Banks face seven-year backlog in debt recovery cases

Banks are dealing with a massive backlog in debt recovery cases, which will take seven years to clear at the current pace. Over 2 lakh cases are pending in Debt Recovery Tribunals (DRTs), which currently handle about 30,000- 40,000 cases annually. This means the existing pace is insufficient to clear the backlog, which could take seven years to resolve, experts say.In the last five years, from 2017 to 2022, DRTs managed to dispose of 1.45 lakh cases. To address this issue, the government has announced plans in the latest budget to increase the capacity of both DRTs and National Company Law Tribunals (NCLTs), which will look to strengthen the Insolvency and Bankruptcy Code (IBC) and improve the efficiency of debt recovery processes.

“In its initial years, DRT recovery which is now in single digit, used to be as high as 77% in 2005-06. Now it is the weakest link among all recovery mechanisms and deserves maximum attention, as claim amount involved is higher than any other legal recovery mechanism, said Hari Hara Mishra, CEO, Association of ARCs in India. “One area which can be explored is to encourage banks and FIs to handle loans up to Rs 1 crore through Lok Adalat/ Settlement which alone will reduce work load at DRTs substantially.”

Currently, there are 39 DRTs in India, but they are overwhelmed by the influx of cases. Each year, about 60,000 new cases are filed, but only 30,000- 40,000 cases are disposed off.

Compared to DRTs, the IBC has been effective in resolving cases, having resolved over 1,000 companies and recovered Rs 3.3 lakh crore for creditors. In what is the cherry on top, around 28,000 cases involving more than Rs 10 lakh crore have been settled before reaching formal admission under IBC procedures.

While there have been reforms to strengthen the tribunal system and speed up insolvency resolutions, despite these efforts, recovery from DRTs has been lagging compared to other mechanisms like the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, where banks can enforce security without court intervention. Data from the Reserve Bank of India (RBI) shows that in some years between 2018 and 2021, recovery rates were as low as 4% while recovery under IBC has been 32%. The government has been asking banks to expedite the recovery of bad loans. Recently, bank chiefs have been instructed to personally monitor the top 20 accounts to ensure faster resolution. In March 2016, the non-performing assets (NPAs) of banks had risen to 14.5%, prompting the government to implement several measures, including amending recovery laws and enacting the IBC. These measures have helped reduce NPAs to 2.8% by March 2024.