cessity of recovey of loan amounts

We are familiar about the working of Urban Co-op. Banks. The Urban Co-op. Banks mobilise deposits from the
members of the public. The banks have introduced various deposits schemes which induce the common man to
save more money. The Urban Co-op. Banks accept deposits for the purpose of lending. One of the most important
functions of the banks is to create credit. Except in a few cases like interest on savings bank deposits and interest on
export credit and interest on small loans upto Rs2 lakh which are administered
( under the control of the RBI), most of the interest rates on deposits as well as loans & advances can now be freely
set by the banks themselves.
It is the primary duty and function of the Urban Co-op. Banks to safeguard the interest of depositors. Whenever
deposits are accepted, the bank agrees and undertakes to repay the amount of deposits with interest to the depositor
on maturity. The ownership of the deposit amount vests with the customer and the custody of the deposit amount is
with the Banker. So whenever Advances and Loans are sanctioned to shareholders / members of the Bank, the
Banker has to take utmost care to see that the Borrower repays the amount of loan with interest so as to enable the
Banker to repay the amount of deposit with interest to the customer.
It is with background, it will be clear that the banker must be vigilant about the utilization of the amount of advances
and loans made to be shareholders/nominal member. If the Banker is reluctant and negligent towards recovery of
loan amounts and advances, it will be very difficult for the bank to repay the amount of "DEPOSIT AMOUNTS" to the
customers on maturity.
What is meant by overdues
The Urban Co-op. Banks should exercise caution, necessary checks and adopt detailed scrutiny measures to
process loan applications, received from the different shareholders.
This is necessary to ensure that every borrower has a proper repaying capacity for repayment of the amount of loans
and advances that would be sanctioned. Securities are also taken to ensure that in case the borrower fails to repay
the amount of loan, the securities can be attached and sold out and the debts can be liquidated.
Even with this background, though there is a detailed scrutiny of loan application, it is observed that there are very
few cases, where the judgment of the bankers fail. In such 'Fail Cases' the borrowers are not ready and willing to
repay the amount of loan, the securities can be attached and sold out and the debts can be liquidated.
We have also studied that whenever loans and advances are sanctioned, the borrowing shareholders nominal
members and sureties etc.are required to execute Demand Promissory Note and other allied Loan Agreements such
as Deed of Hypothecation, Deed of Mortgage and immovable properties, Deed of pledge etc.
On careful reading the Loan agreements, we observe the following points are stipulated in each Agreement/Bond.

a)

Date of sanction of loan

b)

Amount of loan sanctioned.

c)

Rate of Interest that would be charged.

d)

Last date of repayment of loan.

e)

Period for which loan is granted.

f)

g)
Rate of penal interest in case there are defaults committed by the borrower in respect of
repayment of loan amount.

h)

The mode of repayment of loan, i.e on monthly basis / on quarterly basis etc.

Details regarding securities offered.

Normal measures to be adopted by bank officials for recovery of dues

Whenever, a borrower commits breach of agreement in respect of repayment of schedule of the amount of loans with
interest etc., we safely say that there are 'OVERDUES
' in the Loan Account.
Once the Loan A/c is an overdue A/c i.e. the borrower has committed default in repayment of loan amount as per the
dates specified in the Agreement, then the Banker has necessarily to adopt measures which will result into recovery
of overdue amounts.
We now proceed to suggest certain measures to be adopted by Urban Co-op. Banks for effecting recovery of
overdue amounts.
Whenever the borrower commits default in repayment of loan amount, immediately the bank should serve '
Preliminary Notices' on the principal borrower and the sureties advising them to repay the amount of overdues with
interest etc. Such Preliminary Notices should invariably mention information which is of factual nature relating to (i)
amount of loan sanctioned (ii) date of sanction of loan (iii) Names of the sureties (iv)amount of the loan sanctioned (v)
amount of over dues with interest etc. on a particular date. In addition to the above it must also be communicated the
bank shall proceed to take further action against the principal borrower and sureties in case of failure to repay the
amount of loan/over dues. It has been often said 'A' stitch in time saves nine'. Thus, the banker must be vigilant,
right from the disbursement of loan amount till the recovery of the entire loan amount. There should be effective
supervision over the amount of loan sanctioned.
Recovery through salary / wages
After issue of such preliminary notices, there may be a positive response from the principal borrower and he may
repay the amount of defaulted loan installment, or the principal borrower and the surety may approach the authorities
of the bank and may explain their genuine difficulties regarding repayment of loan amount or there may offer to repay
the dues partially. There may be cases where there is no response from the borrower / sureties.
With this background, the bank should proceed further to devise such steps which will result in recovery of dues.
Under various State Cooperative Acts (e.g. Section 49 of M.C.S. Act 1960) it has been provided that if a member of a
society./Bank authorises his Employer to make deduction from his salary/wages, in order to satisfy the claims of the
society/Bank, then on receipt of requisition letter from the concerned Bank, the Employer shall proceed to make
deduction from the salary/wages from the concerned employee/member to meet the claims of the Bank. The
Employer must remit the amount so deducted immediately to the Bank concerned.
Non-compliance of these provisions under the State Cooperative Act shall be constructed as 'offence' and further
Civil and Criminal action can be instituted against suchErring Employer.
In addition to the above, there are provisions under the Indian Payment of Wages Act 1936 (vide Section 7(2) and
Section 7(2)(j) which stipulates that the Employer shall make deduction from the salary/wages of an Employee to
satisfy the claims of the Cooperative Society / Banks.
Settlement of Disputes
Based on the noting of the Management, the Board of Directors may pass a Resolution authorizing the Manager/or
such other officer to file "Dispute Application in the Co-op.Court against the defaulting principal borrower and his
sureties. Section 91 of the MCS Act empowers the co-operative courts to decide on Disputes and Section 95 further
empowers the court to direct attachment of property before announcement of the award which is called Attachment
before award or order and interlocutory order if it is satisfied that the parties to the dispute are likely to remove/

dispose off whole or part of his property. Section 95 similarly empowers the Registrar / Officer authorised by him to
take the above measures in case of disputes referred to him.
Under Section 96 of the MCS Act, the Co-operative courts after giving reasonable opportunity to the parties to the
dispute may make an award on the dispute. The related procedures and documents needed have been detailed
below:
The Dispute Application shall consist of following papers/documents etc.
A.

A copy of the plaint- the plaint should mention the date of

Loan Application

The date of Promissory Note & other loan agreements, bonds executed in favour of the Bank.

Description of the securities offered.

Details regarding sanction of loan.

Details regarding recovery effected.

Details of the loan amounts outstanding together with interest, penal interest etc.,

Date of issue of notice requesting the borrowings & sureties to repay the entire amount of loan with interest.

In the concluding para of the plaint we have to mention about the 'Prayer Clause' requesting the Hon. Court to grant
an Award/Decree in favour of the Bank.
The prayer clause normally consists of following important points

The opponents may be held responsible to repay the entire amount of loan with interest.

If the opponents fail to pay the amount of loan, the disputant may be entitled to attach the movable and
immovable property of the opponents.

The disputant may be entitled to sell the attached property and recover the amount due from the opponents.

Any other orders to meet the ends of justice.

Along with the copy of the plaint, the Bank is required to enclose 'Certified True Copies' of the following documents
i.e.
o

Copy of the Resolution passed by the Board of Directors for filing the dispute in the Co-op. Court.

Copy of the notices issued to the principal borrower and the sureties.

Acknowledgement receipts received from the postal authorities regarding service of notices.

Copies of the promissory note and loan agreement /Bond etc.

A copy of Deed of Mortgage, if any.

Statement of loan account.

Any other papers relevant to the dispute.

A copy of the Treasury challan indicating the amount deposited to meet the Arbitration cost.

On receipt of "Dispute Application" the Court shall issue summons to all the opponents mentioned
in the application.

After serving the summons, the opponents are directed to file their ' Written Statement' or 'Say' or '
Reply ' to the ' Dispute Application'.

After carefully reading the plaint and ' Written statement' filed by the opponents the court shall
proceed to frame issues ' involved in the dispute'.

The courts shall direct the disputant and the opponents to produce documentary evidences in
support of their say or claims etc.

After this, the authorized officer of the Disputant shall stand in the 'Witness Box' and explain the
circumstances which led to filing of dispute against the opponents.

The advocates for the opponents are at liberty to do 'Cross-Examination' of the Bank officials.

The opponents are subsequently required to stand in the 'Witness Box' and explain their stand to
Hon. Court.

The Bank official or the Advocate is also at liberty to do a cross examination of the opponent.

After this, the Advocate for the disputant and Advocate for the opponent are to make 'Arguments'
before the court in support of their claims.

After hearing both sides, the court shall deliver a judgment in the open court.

On the basis of the judgment, a final award / decree shall be passed.

Under section 97 of the MCS Act, an appeal against the decision under Section 96 or order under Section 95 can be
made by the aggrieved party to the Co-operative Appellate Court within 2 months from the date of the decision or
order.
It is observed that there has been often delay in the Co-op. Court for getting an Award and the leading Cooperators &
representatives of Urban Coop. Banks vehemently pressed the State Government to carry out certain amendments
for early disposal of cases of Urban Co-op. Banks. In Maharashtra State, the State Government has amended the
provisions of section 101 of the Maharashtra State Co-op. Societies Act, 1960.
Power of the Registrar to issue Recovery Certificate: Under the provisions of Section 101 of M.C.S. Act 1960, the
Registrar of Co-op. Societies is competent to make an enquiry on the merits of the application made to him by an
Urban Co-op. Bank for grant of 'Recovery Certificate' against the borrowers and sureties.
As provided under section 101 of the M.C.S. Act 1960 the Urban Co-op. Bank is required to file an application for
grant of 'Recovery Certificate' against the borrower in the office of Registrar of Co-op. Society.

The Registrar of Co-op. Societies shall serve summons to the opponents requesting them to appear before him and
explain to him why 'Certificate of Recovery' should not be granted against them.
The Registrar shall apply 'The Principles of summery procedure' for disposal of such cases/applications.
Before issue of 'Certificate of Recovery' the Registrar has to satisfy about following important aspects

I)

The opponents are members/Nominal Members of the Society / Bank.

II)

That the opponents have borrowed money from the Society / Bank.

III)
That the opponents have committed defaults in repayment of loan amounts and that they are in
'ARREARS'

IV)
The Registrar, shall grant a Certificate that the opponents are in arrears and are responsible to
pay the amount to the society with interest, cost of recovery etc.

Once, 'The Certificate of Recovery' is issued it becomes 'Final'. The word 'Final' denotes that it is not appealable in
any Court of Law.
Thus, in short the application under Section 101 is similar to that of 'dispute application'. We are required to enclose
all the papers relevant to documents etc., alongwith the application under Section 101.
The Urban Co-op. Banks, after obtaining awards are required to execute the same so as to recover the decreetal
amount from the opponents.
In Maharashtra, there are special provisions under the Maharashtra Co-op. Societies Act, 1960. Under Section 156
of the M.C.S. Act 1960 the Registrar or a person empowered by the Registrar, is Competent to execute the awards
against the opponents.
There are following broad methods / measures by which an award can be executed.

By issue of Demand Notice to opponents directing them to repay the entire amount as mentioned in the
award.

By attachment of movable property.

By sale of movable property.

By attachment of immovable property.

Without attachment, in case of Mortgage Decree, immovable property can be sold out.

The Registrar of Co-op. Societies in Maharashtra State, has also empowered the officials, not below the rank of
Branch Manager of Urban Co-op. Banks, to exercise the powers under Section 156 of M.C.S. Act 1960 read with
Rule 107 of M.C.S. Rules 1961.
Debt Recovery Tribunal The Debts Recovery Tribunals were established by the Government of India under an Act
of Parliament (Act 51 of 1993) for expeditious adjudication and recovery of debts due to banks and financial
institutions. Accordingly the DRTs were set up in different parts of the country as per the Recovery of Debts due to
banks and Financial Institutions Act, 1993 and Debts Recovery Tribunal (Procedure) Rules, 1993.
As per the provisions ( Section 19) of the DRT Act , banks and financial Institutions could apply to the Tribunal for
recovery of debts of Rs 10 Lakh or more by making an application called Original application to it. The Tribunal has

powers to pass an interim order preventing the borrower from selling/ disposing off / tampering with the property and
can pass orders for attaching the properties of the borrower in case it is satisfied that the latter may sell/ dispose off
whole or part of the property. Further the Tribunal has powers to appoint a receiver for taking care of the property.
Issue of Decree under section 19(20) of the Act- The Tribunal, after giving opportunities to both the parties, issues an
order directing the borrower to pay a specific amount to the bank. Based on the order, the Tribunal then issues a
certificate of recovery to the Recovery Officer. The RO can then proceed to recover the amount by attachment & sale
of property or by appointment of receiver for management of the property in terms of section 25 of the Act. As per
Section 20 of the Act, the aggrieved party can file an appeal against the order of the DRT before the Appellate
Tribunal within 45 days.
Recent Judgement of a three member bench of the Supreme Court:
The Supreme Court held that Cooperative banks can recover outstanding loans only through the mechanism
provided in State cooperative laws and need not approach the Debts Recovery Tribunal. The Bench pointed out that
the reason for excluding cooperative banks from the purview of the RDB Act seemed to be that they had
comprehensive, self-contained and less expensive remedies available under the State Co-operative Societies Acts,
while commercial banks and financial institutions had to file suits in civil courts. The RDB Act was, therefore,
designed to deal with other banks and financial institutions, which had to have recourse to the time-consuming
process of civil courts. The bench held that If cooperative disputes also went to the tribunals, they would be
overburdened and the whole object of speedy recovery of debts due to banks and financial institutions would be
defeated. In conclusion, unless this decision of the bench is revised, the co-operative banks can not recover their
loans through the DRTs.
SARFAESI Act, 2002
There are 3 objectives of the Act viz., to regulate:
o

Securitization and

Reconstruction of financial assets and

Enforcement of security interest.

From the point of view of the UCBs, the Enforcement of security interest is of particular importance and use for
recovery of their bad loans. The specialty of the Act is that the security interest can be enforced without intervention
of the courts subject to procedures being followed as per provisions of the Act and the related Rules.
Procedure to be followed:
o

Under Section 13(2) of the Act, a 60 days notice has to be served by the bank on the borrower with
a request to discharge the loan liability

The notice must contain details of :

amount payable by the borrower;

ecurity interest intended to be enforced.

on receipt of notice, if the borrower makes a representation or raises an objection, the

secured creditor must consider such representation or objection.

if the secured creditor comes to the conclusion that the said representation or objection is
not acceptable or tenable, he must communicate the reasons for non-acceptance of
representation or objection within one week of receipt of the above.

MODES OF RECOVERY AVAILABLE (S.13(4))

If borrower fails to discharge the liability, secured creditor has the following options

Take possession of secured asset

Take over the management of the business of the borrower including

The right to transfer by way of lease, sale, assignment, etc.

The said rights must be exercised only where substantial part of business of borrower is
held as security for the debt.

Appoint a manager to manage the security asset taken over.

Issue notice to persons who acquired the secured asset from the borrower or from whom
money is due.

The CMM( chief metropolitan magistrate)or DM

(district magistrate)is empowered even to use

force necessary for taking steps towards
securing compliance
Non-application under the Act- Section 31 -The exemptions under this Act i.e. properties which can not be attached
have been detailed in the schedule to the Act. Some of the important ones relevant for the UCBs are:

Any security interest securing repayment of any financial assistance not exceeding Rs.1
lakh.

Security interest not registered under this Act.

Any security interest created in agricultural land.

A lien on any goods, money or security given under the Indian Contract Act, 1872

A pledge of movables u/s 172 of the Indian Contract Act

Any conditional sale or hire-purchase or lease or any other contract in which no security
interest has been created.

Rights of unpaid seller u/s 47 of Sale of Goods Act.

Properties not liable to attachment under s.60 of cpc 1908 excluding properties specifically
charged for raising the loan.

The amount due is less than 20 per cent of the principal and interest

RIGHT TO APPEAL: Under the Act, the borrower can appeal before DRT by paying the fee within 45 days
(S.17). The appeal can be entertained only when the borrower deposits fifty per cent of the amounts claimed
in the notice.

DRT can consider the legality of action taken by the bank. If it finds it wrongful, it can restore the business or
management to the borrower. If , however, the DRT finds that the action taken by the bank is as per the
provisions of the law , then the bank/ secured creditor can proceed to take action under Section 13(4) of the
Act. The application has to be disposed of by the DRT within 60 days and if its pending for four months,
either the bank or the borrower can appeal to the Appellate Tribunal for expeditious Tribunal.

An application for recovery of balance amount, if any, by secured creditor can be presented to the debt
recovery tribunal by the authorised officer (AO)of the bank or can be sent by registered post addressed to
the registrar of debt recovery tribunal.

Appeal to the APPELLATE TRIBUNAL under Section 18:

Persons aggrieved by the order of DRT to prefer an application before the appellate tribunal within 30 days.

The appellate tribunal is vested with power to reduce the deposit amount to not less than 25 percent.

Miscellaneous aspects: No civil court has any jurisdiction under this Act.
The Indian Limitation Act, 1963 is applicable to this Act.
The SARFAESI Rules specify as to who should be the AO of a bank, the place of serving of the Demand Notice , the
mode of its delivery, measures to be taken if the amount mentioned in the notice is not paid- the manner of takeover
of possession of property, steps to be taken thereafter, custody of property, manner in which the property could be
sold, the manner of valuation of assets, serving of notice before sale & the contents of the sale notice, sale of assets
& issuance of certificate of sale, appointment of Manager, procedure for recovery of shortfall of amount due to the
bank.
A judicious of the available measures will greatly facilitate recovery of loans in banks.
Prepared by Shri G H Umarji, Sr.Officer, Rupee Coop. Bank Ltd., Pune and updated by Smt.Uma Sankar

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