Banks face 7-year debt recovery backlog; Government plans capacity boost

More than 200,000 cases are pending in Debt Recovery Tribunals (DRTs), which currently manage only 30,000 to 40,000 cases each year

Indian banks are currently facing a significant backlog in debt recovery cases, which, at the present rate, will take seven years to resolve, as reported by the Economic Times. Over 200,000 cases are awaiting resolution in Debt Recovery Tribunals (DRTs), which manage about 30,000 to 40,000 cases annually.

Between 2017 and 2022, DRTs successfully resolved 145,000 cases, according to the report. To tackle this issue, the government has proposed increasing the capacity of both DRTs and National Company Law Tribunals (NCLTs) in the latest Budget, aiming to bolster the Insolvency and Bankruptcy Code (IBC) and enhance the debt recovery process.

Currently, India has 39 DRTs and 5 Debt Recovery Appellate Tribunals (DRATs), but they are overwhelmed by the volume of cases. Approximately 60,000 new cases are filed each year, but only 30,000 to 40,000 are resolved, the business daily reported.

The IBC has proven effective, resolving over 1,000 companies and recovering Rs 3.3 trillion for creditors. Notably, around 28,000 cases, involving more than Rs 10 trillion, have been settled before formal admission under IBC procedures.

Despite reforms to enhance the tribunal system and expedite insolvency resolutions, recovery through DRTs lags behind other mechanisms like the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, which allows banks to enforce security without court intervention, the report added.

Amount recovery via debt recovery fell in FY23

In December, Business Standard reported a significant increase in cases referred to DRTs for 2022-23. The amount involved rose to Rs 4.02 trillion in FY23, up from Rs 69,000 crore. However, the recovery rate via DRTs dropped to 9.2 per cent in FY23 from 17.5 per cent the previous year, resulting in a decrease in the recovery of non-performing assets to 15 per cent from 17.6 per cent in FY22. Recoveries via IBC returned to over 40 per cent in FY23 after two slower years.

Additionally, the sale of stressed assets to asset reconstruction companies surged in FY23, largely due to the newly operationalized National Asset Reconstruction Company Ltd (NARCL). During 2022-23, 9.7 per cent of the previous year’s gross NPAs of scheduled commercial banks were sold to ARCs, compared to 3.2 per cent in 2021-22, according to RBI data.