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Yes, secured lending is a regulated activity in India. Various types of institution are entitled to engage in lending activities.
Regulations require lending agencies to maintain standards relating to capital adequacy, prudential norms, cash reserve ratio, statutory liquidity ratio, credit ceiling and know-your-customer guidelines – although each of these norms would apply to each category of lending agency in a different manner. Each agency plays a different role in terms of the type of lending and borrower.
For example, infrastructure NBFCs can extend credit facilities to entities in the transport, energy, water and sanitation and communication sectors. Loans and advances of up to Rs2.5 million are required to constitute at least 50% of the loan portfolio of small finance banks. A security interest over the assets of the borrower or third party can be created to secure any regulated lending activity. However, if a loan is provided for financing the purchase of a vehicle, it is common for a security interest to be created only over the vehicle which is purchased through the financing and no additional asset is provided as security, although the security is a depreciating asset.
An Indian company may borrow funds in compliance with the Companies Act 2013. A public limited company in India would need the approval of 75% of its shareholders if the proposed borrowing, together with the money already borrowed by the company, would exceed the aggregate of its paid-up share capital and free reserves. This provision excludes temporary loans which are repayable on demand or within six months of the date of disbursement, such as short-term, cash credit arrangements or bill discounting facilities obtained in the ordinary course of business. Appropriate corporate authorisations must be passed along with statutory filings.
Prospective lenders should be registered with the RBI as a bank or NBFC. The RBI regulates the banking sector by issuing various regulations, guidelines, notifications and policies from time to time. However, certain intercompany loans are permitted without the company being recognised as a bank or NBFC by the RBI.
The lender should conduct due diligence on the assets provided as security to ensure the security provider’s absolute title over the same. A lender should ensure that the borrower, third-party security provider and/or guarantor has the due capacity to enter into the financing documents and that these are enforceable under their respective governing laws.
The Debts Recovery Tribunal has been constituted under Section 3 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. The main feature of the DRT is to receive claim applications from Banks and Financial Institutions against their defaulting borrowers. After the enforcement of SARFAESI Act in 2002, it also becomes an adjudicatory authority for that Act.
Now, The DRT now deals with both the SARFAESI act and the DRT act, the aim of both the acts is similar but the way is different. Appeals against orders passed by DRTs lie before Debts Recovery Appellate Tribunal (“DRAT”). DRTs can take cases from banks for disputed loans above Rs 10 Lakhs. In the present scenario, there are 33 DRTs and 5 DRATs functioning in the various parts of the country. In 2014, the government paved the way for six new DRTs to speed up loan related dispute settlement.
The civil courts are barred from handling any case which the DRT is handling, no court or authority has the power or jurisdiction to deal with any kind of recovery of debt which is above 10 lakhs (Jurisdiction of the DRT). The High court and Supreme Court have the jurisdiction under Art 226 and 227 of the Constitution.
Banks have to file an application for the recovery of a loan taking into consideration the jurisdiction and cause of action. Other banks or financial institutions can also apply jointly. The application is filed with the required fees, documents and evidence. The LI Act is also applicable to the DRT cases, so the bank has to take proper care and file the application well within time. If the defendant has to appeal an order of the DRT, he has to first deposit the 75% or the prescribed amount as decided by the tribunal. Failure of payment would automatically mean a failure of filing application of appeal.
The tribunal also issues a recovery certificate to the applicant. Recovery officers attached to the tribunal have adequate powers for recovery under the act. On the receiving of the recovery certificate, the recovery officer has to proceed by attachment and eventual sale of a movable and immovable property. The defendant is not allowed to dispute the correctness of the amount given in the recovery certificate. Orders of the recovery officer are applicable within thirty days to the tribunal.
The extraordinary feature of the DRT is the overriding effect when there is an inconsistency with any other law or in any instrument by virtue of any other law for the time being in force.
In Allahabad Bank v. Canara Bank, AIR 2000 SC 1535 it was held that DRT is said to be a special Act for recovery of the debt due to banks and financial institutions. DRT has overriding effect over the provisions of Companies Act,1956, hence leave of the company court is not required even if the company is under winding up proceedings.
Lok Adalats are organized under the Legal Services Authorities Act, 1987. They were developed to bring about a dispute settlement mechanism all over the country. Lok Adalats basically derive jurisdiction by consent or when the court is convinced that the dispute can be potentially settled at Lok Adalats. It is governed by the ideas of fair, equity and good conscience and various other legal principles. In case of a settlement, the award would be binding on the parties to the dispute. No appeal lies in any court against the award. Presently, Lok Adalats are typically organised between a dispute which is under the value of 20 Lakhs.
On the basis of the recommendations of the working group on Lenders’ Liability Laws constituted by the Government of India, RBI had finalised a set of codes of conduct known as ‘the Fair Practice Code for Lenders’ and advised banks to adopt the guidelines. All the banks went ahead and went to make their own versions of Fair Practice Codes as per the guidelines and started implementing them from 1st November 2013.
It is a grievance redressal system. The service is available for complaints against a bank’s deficiency of service. A customer of the bank can submit a complaint against the deficiency in the services of the bank. If he does not get a satisfactory response from the ban, he can go ahead and approach the banking ombudsman for further action and investigation. Banking Ombudsman is typically appointed by the RBI under the Banking Ombudsman Scheme, 2006. RBI as per Section 35A of the BR Act, 1949 introduced the Banking Ombudsman Scheme with effect from 1995.
There are no costs involved in filing complaints with the banking ombudsman. The banking ombudsman does not levy or charge any fee for filing and resolving customers’ complaints.
The amount to be paid by the bank to the complainant in the form of compensation because of the loss suffered by the complainant is limited to the amount arising directly out of the act or omission of the bank or Rs 10 Lakhs, whichever is lower.
The Banking Ombudsman can award compensation not exceeding Rs 1 lakh to the complainant only in the case of complaints relating to credit card operations for mental agony and harassment. The Banking Ombudsman has to take into account the loss of the complainant s time, expenses incurred by the complainant, harassment and mental anguish suffered by the complainant while passing such award.
The Act extends to the whole of India except J&K, it covers all goods and services except the ones which can be resold or for commercial purpose and services rendered free of charge and a contract of personal service.
Like all the business, banks also have to ensure that they are compliant with the tax laws of the country. They should be aware of the different applicable provisions and laws (Finance Act, Income Tax Act) to deduct and pay all kinds of taxes including – Income Tax, Service Tax, Finance Tax etc. As an employer and the beneficiary of different services, banks have to adhere to the applicable tax provisions through which it is governed. Apart from all the role that it plays as an employer and beneficiary of different kind of services, Banks are expected to pay tax on the interest payable to the customers as per the directives of authorities like Tax Deducted at Source (“TDS”) on interest that is payable on fixed deposits, NRO deposits, income on investments made by the bank and dealing in securities by banks etc.