Mechanisms for Recovering Non-Performing Assets

A loan turns into a Non-Performing Asset the moment a borrower stops paying interest or principal for 90 days in a row. What happens after that single date decides whether a bank quietly writes off the loss or gets its money back. Recovering that money isn’t just a paperwork exercise, it needs specific legal machinery, because ordinary civil courts are far too slow for the volume and value involved. This is exactly why India built a layered set of recovery mechanisms, and understanding how each one works is essential for anyone studying corporate accounting or banking law.

Why banks needed a dedicated recovery toolkit 🔗

Before the 1990s, a bank trying to recover a defaulted loan had only one route: file a civil suit. Civil courts in India handle everything from property disputes to matrimonial cases, so a bank’s recovery suit could sit in the queue for years, sometimes over a decade, while the underlying asset lost value and the borrower found new ways to delay proceedings. Banks needed forums that dealt with nothing but debt recovery, moved faster, and gave secured creditors real teeth. That need produced, in sequence, Debt Recovery Tribunals, Lok Adalats, the SARFAESI Act, and eventually the Insolvency and Bankruptcy Code.

Debt Recovery Tribunals: the first specialised forum 🔗

The Recovery of Debts due to Banks and Financial Institutions (RDDBFI) Act, 1993 created Debt Recovery Tribunals (DRTs), exclusively to hear cases where banks and financial institutions are trying to recover dues classified as NPAs under RBI norms. Unlike a regular civil court, a DRT is not bound by the Code of Civil Procedure, which lets it move through cases far more quickly while still carrying all the powers of a District Court.

How a case moves through a DRT 🔗

A bank files what is called an Original Application (OA) before the DRT having jurisdiction over the case. The Tribunal hears both sides, examines the security offered, and passes a recovery certificate if it finds in favour of the lender. A Recovery Officer attached to the Tribunal then executes that certificate, which can involve attaching and selling the borrower’s property. DRTs also hear applications filed under the SARFAESI Act, making them a common thread running through India’s recovery framework.

Appeals go to the DRAT 🔗

If either the bank or the borrower is unhappy with a DRT’s order, the next stop is the Debts Recovery Appellate Tribunal (DRAT). This two-tier structure gives borrowers a genuine right to contest a claim while still keeping the process outside the general court system.

Lok Adalats: settling small-ticket NPAs without a full trial 🔗

Lok Adalats, or “people’s courts,” offer a conciliatory, out-of-court settlement route rather than an adversarial trial. Banks refer smaller-value NPA accounts here, and both parties negotiate a settlement under the guidance of a panel, usually a retired judge along with other members. Recent RBI data shows just how much volume flows through this channel: Lok Adalats handled the largest number of NPA cases of any mechanism in 2024-25, involving a total sum of roughly ₹1.98 lakh crore, even though the recovery rate here remains the lowest among all four channels. Lok Adalats are best understood as a high-volume, low-value filter, useful for clearing small dues quickly rather than resolving large corporate defaults.

The SARFAESI Act, 2002: recovery without going to court first 🔗

By the early 2000s, even DRTs weren’t recovering dues fast enough. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 changed the equation by letting secured creditors enforce their security interest directly, without first approaching a court or tribunal. Its core idea is simple: if a loan is secured against an asset, and the account has been classified as an NPA, the bank can move to seize and sell that asset through its own internal process.

The Section 13(2) demand notice 🔗

Recovery under SARFAESI begins with a notice under Section 13(2). Once an account is classified as an NPA per RBI norms, the lender issues a written notice giving the borrower a minimum of 60 days to repay the outstanding dues in full. The notice has to spell out the exact amount owed and warn the borrower of the consequences of non-payment. The borrower is entitled to object or make representations during this window, and the lender must respond to any valid objection.

Taking possession and selling the asset 🔗

If the borrower still doesn’t pay, Section 13(4) allows the bank to take symbolic or physical possession of the secured asset, appoint a manager to run it if it’s a business, or step in to collect payments owed to the borrower by third parties. The asset is then valued and sold, typically through a public auction, to recover the outstanding amount. If the sale proceeds fall short, the bank can still pursue the remaining balance through a DRT.

Asset Reconstruction Companies enter the picture 🔗

SARFAESI also gave rise to Asset Reconstruction Companies (ARCs), specialised entities registered with the RBI that buy stressed loans off a bank’s books at an agreed price. Once an ARC acquires an NPA, it can restructure the underlying business, change its management, or enforce the security interest itself, while issuing security receipts to qualified institutional buyers against the assets it has acquired. This lets banks clean up their balance sheets quickly instead of chasing recovery themselves for years.

The borrower isn’t without recourse 🔗

SARFAESI’s power is balanced by an appeal route. A borrower who believes the bank’s action was improper can approach the DRT, generally within 45 days, though this typically requires depositing a portion of the demanded amount. From there, a further appeal is possible to the DRAT. Courts have also stepped in to protect this balance; the Supreme Court, for instance, upheld both the bank’s right to enforce security under SARFAESI and the borrower’s right to be heard, while striking down a rule that forced borrowers to pre-deposit 75 per cent of the claimed liability before even filing an appeal.

The Insolvency and Bankruptcy Code, 2016: a broader net for corporate defaults 🔗

DRTs, Lok Adalats, and SARFAESI all focus on recovering dues from an existing borrower. The Insolvency and Bankruptcy Code (IBC), 2016 takes a different approach entirely: rather than just recovering money, it resolves the insolvency of the defaulting company itself, within a strict time frame.

NCLT as the adjudicating authority 🔗

For corporate borrowers, the National Company Law Tribunal (NCLT) acts as the adjudicating authority, while the DRT continues to play this role for individuals and partnership firms. The Insolvency and Bankruptcy Board of India (IBBI), a statutory body with representation from the Ministry of Finance, the Ministry of Corporate Affairs, and the RBI, frames the regulations governing the entire process.

Resolution or liquidation 🔗

Once a case is admitted, a resolution professional takes over management of the company and invites resolution plans from prospective buyers or investors, all within defined timelines. If a viable plan is approved, the company continues under new ownership or a restructured arrangement. If no plan works out, the company moves to liquidation, and the sale proceeds are distributed among creditors in the order of priority set out in the Code. This shift from a “debtor-in-possession” system to a “creditor-in-control” system is one of the most significant changes the IBC introduced to Indian insolvency law.

How the four mechanisms compare 🔗

What the recovery numbers actually show 🔗

The RBI’s Report on Trend and Progress of Banking in India for 2024-25 gives a clear picture of how these four channels perform in practice. Banks recovered just over ₹1.04 lakh crore out of ₹5.79 lakh crore involved across all mechanisms that year, an overall recovery rate of around 18 per cent. The IBC alone accounted for roughly 52 per cent of that recovered amount, with SARFAESI contributing the next largest share; together the two made up more than 80 per cent of total recoveries, even though Lok Adalats handled far more cases by number. This pattern has held for several years: high-volume, low-value channels like Lok Adalats clear the backlog of small accounts, while SARFAESI and the IBC do the heavy lifting on value. It also lines up with a broader improvement in asset quality, with India’s gross NPA ratio falling to 2.15 per cent by September 2025, its lowest level since 2010-11.

What this tells us is that no single mechanism does the whole job. DRTs give banks a specialised court, Lok Adalats clear the small stuff quickly, SARFAESI lets secured creditors act without waiting for a court order, and the IBC handles the large, complex corporate failures that the older tools weren’t built for. Together, they form a system that has meaningfully improved recovery outcomes for Indian banks over the past two decades, even if it’s still far from perfect.

What do you think? Given that the IBC and SARFAESI recover the most money while Lok Adalats handle the most cases, should banks be pushing more small NPAs toward SARFAESI instead of Lok Adalats? And do you think a single unified recovery law would work better than having four separate mechanisms running in parallel?

References

1. https://www.clearias.com/debt-recovery-tribunals/
2. https://factly.in/what-indias-npa-data-reveals-about-bank-recovery-strategies/
3. https://thelegalschool.in/blog/sarfaesi-act
4. https://cleartax.in/s/sarfaesi-act-2002
5. https://www.drishtiias.com/daily-updates/daily-news-analysis/insolvency-and-bankruptcy-code-ibc-process
6. https://www.newkerala.com/news/a/ibc-helps-banks-recover-rs-432-lakh-crore-822.htm
7. https://legistify.com/blogs/debt-recovery-in-india/