Role and functions of legal managers in the Banking and Finance Industry
Legal managers are crucial in debt recovery within the banking sector. Banks extend credit through loans, forming their significant revenue source. However, defaults on loan repayments are not uncommon among borrowers, posing challenges to both banks and the broader economy.
When customers default, the credit recovery or collections departments first attempt to recover debts through calls and visits. If these efforts fail, cases are escalated to legal managers, who then guide judicial remedies and supervise panel advocates in litigation to recover outstanding debts.
India's banking and debt recovery laws provide various legal tools for loan recovery, which legal managers utilise based on each case's specifics. These tools are categorised into 'soft tools' and 'hard tools.'
Soft tools include intimation notices, which in turn include:
Demand Notices: Request for payment of overdue instalments.
Loan Recall Notices: Demand full repayment when a loan becomes a Non-Performing Asset (NPA).
Asset Verification Notifications: Check the condition of secured assets.
Mediation and Conciliation Notices: Facilitate non-adversarial settlements.
Notices to authorities: Request actions like non-renewal of vehicle registrations or inform employers of defaulting borrowers.
Pre-Litigation Notices: Includes Pre-RRC Notice issued before filing a recovery suit in the court of Executive Magistrate and Pre-NPA Notice issued before initiating proceedings under the SARFAESI Act, 2002.
These measures help legal managers in effectively pursuing debt recovery for banks.
Hard tools in debt recovery involve initiating legal proceedings.
When softer approaches fail, Legal Managers use 'hard tools' to recover debts through formal legal channels. These tools include various legal proceedings and dispute resolution mechanisms to ensure effective debt recovery. Below, we explore the distinct categories of such hard tools:
Alternative Dispute Resolution (ADR) Mechanisms: Legal managers utilise ADR methods like arbitration and Lok Adalat for resolving disputes outside traditional courts.
Arbitration: Arbitration proceedings under loan agreements may involve interim measures like asset preservation and appointment of receivers. Legal managers enforce arbitral awards through civil court execution petitions.
Lok Adalats: Lok Adalats facilitate informal settlements between banks and defaulting borrowers. Awards from Lok Adalats hold equivalent legal status as court decrees under Section 21 of the Legal Services Authorities Act, 1987.
Quasi-Criminal proceedings: Legal managers employ quasi-criminal measures under the Negotiable Instruments (NI) Act, 1881 and Payments and Settlements Systems (PSS) Act, 2007 for debt recovery.
When borrowers default on cheque payments, legal managers issue a demand notice under Section 138 of the NI Act, allowing 15 days for settlement. Failure to comply results in criminal proceedings.
Addressing dishonoured electronic fund transfers, legal managers issue demand notices under Section 25C of the PSS Act before initiating legal action, following a process akin to Section 138 of the NI Act.
Civil proceedings under specific laws: Under the SARFAESI Act, 2002, banks enforce their security interests for NPAs on secured assets. Legal managers issue a sixty-day demand notice under Section 13(2). If the borrower fails to settle, actions under Section 13(4) ensue. These include taking possession of secured assets, managing borrower business, including appointing a manager and even issuing notices to the debtor of defaulting borrower.
Debt Recovery Tribunals (DRTs) are tribunals that specialise in adjudicating on recovery matters where outstanding amounts exceed twenty lakh rupees. Legal managers initiate proceedings by filing applications under Section 19 of the Recovery of Debts and Bankruptcy Act. For debts below this threshold, legal managers pursue recovery through civil suits in regular courts.
Debt recovery through proceedings before Executive Magistrate: This involves utilising state-specific laws that facilitate swift recovery of dues owed to banking institutions under loan agreements. For instance, in Madhya Pradesh, the Madhya Pradesh Lok Dhan (Shodhya Rashiyon Ki Vasuli) Adhiniyam, 1987 enables expedited adjudication of such matters before Executive Magistrates. Legal managers initiate proceedings by submitting an application with the required certificate to the Magistrate, who then takes actions such as issuing attachment notices against secured assets to recover outstanding amounts as arrears of land revenue.
Realisation of debt through insolvency resolution process and liquidation under IBC: In cases where a borrower defaults on a debt exceeding ₹1 crore, legal managers can initiate insolvency proceedings under the Insolvency & Bankruptcy Code, 2016. This involves filing an application with the National Company Law Tribunal (NCLT). Throughout this process, legal managers protect the bank's interests by assessing claims, representing the bank in Committee of Creditors (CoC) meetings, strategically voting on resolution decisions, and evaluating plans. They also decide between pursuing resolution or opting for liquidation. If liquidation is chosen, they negotiate final claim amounts and oversee asset distribution with the liquidator.
Legal managers critically assess each case, considering factors like outstanding amounts, loan characteristics, potential litigation costs and other pertinent factors to determine the optimal legal strategy for securing debt recovery for the bank.
In addition to managing debt recovery, legal managers oversee the bank's defence before consumer dispute redressal commissions, ensuring compliance with regulatory requirements. They also address fraud and counterfeit currency issues during loan repayment, reporting incidents to the Reserve Bank of India (RBI) and the police, and supporting investigations. These roles underscore the significant contributions of legal managers in safeguarding the bank's interests.