Resolution Frameworks: SARFAESI, IBC, and Bad Banks
Exploring the legal and institutional mechanisms implemented in India to recover bad loans, featuring the SARFAESI Act of 2002, the Insolvency and Bankruptcy Code (IBC) of 2016, and the 'Bad Bank' (NARCL).
Expert Answer & Key Takeaways
Exploring the legal and institutional mechanisms implemented in India to recover bad loans, featuring the SARFAESI Act of 2002, the Insolvency and Bankruptcy Code (IBC) of 2016, and the 'Bad Bank' (NARCL).
1. The SARFAESI Act, 2002
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, was enacted to empower banks & financial institutions to recover their non-performing assets (NPAs) without the intervention of the Court.
Key Provisions:
- Enforcement of Security Interest: It allows secured creditors (banks) to take possession of the collateral (like land, building) pledged against the loan and sell it off to recover their dues, stepping past the long drawn-out civil court proceedings.
- Asset Reconstruction: Paved the way for the establishment of Asset Reconstruction Companies (ARCs).
- Condition: It is applicable only to secured loans where the collateral value is more than ₹1 lakh and the NPA loan outstanding is at least 20% of the principal amount.
- Exception: SARFAESI cannot be applied to agricultural land.
2. Insolvency and Bankruptcy Code (IBC), 2016
The IBC 2016 was a massive structural reform replacing a plethora of overlapping laws (like SICA, DRT Act) to consolidate the framework for resolving corporate bad debts, insolvency, and bankruptcy.
Mechanism:
- When a corporate debtor defaults (minimum default limit is ₹1 crore), the financial creditor (bank), operational creditor, or the corporate debtor itself can file an application to the adjudicating authority: the National Company Law Tribunal (NCLT).
- Once admitted, a Corporate Insolvency Resolution Process (CIRP) begins.
- A Committee of Creditors (CoC) is formed, comprising all financial creditors.
- An Insolvency Professional (IP) takes over the company"s management.
- Time Bound: The entire CIRP must be concluded within 330 days (including any litigation). If a resolution plan (revival) is not approved within this timeframe, the NCLT orders the liquidation (selling off assets to pay debts) of the corporate debtor.
3. Debt Recovery Tribunals (DRT)
Established under the Recovery of Debts Due to Banks and Financial Institutions (RDDBFI) Act, 1993, on the recommendations of the Narasimham Committee I.
- DRTs adjudicate claims exceeding ₹20 lakhs (now usually handled under IBC context for larger corporataes, but heavily used for individuals/unincorporated bodies under IBC, and SARFAESI appeals).
- Appeals against DRT orders go to the Debt Recovery Appellate Tribunal (DRAT).
4. The "Bad Bank" (NARCL)
In the Union Budget 2021-22, the government proposed a "Bad Bank" to consolidate and take over the massive scale of legacy stressed assets (NPAs) from public sector banks.
Structure:
- NARCL (National Asset Reconstruction Company Limited): It acquires stressed loans (above ₹500 crores) from banks. It pays the bank 15% upfront in cash and the remaining 85% in Security Receipts (SRs), which are guaranteed by the Government of India.
- IDRCL (India Debt Resolution Company Ltd): While NARCL acquires the asset, IDRCL (an operational entity primarily owned by the private sector) attempts to sell it in the market or resolve the debt to realize the value.
- Benefit: This cleans up the balance sheets of PSBs immediately, allowing them to focus on fresh lending rather than being stuck recovering bad loans.
Course4All Editorial Board
Verified ExpertSubject Matter Experts
Comprising experienced educators and curriculum specialists dedicated to providing accurate, exam-aligned preparation material.
Pattern: 2026 Ready
Updated: Weekly
Found an issue or have a suggestion?
Help us improve! Report bugs or suggest new features on our Telegram group.