FLPC

● Implemented through RBI circular - based on recommendations from the Working Group on
Lenders' Liability Laws
● Applicable- Scheduled Commercial Banks and All India Financial Institutions, excluding RRBs
and LABs
● Voluntary code adopted- synchronise best practices and facilitate effective communication
between banks and customers, particularly for retail credit facilities up to Rs. 2 lakhs.
● Codifies procedures to ensure transparency, Timelines and responsiveness in Bank's relationship
with the borrowers at stages - marketing, processing, sanctioning, monitoring and administration.
● The code is built on eight fundamental declarations: PNMTCDRR
1. Professional, efficient, and speedy services
2. Non-discrimination based on religion, caste, sex, or descent
3. Honest marketing practices
4. Transparent disclosure of terms and costs
5. Customer assistance when requested
6. Effective dispute resolution mechanisms
7. Regulatory compliance
8. Promotion of lending risk awareness

● Product information - comprehensive details - application process, timeframes, and contact

information - Through various channels.

● Interest rates and charges, banks must display- current rates, Providing periodic updates,
Notifying customers of rate changes within 7 days
● Privacy is protected with confidential handling of personal information.

● For financial distress cases, banks must- Consider cases sympathetically, Encourage early
disclosure , Provide possible assistance within capacity

Lending
Key Principles of Lending: PRIMELOANSBFPR (PRIME LoaNS SaaR BF PaR)
1. Safety of Funds: The foremost principle is to safeguard depositors' money. Banks must exercise
caution and due diligence to ensure loans are given to creditworthy borrowers who can repay.
2. Identification of borrower
3. Purpose: Banks evaluate the purpose of loans to ensure funds are used for productive, socially
and economically beneficial activities that contribute to development. Speculative or
unproductive purposes are discouraged.
4. Profitability: While serving social objectives, banks must ensure lending generates sufficient
returns to cover costs and yield reasonable profits for sustainability.
5. Repayment - Method of repayment should be decided upon while disbursing credit.
6. Liquidity: Banks maintain adequate liquidity by balancing long-term and short-term lending.
Repayment terms are structured to match banks' own liquidity needs.
7. Security: While not the primary consideration, banks obtain adequate collateral as a secondary
source of repayment in case of default. Both primary and collateral security are evaluated. -
Marketability, Ascertainment of title, Stability, Storability, Transferability
8. Risk Management : Banks spread risks by lending to different sectors, industries and borrower
types to avoid concentration of risk.
9. National Interest: Banks align lending with broader economic priorities and regulatory guidelines
to serve national development goals.
10. FLPC
11. Bank’s Loan Policy - RBI, NABARD, LFAR report, internal strategy, market practice
12. Monitoring: Regular review of borrower financials, end-use monitoring, stock audits etc.
13. Ethical Considerations- Banks are expected to conduct lending ethically and responsibly.

14. Regulatory Framework- Banks' lending policies are guided by regulatory guidelines issued by
the central bank.-
● Priority sector lending targets
● Restrictions on loans to directors and related parties
● Guidelines on loan pricing, security, asset classification etc.
● FLPC
● KYC and AML guidelines

Regulatory Compliances -
1. Bank cannot loan out its own shares or subsidiaries- Sec 20 Banking Regulation Act
2. No loan to directors professionally use, but personal post RBI Approval
 Ombudsman
1. Quasi-judicial - Resolve customer complaints against banks efficiently and cost-effectively.
2. Integrated Ombudsman Scheme, 2021-
a. NBFC, Banking, Digital - One Nation One Ombudsman
b. No Need to Choose Scheme - Complainant doesn’t need to select the scheme.
c. Deficiency in Service - Broad definition of service issues; fewer rejections.
d. No Jurisdiction Limit - Removed jurisdiction constraints for Ombudsman offices.
e. Centralised Processing - Centralised Receipt and Processing Centre at RBI, Chandigarh.
f. Nodal Officer Responsibility - Principal Nodal Officer (GM rank) represents the bank.
g. No Right to Appeal - Regulated entity cannot appeal if it fails to provide information.
h. Appellate Authority- Executive Director-in charge of Consumer Education and Protection
Department of RBI
3. Ombudsman is Chief General Manager or General Manager rank of RBI - 3 years
4. Filing a Complaint:
a. Must first file written complaint with Regulated Entity
b. If rejected/unsatisfied or no reply within 30 days, can approach Ombudsman
c. Must file within 1 year after receiving reply (or 1 year + 30 days if no reply)

● Non-maintainable Complaints: Vendor-Regulated Entity disputes, Services outside RBI purview,

Employee-employer matters

● Powers of Ombudsman:
○ Can handle disputes of any amount
○ Can call for information from Regulated Entities
○ Compensation limits:
■ Up to ₹20 lakh for consequential losses
■ Additional up to ₹1 lakh for time loss/expenses/harassment
● Resolution Process: Initial scrutiny of complaints , Promotes settlement, 15 days for Regulated
Entity to file written reply - Can proceed ex-parte if no response
● Award & Appeals:
○ Award must be accepted within 30 days by complainant
○ Regulated Entity must comply within 30 days
○ Appeals allowed within 30 days (with possible 30-day extension)
○ No appeal rights for Regulated Entity in ex-parte awards
○ Appellate Authority can dismiss, allow, remand, or modify awards
● Regulated Entity Obligations - Must appoint Principal Nodal Officer (GM or equivalent rank)

● BDL- Basic, Deposit, Lending

1. Cheque Delays
2. Small Denomination Refusal
3. Delay in Inward Remittances
4. Drafts Delay
5. ATM/Credit Card Issues
6. Forced Account Closure
7. Levying Charges Without Notice
8. Refusal to Close Accounts
9. Wrong Information Loss

Frauds
Any hostile behaviour aimed at deceiving a bank to steal a percentage of money
Types - SSSSPFFVIB (sus profile vibes)
1. Bank Impersonation- Fraudsters pretend to be bank employees
2. Stolen Cheque
3. Forgery
4. Fraudulent Loans-Obtaining loans through false information, such as fake income
5. Internet Fraud- Using the internet to commit financial fraud, often involving hacking
6. Phishing - Fraudsters impersonate legitimate banks
7. Spearhead Phishing- More targeted form - attackers personalise their fraudulent messages
8. Spoofing- Fraudsters disguise their identity
9. Vishing- Voice Phishing- phishing where scammers use phone calls or voice messages
10. SMS-ishing- Fraudsters use text messages to impersonate banks

Penal Actions-
1. IPC - Counterfeiting and Theft
2. ICA- Sec 17 Fraud, Sec 18 Misrepresentation
3. IT Act - Computer Crimes and Sec 43- Penalties for unauthorised access
4. RBI - Fraud Detection guidelines
5. Companies Act - Sec 447 - Penalises Fraud
Penalties - both money and jail time

Master Directions on Fraud Risk Management by RBI-

Key Reporting Requirements:

● Fraud Monitoring Report FMRs: Report frauds to RBI within 14 days of classification.
● CFR: Use Central Fraud Registry for cross-institutional sharing.
 ● Flash Reports: For frauds ₹50 million and above, submit within 7 days.
● Monthly Certificate: Confirm FMR submission by the 7th day of each month.

Reporting to Law Enforcement:

● Private Banks/Foreign Banks: Below ₹1 crore: State Police and above: SFIO & Police
● Public Sector Banks/RRBs: Below ₹6 crore: State Police and above: CBI

Banks must establish a robust Early Warning system framework integrated with their Core
Banking Solutions (CBS) for real-time monitoring. Accounts identified as Red Flagged Accounts
(RFA) must be reported to the RBI within 7 days if they meet the threshold.

Prevention- Supervision, Routine compliance, Staff selection, Vigilance and Danger Signals

Grievances
1. Branch Level (7 days)- Customer's Day on 15th of every month
2. Regional Office Level (7 days)- Regional Head is nodal officer
3. Head Office Level (30 days)- General Manager as Principal Nodal Officer

Standing Committee on Customer Service for quality review and Ombudsman if not Happy

RBI issued a circular on 21.01. 2021, to strengthen the grievance redress mechanism-

● Mandates enhanced disclosures by banks regarding customer complaints in their annual reports.
● Introduction of a cost-recovery mechanism. Banks that exceed their peer group average in
maintainable complaints will be required to bear the cost of complaint redress.
○ Banks may be charged 30%, 60%, or 100% of the redress cost depending on how many
parameters they exceed.
● The RBI will conduct annual assessments of banks' customer service and grievance redress
mechanisms through its supervisory framework.

SARFAESI Act
1. Asset reconstruction- means acquisition by ARC of any interest of any bank in any financial
assistance for the purpose of realisation of such financial assistance;
2. ARC means a company registered with RBI for the purposes of carrying on the business of asset
reconstruction or securitisation
3. “bank” means—
(i) a banking company; or
(ii) a corresponding new bank; or
(iii) the State Bank of India; or
(iv) a subsidiary bank; or
4[(iva) a multi-State co-operative bank; or]
 (v) such other bank which the Central Government may, by notification, specify
for the
purposes of this Act;
4. Board is SEBI
5. Borrower A person or entity granted financial assistance by a bank, or who has provided a
guarantee, mortgage, or pledge as security. It includes those who become borrowers of an ARC
after the company acquires rights in relation to their financial assistance, or those who raise
funds through debt securities.
6. Debt- Any unpaid portion of the purchase price of assets, or any obligation incurred or credit
extended or obligations secured by intangible assets.
7. Default: Failure to pay any debt to a secured creditor, resulting in classification of the borrower’s
account as NPA, or failure to pay debt securities after a 90-day notice demanding payment.
8. Financial Assistance: Any loan, advance, debenture, bond, guarantee, letter of credit extended
by a bank, including funds for acquiring assets or debt securities.
9. Financial Asset: Claim to debt whether secured or unsecured, and includes interests in tangible
or intangible assets, or any beneficial interest in property securing financial obligations.
10. Non-Performing Asset: An asset classified by a bank as sub-standard, doubtful, or loss asset
due to non-payment of dues, in accordance with asset classification guidelines.
11. Obligor: A person liable to pay or discharge any obligation regarding a financial asset.
12. Originator: The owner of a financial asset acquired by ARC for securitisation or reconstruction.
13. Qualified Buyer: A financial institution, bank etc specified by board, eligible to buy FA
14. Securitisation: The acquisition of financial assets by ARC from an originator.
15. Security Agreement: Agreement under which security interest is created in favour of SC
16. Secured Asset: The property on which a security interest is created.
17. Secured Creditor: Any bank, financial institution, ARC, or other entity holding a security
interest created by a borrower for repayment of financial assistance.
18. Security Interest: The right, title, or interest in property, created in favour of a secured creditor
to secure the repayment of financial obligations..

Constitutional Validity - Mardia Chemical Ltd. v. Union of India

Challenge was primarily based on Sec 13, 15, 17, and 34

Issues- 1. Necessity of SARFAESI- given RDB existed
2. Sec 13 allowed creditors to enforce rights and ignored borrower's rights- inadequate recourse
3. Sec 17(2) required borrowers to deposit 75% to file appeal - too excessive
4. Sec 15 and Sec 34- Deals with the process of taking over the management of a borrower’s
business, and grants exclusive jurisdiction to DRTs- which was arbitrary and denied civil court
jurisdiction
SC- 1. Parliament's discretion to new legislation
2. Sec 13- Secured Creditors have a right nothing wrong + Borrowers have Right to redemption
3. Deposit Amount reduced to 50%

Sec 3 - Registration of ARC

Obtain a Certificate of Registration from RBI + Have net owned fund of more than 2 Crores
Points of consideration-
A. ARC has not incurred losses in the preceding 3 financial years
B. ARC has adequate arrangements for realisation of financial assets acquired
C. Directors have professional experience in finance, securitisation, and reconstruction
D. No Director has been convicted of any offence involving moral turpitude
E. Sponsor of the ARC is a fit and proper person as per RBI guidelines
F. Compliance with prudential norms specified by RBI
G. Compliance with guidelines issued by RBI for specific purpose of asset reconstruction
If Rejecting, RBI has to give opportunity to be heard- After granting if there is a substantial
change in management RBI approval needed

Sec 4- Cancellation of Certificate

1. Ceases to carry business of Asset Reconstruction
2. Ceases to receive or hold any investment from a qualified buyer
3. Failed to comply with conditions of grant
4. Failed to comply with conditions under Sec 3
5. Failed to comply with RBI guidelines, does not submit books for inspection

Give them opportunity to be heard, can appeal within 30 days of Govt communication
Rejection in effect only after repayment of all investments

Sec 5 - Acquisition of interest/ Right in Financial Assets by ARC-

1. Issuing Debenture or bond for consideration
2. Entering into an agreement with bank for transfer - No Stamp Duty

Principle of subrogation - ARC becomes Lender after acquisition - all such right, title or
interest transfer - so does all obligations and suits of such asset

Sec 9 - Measures for asset reconstruction through-

1. Proper Management of borrower - change, take over
2. Sale or lease of business
3. Reschedule payments of debts
4. Enforcement of security interest
5. Settlement of Dues
6. Take possession of Secured Assets
 7. Conversion of Debt to Shares

Sec 10 - Other Functions of ARC

1. Act as an agent for any bank for recovering their dues from borrower
2. Act as manager under Sec 13
3. Act as receiver once appointed by Tribunal

Sec 12 Power of RBI to determine Policy issue directions

In particular to -
1. The type of Financial Asset which can be acquired and procedure + valuation as such
2. The aggregate value of financial assets which maybe acquired
3. The fee charged
4. Transfer of security receipts to Qualified buyer

12A- can call for statements, 12B- can carry out audits and inspections- remove or appoint
director, appoint officers
Sec 13 - Enforcement of Security Interest
Default then notice then within 60 days of notice if still default then Secured Creditor can -
1. Take possession of the secured assets including right of transfer
2. Take over management - herein right of transfer can only be exercised if substantial part
of the business of the borrower is held as security for the debt
3. Appoint any person to manage the secured assets
4. Quote amount to be paid directly to the creditor to settle
Notice Details- Amount Payable, and Secured Assets intended to be enforced in event of default
Borrower can object to the Notice to which creditor needs to reply in 15 days
Payment made to a secured creditor shall give valid discharge as if he has made payment to
borrower
first covers the creditor’s costs and expenses then Pays off debt lastly amt left goes to Borrower.
If payment is made before auction- the auction and transfer cannot go forward by creditor
If a financial asset is financed by multiple secured creditors, no single creditor can exercise their
rights unless at least 60% of the creditors (in value) agree to it.
In case the company is liquidated, the money from selling secured assets will be distributed
based on Section 529A. Section 529A - when a company is winding up, the debts due to secured
creditors and workmen must be paid before all others. If assets are insufficient, debts must be
abated proportionately.
During Liquidation If creditor chooses to realise their secured asset instead of proving their debt,
they must deposit the workmen’s dues with liquidator and then keep remaining sale proceeds.
If dues not fully satisfied even after sale he can go to DRT
Creditor can go to Guarantor before possession
After receipt of notice, borrower cannot transfer the asset.
Sec 14- If a secured creditor needs to take possession of secured assets or sell them, they can
request the CMM or DM to [Link] must act on the request within 30 days - can use
force.
Sec 15- Takeover of Management
Publishing a notice in a newspaper- English language and Indian language in circulation- where
the principal office of the borrower
Can appoint Director / administrator
Upon Publication- all past contracts with directors, administrators stand vacated
Once SC takes over - shareholders cannot -
1. nominate or appoint any person to be a director;
2. Passed Resolutions at any meeting of the shareholders shall be given effect to unless
approved by the secured creditor;
3. no proceeding for the winding up or for the appointment of a receiver in respect thereof
shall lie in any court, except with the consent of the secured creditor.
Restore management post realisation unless has realised by converting Debt to Equity
Sec 16 - No Compensation to Directors for loss of office
Sec 17 - Appeal to DRT
Affected persons (including borrower) can challenge creditor's actions in DRT within 45 days-
but not on mere rejection of objection to notice by SC
DRT - examines SC actions and can restore possession by declaring SC actions invalid
Must dispose of the application within 60 days, with a possible extension of up to 4 months
Sec 18 Appeal to DRAT
Within 30 days, deposit 50% of the debt due can be reduced to 25%
Sec 20- Central Registry
with its own seal for the purposes of registration of transaction of securitisation and
reconstruction of financial assets and creation of security interest
Sec 21 - Central Registrar, Sec 22- Central register - Book with all transactions
Sec 26- Right to inspection of Register by any person.
 Securitisation Process

1. Identification of non-performing assets (NPAs) by the originator bank

2. Acquisition Process [Sec 5]
3. Measures by ARC [Section 9]
4. Fund Raising [Section 7]
5. Asset Resolution [Section 13]
6. Distribution
● Collection of recoveries
● Distribution to security receipt holders
● Periodic reporting to investors

Recovery of Debts and Bankruptcy Act

Debt - Sec 2(g)- means any money owed by a person to a bank, financial institution, or a
consortium. This includes amounts owed for business activities, whether secured or unsecured,
under a court order, arbitration, mortgage, or other legal means. It also covers unpaid debt
securities after a 90-day notice is given to the borrower.

Sec 2(h)- A "financial institution"-

1. Public financial institution- Sec 4A of the Companies Act, 1956.
2. Securitisation or reconstruction company under SARFAESI
3. Debenture trustee registered with the Board and appointed for secured debt securities.
4. Any other institution specified by the Central Government

Sec 2(l)(b)- Security interest refers to a legal claim on property created to secure a debt in
favour of a bank. This includes-
1. Mortgage, charge, hypothecation, assignment;
2. Tangible assets where the bank retains ownership, securing payment of any unpaid portion;
3. Intangible assets or licences that secure payment of any unpaid portion.
DRTs and DRATs are specialised tribunals created by the Central Government to resolve
disputes related to debt recovery

DRTs

Sec 3- Establish DRT for debt Recovery under RDB and IBC

Sec 4- consists of a Presiding Officer (PO), who is a single member of the Tribunal- CG notified

Sec 5- PO qualifications- at least district court judge

Sec 6- Term- 5 years, can be reelected, ,upper age limit 65 years

Sec 7- Staff of tribunal- Recovery Officers and other officers

Jurisdiction - Sec 17- Applications for recovery of debts due to banks and financial institutions
+ Part III of IBC (17(1)(A))

DRATs

Sec 8 - Establish DRAT to hear appeals against DRT and against AAs under IBC
Sec 9- consists of a Chairperson, who is a single member of the Tribunal- CG notified
Sec 10- Qualifications for Chairperson-
1. Qualified to be HC Judge, or,
2. Presiding Officer at DRT for 3 years, or,
3. Has been a Grade I officer of Indian Legal Service for 3 years.
Sec 11- Term- 5 years, can be reelected, ,upper age limit 70 years
Sec 12- Same as Sec 7 just omission of recovery officers

Jurisdiction - Sec 17(2) - appeals against DRT; 17(A)- Recovery of debts due + Part III of IBC

Common Sections
Sec 15- Resignation and Removal
Resignation- PO or Chairperson may resign by giving a written notice to CG- notice period is 3
months
Removal- Can be removed only by CG on grounds of proved misbehaviour or incapacity, after
an inquiry-
PO - inquiry by a Judge of a High Court; Chairperson by a Judge of the Supreme Court.
PO or Chairperson under inquiry, CG may suspend them after consulting Chairperson of the
Selection Committee.

Sec 16- No order of CG appointment shall be challenged- No act of a Tribunal will be

invalidated solely due to a defect in its constitution

Application to Tribunal Sec 19-

Bank institution can make an application to the Tribunal for debt recovery.
The application can be filed where:
● The debt is outstanding in the branch or office of the institution.
● The defendant resides or carries on business.
● The cause of action wholly or partly arises.
Withdrawal - if the bank wishes to pursue recovery under other relevant laws (SARFAESI)- has
to be dealt within 30 days, can also withdraw if settled before judgement

Another bank has a claim against same defendants they can join at any stage before the final
order is passed

Every application shall have true copies of all documents referred and fee paid – statement of
account or any entry in bankers book duly certified

Application should specify-

1. particulars of debt with details of property and estimated value, or,
2. if estimated value is not sufficient to satisfy the debt claimed, state particulars of any
other assets owned by defendants,
3. if estimated value of such other assets is not sufficient, seek an order directing the
defendant to disclose to the Tribunal particulars of other assets owned

(4) Tribunal shall issue summons with-

1. Show cause to why relief shall not be granted
2. Direct defendant to disclose details of properties
3. Restrain defendant from disposing off property

Defendant to reply within 30 days with counter claim- delay condonable by 15 days

Defendant cannot dispose off any such property disclosed except by Tribunal’s approval.
Tribunal shall give show cause notice to applicant bank asking why this shall not be granted.

If defendant tries to disposes off such property, PO can Detain in civil prison for 3 months
If defendant makes an admission of the full or part of the amount of debt due- Tribunal shall
order defendant to pay the amount, to the extent of the admission within 30 days otherwise issue
certificate

Defendant can present a set-off against an applicant's demand via W.S with supporting
documents at the first hearing, not later. This [Link] has the same effect as a plaint in a cross-suit,
allowing Tribunal to pass a final order on both. Defendants can raise set-offs and counter-claims
against an applicant's demand before delivering a defense, enabling the Tribunal to issue a
comprehensive final order.

If Tribunal believes a defendant intends to obstruct debt recovery by disposing of property, it can
direct defendant to furnish security or face property attachment. If the defendant fails to provide
satisfactory security within the fixed time- Tribunal may attach sufficient property.

Tribunal may appoint receiver for the property with vast legal powers including legal actions,
property management, rent collection and documentation. Also appoint a Commissioner to
inventory or sell defendant's properties

Pass order within 30 days of conclusion of hearing

While passing judgement, shall specify-

1. Assets against which security interest is created and recovery officers can distribute the
proceeds of
Proceeds distribution priority firsts the costs incurred in preservation of assets, valuation and
other costs incurred then debt owed is paid
Tribunal shall-
1. Send final order and recovery certificate copies to applicant and defendant
2. Issue recovery certificate to Recovery Officer for debt payment
3. Consider recovery certificate equivalent to court decree for winding up proceedings
4. Distribute recovery certificates across multiple Tribunals if property spans jurisdictions
5. Complete proceedings within 180 days, preferably in two hearings

Appeal to DRAT Sec 20

No appeal if order after consent of parties
Filed within 30 days- condonable
Set aside, confirm or modify
Dealt within 6 months
Sec 21- Deposit of Amount - 50% amount for appeal, may reduce it to 25%
Sec 22- Not bound by CPC, but natural justice
 Modes Of Recovery Sec 25 and Sec 28
Sec 25- Recovery officer can recover debt by-
(a) Attachment and sale of property
(aa) Taking possession of property and appointing a receiver, followed by its sale.
(b) Arrest of the defendant and detention in prison.
(c) Appointment of a receiver for the management of the properties
(d) Any other mode of recovery as may be prescribed by the Central Government.

Sec 28- Other modes of Recovery-

28 (2)- Attachment of property of Defendant's debtor - does not apply to amounts exempt
from attachments under Sec 60 CPC
28(3)- Notice for payment- To the defendant's debtor asking for payment to RO- only when
debt becomes due.
If the money is held jointly- presumed joint owners
Copy of notice to last known address - The person receiving the notice must comply
Any claim against same property after notice is issued is void

If the person to whom a notice is issued fails to make payment, they are treated as a defendant
in default

28(4) Application to Court for Payment- to the court holding money belonging to the
defendant for the payment of the debt

28(5) Distraint and Sale of Movable property

RO can ask for affidavit declaration of assets, can appeal against RO- 30 days (50% deposit)

Stay Of Proceedings Sec 27

27(1)- Grant payment of time if defendant pays 25% down and commits to balance payment- till
then stay is granted

Recovery stay is withdrawn if defaults on payment as per undertaking

In such cases, defendant forfeits right to future appeal

27(2)- PO must keep RO informend of payments

If the amount in the recovery certificate is modified due to an appeal PO shall amend the
certificate