₹1 crore or more, a financial creditor may initiate the Corporate Insolvency Resolution Process (CIRP) before the National Company Law Tribunal (NCLT).
• Once admitted, management control shifts from the debtor to an Insolvency Professional, and a Committee of Creditors (CoC) comprising financial creditors is constituted.
• The CoC must decide the future of the company within a strict timeline of 180 days, extendable up to a maximum of 330 days including litigation.
• If a resolution plan is approved by at least 66% of the CoC (by voting share) and endorsed by NCLT, the company is rescued through new ownership or debt restructuring.
• Failing this, the company proceeds to liquidation, with asset sale proceeds distributed according to the statutory waterfall, where secured creditors rank high after insolvency costs.

IBC is a creditor-driven and unified framework, strengthening the position of banks by removing debtor control and curbing delays. Its impact on NPA recovery has been substantial: average recoveries under IBC have improved to around 32–45% of claims, compared to about 20% under earlier mechanisms, and by 2025, creditors had recovered nearly ₹4 lakh crore through approved resolution plans.
In FY 2023–24, IBC accounted for about 48% of total NPA recoveries, surpassing SARFAESI, largely due to resolution of large corporate cases. While challenges remain—such as NCLT backlogs and occasional timeline overruns—IBC represents a landmark shift from mere recovery to resolution and revival of viable businesses, fundamentally transforming India’s approach to insolvency and credit discipline.

Compromise Settlements / One-Time Settlements (OTS)

Apart from formal legal recovery mechanisms such as SARFAESI, DRTs, and the Insolvency and Bankruptcy Code, banks frequently use negotiated settlements to resolve non-performing assets.

• A One-Time Settlement (OTS) is a mutually agreed arrangement in which the bank accepts a lump-sum payment lower than the total outstanding dues and treats it as full and final settlement, waiving the remaining amount.
• The rationale behind OTS is pragmatic: recovering a substantial portion quickly is often preferable to prolonged litigation with uncertain outcomes, high legal costs, and erosion of asset value.
• OTS is commonly used for chronic NPAs where the borrower lacks the capacity to repay in full but is willing to make a partial payment, particularly in agriculture, MSMEs, and retail loan segments.

OTS and compromise settlements are governed by internal policies framed in line with guidelines issued by the Reserve Bank of India. Banks are required to have a Board-approved Loan Recovery Policy specifying eligibility, approval levels, and safeguards.
Typically, accounts involving fraud or wilful default are excluded, as OTS is meant for distressed but cooperative borrowers. The settlement may involve a single cash payment or a structured payment of a reduced amount, after which the account is closed as “settled” and the unrecovered balance is written off.

While OTS helps banks clean up balance sheets and reduce NPAs efficiently, excessive or indiscriminate use can weaken credit discipline. Hence, RBI mandates careful evaluation, higher-level approvals, and certification that the settlement is in the bank’s interest and that alternative recovery options have been duly considered.