ABSTRACT
This paper provides a comprehensive historical development of money lending in India, exploring the intricate dynamics surrounding debt recovery in India, encompassing the legislative framework, significant legal judgments, and emerging challenges posed by the prevalence of instant loan apps. The legislative backbone is formed by the Recovery of Debts and Bankruptcy Act, 1993, and the SARFAESI Act, 2002, which delineate the processes governing the adjudication and recovery of debts owed to banks and financial institutions.
In the contemporary era of instant loan apps, this paper highlights the popularity of these digital platforms and associated risks. This research underscores the necessity for caution and awareness in the face of evolving financial technologies.
The paper concludes by offering prudent financial suggestions for a sustainable financial lifestyle. These recommendations aim to empower individuals to navigate the dynamic landscape of debt recovery, fostering awareness and informed decision-making in the realm of personal finance.
Keywords: Debt recovery, legislative framework, legal precedents, instant loan apps, financial dynamics.
INTRODUCTION
Today, with a plethora of banks and financial institutions offering a variety of loan products, borrowers in the country have never had it better. With low interest rates, banks and financial institutions continue to elbow one another out of the way to attract customers by offering them better interest rates. However, with the increase in the loan market, recently, defaulters of the loan have also been found to be increasing, causing major concern for banks. This paper concerns on the illegal ways adopted by the financial institutions for the recovery of debts in India. As we delve into the landscape of instant loan apps, we encounter a paradigm shift in borrowing behaviours driven by the technological advancements. However, this convenience brings forth challenges, particularly in the realms of data security and potential misuse during debt collection. With some measures, borrowers can lead a financial healthy life.
EVOLUTION OF MONEY LENDING IN INDIA:
The practice of money lending has played a pivotal role in shaping the ancient Indian economy, yet its importance has often been overlooked. Dating back to the Vedic period (2000 BC to 1400 BC), traces of loans and usury can be found, with money lending considered one of the four honourable occupations alongside tillage, trading, and harvesting during the early Aryan period. During the Mughal period, indigenous banking flourished, with virtually every village in India boasting its money lender or Sharoff, who facilitated trade and commerce. At the time, the prevailing currency and coinage system made money lending a lucrative venture.
In the late 18th century, modern banking in India took its nascent steps with the establishment of the Bank of Hindustan in 1770. The establishment of the Reserve Bank of India in 1935 was based on the recommendations of the Hilton Young Commission, which advocated for a comprehensive regulatory framework for banking to be put in place. The Reserve Bank of India Act of 1934 laid the statutory basis for the functioning of the bank, which officially commenced operations on 1 April, 1935. The subsequent decades saw incremental changes, but the economic reforms of the 1990s brought about significant transformations, liberalizing the financial sector, encouraging foreign investment, and diversifying loan products.
In recent years, the Indian banking sector has witnessed a paradigm shift in loan disbursement processes, leveraging technology and digital platforms to streamline operations and enhance the overall lending experience.
LEGISLATIVE FRAMEWORK ON DEBT RECOVERY
The Recovery of Debts and Bankruptcy Act,1993
The purpose of this act is to expedite the adjudication and recovery of debts owed to banks and financial institutions. According to a 2018 central government notification, the act applies only when the debt value is 20 lakhs or more. The adjudicating authorities were Debt Recovery Tribunal (DRT) and Debt Recovery Appellate Tribunal (DRAT). With 39 DRTs and 5 DRATs currently in India, banks and financial institutions must apply to the tribunal for debt recovery under section 19(2) of the Act. If another bank files an application on the same person, later bank can join before the tribunal passes final order. Section 20 of the Act allows an aggrieved party to file an appeal within 30 days, extendable if the tribunal permits, with the appeal to be disposed of within 60 days.
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002
The SARFAESI Act, 2002 outlines a procedure in which banks or financial institutions itself will adjudicate the debt. The act is only applicable to secured assets, excluding agricultural land. It is invoked when the security interest is over Rs.1,00,000 and the amount due is 20% or more of the principal amount and interest. Adjudicating authorities include DRT and DRAT. Section 13(10) of the Act allows secured creditors to approach the DRT if unsatisfied after realizing security interest, while section 17 of the Act permits borrowers to approach the DRT within 45 days if creditors’ actions are not in accordance with the act.
LEGAL PRECEDENTS REGARDING PHYSICAL COERCION BY FINANCIAL INSTITUTIONS:
In ICICI Bank v. Shanti Devi Sharma and others, the bank’s repossession of the respondent’s husband’s motorcycle turned tragic when their recovery agent resorted to force, leaving him carrying vegetables on his back. This ensuing neighbourhood ridicule pushed him to the brink, resulting in his untimely demise. The Supreme Court, deeming such actions illegal, delivered a landmark verdict that condemned the bank’s role in this tragic episode.
In Magna Fincorp Ltd. v. Rajesh Kumar Tiwari, where the Supreme Court clarified that, under a hire-purchase agreement, the financier holds true ownership of the vehicle. While the financier has the right to reclaim the vehicle upon the hirer’s failure to meet payment obligations, the Court unequivocally emphasized that employing forceful recovery tactics by agents is impermissible, setting a significant legal precedent.
In Dhananjay Seth v. Union of India, the petitioners lamented the forceful seizure of their vehicle, acquired through financial support from institutions, by the respondents’ hired goons during unconventional hours. They raised concerns about the manner in which the respondents took possession of their vehicles. The Patna High Court determined that the respondents, comprising banks and financial institutions, acted unlawfully by seizing or repossessing vehicles without adhering to RBI guidelines, the SARFAESI Act,2002 and relevant judicial precedents.
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