Non-performing assets remain a significant challenge for India's banking sector. Gross NPAs declined significantly following IBC-driven resolutions, but the stock of stressed assets remains large. For banks and NBFCs managing NPA portfolios, the choice of recovery mechanism — SARFAESI, Debt Recovery Tribunal (DRT) proceedings, or IBC insolvency — is a strategic decision that depends on the nature of the exposure, the nature and value of available security, the promoter's conduct, and the long-term recovery objective.
SARFAESI: The Fastest Tool for Secured Creditors
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) allows secured creditors to enforce their security interest — take possession of mortgaged property, sell it, and apply proceeds to the outstanding debt — without obtaining a court decree. The process is initiated by a demand notice under Section 13(2), and if the borrower fails to pay or respond within 60 days, the bank can take symbolic or physical possession of the secured asset under Section 13(4).
SARFAESI is most effective for real estate and plant and machinery-backed exposures where the market value of the collateral is adequate to cover the outstanding. The process is vulnerable to challenge under Section 17 before the DRT (an application to set aside possession action), and courts have held that procedural non-compliance by the bank can vitiate SARFAESI enforcement entirely. Meticulous documentation and process compliance is essential.
DRT Proceedings: Recovery Certificates and Attachment
Debt Recovery Tribunals established under the Recovery of Debts and Bankruptcy Act, 1993 (RDBA) have exclusive jurisdiction over bank and NBFC recovery suits above ₹20 lakh. An Original Application (OA) before the DRT results in a Recovery Certificate, which is executed by the Recovery Officer through attachment and sale of the debtor's properties. The DRT can also pass interim orders of attachment pending final hearing.
DRT proceedings are particularly useful where: (a) the debt is partly unsecured, (b) the borrower has contested SARFAESI action, or (c) the bank seeks to establish personal liability of guarantors. The DRT has significantly reduced timelines under recent amendments and case management initiatives, though dockets remain heavy in Delhi and Mumbai.
IBC: Section 7 for Corporate Debtors
Where the borrower is a company and the default exceeds ₹1 crore, a Section 7 IBC application by a financial creditor is the most powerful tool available. The moratorium under Section 14 immediately halts all pending legal proceedings — including SARFAESI possession actions and DRT proceedings — and places the corporate debtor under the IRP's management. The CoC process and resolution plan mechanism can result in either a significant haircut (but faster recovery than litigation) or liquidation.
The strategic calculation between SARFAESI/DRT and IBC depends primarily on: the value of unencumbered assets, the promoter's willingness to cooperate and settle, the likely resolution plan value versus liquidation value, and the bank's appetite for the 12–18 month CIRP timeline. For large exposures above ₹50 crore, a coordinated strategy using IBC alongside parallel SARFAESI enforcement on security outside the moratorium's reach is often optimal.
Personal Guarantor Insolvency
The IBC framework for personal insolvency (Parts III and IV) now provides an additional mechanism for banks to pursue promoter-guarantors through the NCLT. A financial creditor can file an application before the NCLT against a personal guarantor of a corporate debtor that is already in CIRP or liquidation. This is a powerful accountability mechanism that has significantly changed the promoter's calculus in NPA negotiations.
Parallel Proceedings: Strategy and Limitations
Banks can simultaneously pursue SARFAESI enforcement, DRT proceedings, and IBC applications — there is no rule against parallel proceedings targeting different aspects of the recovery. However, once a Section 14 moratorium is in effect (on admission of a Section 7 IBC application), SARFAESI possession actions against the corporate debtor's assets are stayed. DRT proceedings against the company are also stayed, but DRT proceedings against personal guarantors can continue.
For counsel on NPA recovery strategy, SARFAESI enforcement, or IBC proceedings, contact our banking litigation practice.