The legal toolkit Indian banks use to recover bad loans â from a direct SARFAESI enforcement notice to Tribunal proceedings and full-blown insolvency resolution â and when each one applies.
Once a loan turns into an NPA, a bank has several distinct legal routes to recover its dues â each suited to a different exposure size, security position, and borrower situation. Choosing the wrong route wastes years; India's recovery mechanisms have evolved precisely because ordinary civil suits proved far too slow for secured lending at scale.
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 lets a secured creditor enforce its security without court intervention â a landmark shift from earlier civil-suit recovery.
Bank issues a 60-day demand notice to the defaulting borrower once the account is classified NPA.
If dues remain unpaid after 60 days, the bank can take possession of the secured asset, or sell/lease/assign it, without approaching a court.
An aggrieved borrower can appeal to the DRT under Section 17, and thereafter to the DRAT â but only after depositing a percentage of the claimed dues.
Set up under the Recovery of Debts and Bankruptcy Act, 1993 (RDDBFI Act), DRTs are specialised tribunals that adjudicate bank/FI recovery suits above a prescribed threshold (currently âš20 lakh), bypassing slower civil courts. An order from the DRT (a "Recovery Certificate") is executed by a Recovery Officer, who can attach and sell the borrower's assets. Appeals lie to the Debt Recovery Appellate Tribunal (DRAT).
The IBC provides a time-bound (originally 180 days, extendable to 330 days) resolution process before the National Company Law Tribunal (NCLT) for corporate borrowers. A financial creditor (including a bank) can trigger the Corporate Insolvency Resolution Process (CIRP) on default, after which a Resolution Professional takes over management and invites resolution plans â with liquidation as the fallback if no viable plan is approved.
Unlike SARFAESI (asset-specific enforcement) or DRT (a money-decree route), IBC addresses the borrower's insolvency at the entity level â all creditors participate through a Committee of Creditors (CoC), making it best suited for larger, multi-lender corporate exposures.
For smaller NPAs (commonly up to âš20 lakh, though limits are periodically revised), banks refer cases to Lok Adalats for quick, low-cost conciliated settlement. Banks also use One-Time Settlement (OTS) / compromise settlement schemes under their Board-approved recovery policy for accounts where litigation costs would exceed the likely recovery.
| Mechanism | Best Suited For | Key Feature |
|---|---|---|
| SARFAESI | Secured loans above âš1 lakh with clear, enforceable security | No court needed to enforce security |
| DRT | Bank/FI dues above âš20 lakh, secured or unsecured | Specialised, faster than civil court |
| IBC | Corporate borrowers, multi-lender exposures | Entity-level resolution, time-bound CIRP |
| Lok Adalat / OTS | Small-value or old, low-recoverability NPAs | Fast, negotiated, minimal cost |
Related deep-dive: See the JAIIB notes on Recovery of Dues for exam-focused MCQs.
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