Debt Recovery Laws and Rights of the Debtors: Balancing Finance and Fairness

Debt Recovery Laws and Rights of the Debtors: Balancing Finance and Fairness

Abstract

Debt recovery laws in India are designed to ensure that financial institutions can recover public money efficiently, while also safeguarding the fundamental rights and dignity of borrowers. However, the interplay between creditor rights and debtor protections has often tilted towards coercive recovery mechanisms. This essay examines the framework of Indian debt recovery laws, analyses the rights of the debtors, and proposes a people-centric approach to ensure both financial discipline and human dignity.

1. Introduction: The Dual Mandate of Debt Law

The modern credit economy thrives on trust—trust that loans will be repaid and trust that recovery will be just. The legislative and judicial ecosystem of debt recovery in India seeks to maintain this delicate equilibrium. However, in practice, the pendulum often swings towards harsh enforcement, particularly under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), and the Recovery of Debts and Bankruptcy Act, 1993 (RDBA). With millions of small borrowers and entrepreneurs facing aggressive recovery actions, the jurisprudence surrounding debtor rights has assumed constitutional significance.

2. Legal Framework for Debt Recovery in India

(a) The Recovery of Debts and Bankruptcy Act, 1993 (RDBA)

Originally enacted as the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, the RDBA created specialised tribunals, Debt Recovery Tribunals (DRTs) and Appellate Tribunals (DRATs), for speedy adjudication of debt claims exceeding ₹20 lakh. The Act allows banks to bypass civil courts, but mandates procedural fairness in hearing the debtor.

(b) The SARFAESI Act, 2002

The SARFAESI Act revolutionised debt recovery by empowering banks to enforce security interests without court intervention. Sections 13(2) and 13(4) allow banks to take possession of mortgaged assets after a 60-day notice period. However, the right to challenge such action before DRT under Section 17 provides limited judicial oversight.

(c) Insolvency and Bankruptcy Code, 2016 (IBC)

The IBC unified corporate and individual insolvency processes, ensuring that debt resolution precedes liquidation. While it prioritises creditor rights, it also allows the debtor an opportunity for restructuring through moratoriums and resolution plans.

(d) Civil and Criminal Remedies

In addition to these statutes, creditors often invoke Section 138 of the Negotiable Instruments Act, 1881 for cheque dishonour cases, and civil suits under the Code of Civil Procedure, 1908 for money recovery.

3. Constitutional and Human Rights Dimensions

Debt recovery is not merely a commercial act—it implicates Article 21 of the Constitution (Right to Life and Personal Liberty). The Supreme Court in ICICI Bank Ltd. v. Shanti Devi Sharma (2008) condemned the use of musclemen for recovery, declaring such practices “unconstitutional and unacceptable in a civilised society.”

The National Human Rights Commission (NHRC) has also issued advisories to banks, emphasising dignity and due process.

Furthermore, the judiciary has consistently reaffirmed that “public money” cannot justify violation of fundamental rights. In Keshavlal Khemchand & Sons v. Union of India (2015), the Court underscored that recovery must remain within the bounds of natural justice and fair procedure.

4. Rights of the Debtor: Legal and Equitable Safeguards

(a) Right to Notice and Hearing

Under Section 13(2) of SARFAESI, the borrower must receive a 60-day notice before any asset seizure. The debtor can make a representation or objection under Section 13(3A), which the bank is bound to consider.

(b) Right to Redemption

Even after possession, the borrower may redeem the secured asset before sale under Section 13(8), by paying dues with costs and charges.

(c) Right to Fair Valuation and Transparent Auction

RBI guidelines and the Security Interest (Enforcement) Rules, 2002 require proper valuation, public notice, and competitive bidding. Debtors have the right to be informed of the reserve price and sale details.

(d) Right to Challenge

Under Section 17 of the SARFAESI Act, aggrieved borrowers can challenge bank actions before DRT. The tribunal is empowered to scrutinise compliance with procedural and substantive fairness.

(e) Right to Restructuring and Settlement

RBI’s frameworks for One Time Settlement (OTS), Resolution of Stressed Assets, and Restructuring of MSME Loans encourage negotiated settlements and prevent liquidation of viable enterprises.

5. Judicial Evolution: From Recovery to Responsibility

The Indian judiciary has gradually evolved from validating bank powers to insisting on accountability:

a. Mardia Chemicals Ltd. v. ICICI Bank (2004) — Upheld the constitutional validity of SARFAESI but introduced checks on arbitrary action.

b. Transcore v. Union of India (2008) — Clarified that simultaneous proceedings under DRT and SARFAESI are permissible, but fairness must prevail.

c. Harshad Govardhan Sondagar v. International Assets Reconstruction Co. (2014) — Protected bona fide tenants’ rights during enforcement.

d. Vishal N. Kalsaria v. Bank of India (2016) — Reiterated that tenants under Rent Acts cannot be evicted summarily by banks.

This jurisprudence reflects an emerging principle: economic justice must coexist with social justice.

6. The Rights of Small Borrowers and MSMEs

Micro and small enterprises face unique vulnerabilities. Delayed payments, rising interest, and lack of legal literacy often push them into default. To counter this, the MSME Development Act, 2006 provides for Delayed Payment Tribunals, and the RBI’s Fair Practices Code for Lenders mandates non-coercive recovery.

Further, the Credit Information Companies (Regulation) Act, 2005 gives borrowers the right to access and correct their CIBIL reports—a vital tool to restore financial credibility.

7. Challenges and Reforms Needed

Despite legislative safeguards, systemic flaws persist:

a. DRTs are overburdened and understaffed, with pendency exceeding 1.5 lakh cases.

b. Asset Reconstruction Companies (ARCs) sometimes exploit valuation gaps to acquire assets cheaply.

c. Lack of financial education leads to uninformed borrowing.

d. Harassment and mental trauma from recovery agents persist despite regulatory warnings.

8. Reform Proposals

a. Establish Debtor Protection Ombudsmen under RBI for grievance redressal.

b. Mandate psychological and financial counselling before extreme recovery measures.

c. Create Public Credit Literacy Missions through state legal services authorities.

d. Recognise “Right to Restructuring” for genuine financial distress.

e. Incorporate Restorative Financial Justice principles—prioritising rehabilitation over punishment.

9. Towards People-Centric Banking

Debt recovery is not merely about reclaiming money—it is about restoring trust in the banking system. Every unpaid loan is a public concern, but every debtor is also a citizen entitled to dignity and fairness. The path forward lies not in aggressive enforcement, but in equitable restructuring and transparent governance.

As the economy transitions to new digital credit models, the law must evolve to ensure that borrowers are informed participants, not helpless victims, of the financial system. A humane and lawful recovery process will strengthen both democracy and development.

Yours,

RG

The Spiritual Lawyer 🦅

+91 98230 44282

21:21 — 23 Ashwin 14234 / 15 October 2025