India's banking crisis is made worse by the poor performance of its debt recovery tribunals

One of the most pressing problems affecting the Indian economy these days is the poor health of its banking system. The rising percentage of non-performing assets, where borrowers default on repaying loans to banks, has reached alarming levels. In response to questions in Parliament in November, the government revealed that the total non-performing assets of 49 Indian public and private-sector banks has risen to Rs 1.5 lakh crores. In terms of non-performing assets as a percentage of the overall loans made by Indian banks, the figure is as high as 20.2% for some banks like the Indian Overseas Banks.

When borrowers default on paying their debts, banks have the liberty to move the debt recovery tribunals to get back their dues from the defaulter. Unfortunately, these tribunals are in bad shape. The total volume of bad debt being litigated before the tribunals has increased from Rs 1,46,180 crores in 2011 to Rs 3,74,983 crores in 2015. The reason for the poor performance of debt recovery tribunals can be traced to both legal and administrative issues related to its functioning.

Judicial independence

Debt recovery tribunals were set up under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 with the aim of streamlining the mechanism to recover bad debts. This process was earlier handled by civil courts before being shifted to 38 debt recovery tribunals and five debt recovery appellate tribunals across the country. Since their conception, these tribunals have been dogged by concerns about their judicial independence because the Ministry of Finance, which controls public-sector banks, has had significant influence on them.

Almost as soon as its parent statute was passed by Parliament in 1993, the Delhi High Court Bar Association challenged the constitutionality of the debt recovery tribunal on the grounds that its parent statute lacked the judicial independence that is expected of judicial bodies. In 1995, the Delhi High Court struck down the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 ruling that it was “unconstitutional as it erodes the independence of the judiciary and is irrational, discriminatory, unreasonable, arbitrary and is hit by Article 14 of the Constitution”. (Article 14 deals with equality before the law). Subsequently, the Gauhati and Karnataka High Courts also struck down the same legislation for being unconstitutional. On appeal, however, the Supreme Court in 2002 over-ruled all of the High Courts and upheld the constitutionality of the legislation.

Since that judgement, the Supreme Court has heard several other constitutional challenges in the context of other tribunals and its jurisprudence in this regard has evolved significantly. The debt recovery tribunal falls foul of some of the new safeguards laid down post-2002. For instance, one of the most hotly debated issues in the context of independence of tribunals is the question of appointment of judges presiding on the tribunals. The Debts Recovery Tribunal (Procedure for Appointment as Presiding Officer of the Tribunal) Rules, 1998 requires all appointments to be made through a committee consisting of the chief justice of India, three secretaries of the government of India (finance, law, and the department of financial services) and a representative of the governor of the Reserve Bank of India. The judiciary, therefore, has only one representative on the committee. However, as per the Supreme Court judgement in the challenge to the National Company Law Tribunal, a constitutional bench held that the selection committee for appointments to this tribunal should have two members each from the judiciary and the government. Going by this criteria, the debt recovery tribunal lacks independence because the government nominees can technically over-rule the chief justice while making appointments.

A second issue pertaining to the independence of the debt recovery tribunals is the appointment of support staff, such as registrars and recovery officers, to support the administration and enforcement of justice by the tribunals. In the case of most tribunals, administrative support is provided by the parent ministry, that is, the ministry that has moved for the creation of the tribunal. This again is a recipe for disaster because in the case of the debt recovery tribunal, it means that the department of financial services, Ministry of Finance, provides administrative support. This same department is also tasked with oversight of public-sector banks that litigate before the tribunal. The conflict of interest is apparent and the Supreme Court has cautioned against this practice in two different judgements in 1997 and 2010 because it severely dilutes the independence of the tribunals.

But various ministries of the Central government have simply refused to enforce this ruling of the court. The effect of this refusal can be felt in the daily working of the debt recovery tribunal. For instance, in September 2015, the Times of India reported that bank officers were being deputed to key administrative positions in the debt recovery tribunals despite the availability of permanent staff at the tribunals for the same positions. This is highly inappropriate because all of the litigation before the tribunals pertains to banks. Therefore, to have officials from the banks deputed to the tribunals can lead to a conflict of interest.

Poor administration

Closely linked to the issues discussed above is the poor administration of the debt recovery tribunals by the Ministry of Finance. In October, India Today reported that the tribunal located on Parliament Street in Delhi lacked access to electricity because the ministry had not paid the Rs 13 lakhs that was owed to the contractor who was providing the electric generators. The fact that a debt recovery tribunal in the heart of the Capital lacks electricity calls into question Finance Minister Arun Jaitley’s plan to computerise the debt recovery tribunals. It is the only policy reform suggested by the Finance Minister since he assumed office in 2014 and it is not yet clear how computers will work without electricity.

Another ridiculous problem faced by the tribunals is the lack of office space. In multiple cities, lawyers and litigants have had to sue the government for failing to provide adequate space for the tribunals to function efficiently, including in the financial capital of Mumbai. One such petition filed before the Punjab and Haryana High Court worked its way up to the Supreme Court, which in 2013 delivered a judgement disposing of the petition after managing to elicit some promises from the additional solicitor general to provide better office space and other resources to the tribunal.

Yet in 2015, the Bombay High Court heard similar petitions seeking better accommodation for the debt recovery tribunal in Mumbai and another petition last year pertaining to the lack of appointments to the same tribunal. In November, the Supreme Court asked the government for an explanation of the steps it had taken to improve the functioning of the debt recovery tribunals.

And so the wheels of justice will continue to grind on slowly while the banking system continues to bleed red ink on their balance sheets.

Prashant Reddy Thikkavarapu is a Research Associate at the School of Law, Singapore Management University.