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Risk Management in Banking and Insurance · Management of Non-Performing Assets (NPAs)

Resolution and Recovery Mechanisms outside IBC for NPAs

Updated 11 October 2026 · Fact-checked

These are the routes a bank uses to recover or clean up a non-performing asset without going to the Insolvency and Bankruptcy Code. They include one-time settlement, restructuring, sale to an asset reconstruction company, SARFAESI enforcement of security, suits in DRTs, Lok Adalats and write-offs. Solve questions by matching the route to the facts.

Understand Resolution and Recovery Mechanisms outside IBC

A bank that holds an NPA wants to get money back, or at least remove the loan from its books at the least loss. IBC is one route. There are many others that work outside it, and exam questions ask you to pick the right one for a given case.

Some routes are negotiated. In a one-time settlement (OTS), the bank and borrower agree on a lump sum or short schedule that is less than the full dues, and the bank closes the account. In restructuring, the bank changes the terms, such as repayment schedule, so a viable borrower can keep paying. Both depend on the borrower's cooperation and on the bank's own board-approved policy and RBI directions.

Some routes are enforcement-based. Under the SARFAESI Act, 2002, a secured creditor can enforce its security interest without going to court, subject to the Act's conditions. Where the bank needs a legal decree, it files a recovery case before a Debts Recovery Tribunal (DRT). Lok Adalats are a conciliatory forum: both sides compromise, and the settlement is the outcome rather than a contested judgment.

Some routes are transfer-based. A bank can sell the NPA to an asset reconstruction company (ARC). Under Section 9 of SARFAESI, an ARC may, for asset reconstruction, use measures such as: taking over or changing the management of the borrower's business; selling or leasing part or whole of the business; rescheduling debts; enforcing security interest; settling dues; taking possession of secured assets; and converting part of the debt into shares of a borrower company. The Reserve Bank determines the policy and issues directions, and the ARC must act under them.

A write-off is different. It is an accounting step that removes a loan from the balance sheet, usually against provisions already made. It does not waive the borrower's liability, so the bank can still pursue recovery. Think of it as cleaning the books, not as giving up the claim.

Key rules to remember

Section 9 SARFAESI: ARC measures
Management change or takeover | sale or lease of business | rescheduling of debts | enforcement of security interest | settlement of dues | possession of secured assets | conversion of debt into shares
The seven measures an ARC may provide for asset reconstruction. Under Section 9(3) the ARC acts in accordance with RBI policies and directions.
Section 10(1) SARFAESI: other functions of an ARC
Agent for recovery of dues | manager under Section 13(4)(c) | receiver if appointed by a court or tribunal
Fees for agency and manager roles are mutually agreed. An ARC cannot act as manager if this gives rise to any pecuniary liability.
Section 10(2) SARFAESI: business restriction
No business other than securitisation or asset reconstruction without prior RBI approval
Applies to an ARC with a certificate of registration, save for the functions in Section 10(1). The Explanation says ARC does not include its subsidiary.
OTS recovery comparison
Recovery % = OTS amount ÷ Total dues × 100
Use it to compare an OTS offer with expected recovery from enforcement, after costs and time.
Net write-off loss
Loss to profit and loss = Amount written off − Provision already held
If provision already covers the loan, the write-off has no further profit impact. Write-off does not extinguish the borrower's liability.

How to solve Resolution and Recovery Mechanisms outside IBC questions

Use this sequence for any case-based or descriptive question on NPA recovery outside IBC.

  1. 1Read the facts: is the loan secured or unsecured, is the borrower willing to pay, is the business viable, and how large is the exposure?
  2. 2Name the objective: recover cash, revive the borrower, or clean the books. This points you to negotiation, restructuring, or write-off.
  3. 3List the routes that fit: OTS, restructuring, SARFAESI enforcement, DRT, Lok Adalat, sale to an ARC, write-off.
  4. 4For each route, state how it works in one or two lines, and its key condition, such as security interest for SARFAESI or compromise for Lok Adalat.
  5. 5If an ARC is involved, name the Section 9 measures that suit the facts and mention that the ARC acts under RBI policy and directions.
  6. 6Compare outcomes using recovery percentage, cost and time where numbers are given.
  7. 7Give a clear recommendation and note that a write-off is an accounting step and the claim continues.
  8. 8Close with the governance point: board-approved policy, RBI directions and proper documentation.

Quickest way: Match the fact to the route

When to use it: Use it for MCQs and short notes when you have only a minute or two.

  1. Willing borrower, viable business: restructuring.
  2. Willing borrower, cannot pay in full: OTS.
  3. Secured loan, borrower not paying: SARFAESI enforcement.
  4. Needs a decree or SARFAESI not suitable: DRT.
  5. Compromise at low cost: Lok Adalat.
  6. Bank wants to sell the asset and exit: ARC.
  7. Provided for and no realistic recovery: write-off, claim continues.

Common mistakes in Resolution and Recovery Mechanisms outside IBC

  • Saying a write-off waives the borrower's debt.

    The word sounds like cancellation.

    Fix: Write-off is a book entry. The borrower still owes the money and the bank can keep pursuing recovery.

  • Confusing a DRT with a Lok Adalat.

    Both are non-bank forums for recovery.

    Fix: A DRT adjudicates a recovery claim and can pass an order. A Lok Adalat works by compromise between the parties.

  • Listing ARC measures from memory and missing some, or adding ones not in Section 9.

    Students blend ARC functions with bank powers.

    Fix: Learn the seven Section 9 measures. Keep Section 10 functions (agent, manager, receiver) separate.

  • Saying an ARC can run any business it likes.

    Students overlook Section 10(2).

    Fix: Say that without prior RBI approval an ARC cannot carry on business other than securitisation or asset reconstruction, apart from Section 10(1) functions.

  • Treating SARFAESI as available for all loans.

    It is popular as a no-court route.

    Fix: Say that it is for enforcing security interest, so the loan needs security, and the Act's procedure must be followed.

Worked examples

Example 1

A bank has an NPA with total dues of ₹80,00,000. The borrower offers an OTS of ₹52,00,000 payable at once. The bank estimates that enforcement would recover ₹60,00,000 after two years, with costs of ₹6,00,000. Provision held is ₹40,00,000. Compare the options and recommend, ignoring the time value of money.

Show the solution
  1. OTS recovery = 52,00,000 ÷ 80,00,000 × 100 = 65%.
  2. Enforcement net recovery = 60,00,000 − 6,00,000 = ₹54,00,000.
  3. Enforcement recovery % = 54,00,000 ÷ 80,00,000 × 100 = 67.5%.
  4. On raw numbers, enforcement gives ₹2,00,000 more (54,00,000 − 52,00,000).
  5. Enforcement takes two years and carries uncertainty, while OTS pays now. Cash received now can be redeployed.
  6. Both outcomes recover more than the provision of ₹40,00,000, so either would release provision.

Answer: Enforcement gives a net ₹54,00,000 (67.5%) against OTS ₹52,00,000 (65%). The gap is only ₹2,00,000 for a two-year wait and execution risk, so accepting the OTS is reasonable, subject to board-approved policy. If the bank is confident about early realisation, enforcement is slightly better on the numbers.

Example 2

Explain the role of an asset reconstruction company in resolving a bank's NPA, with reference to the SARFAESI Act, 2002.

Show the solution
  1. Define the role: an ARC buys NPAs from banks and works to recover value, freeing the bank's balance sheet.
  2. State the Section 9 measures it may provide for: change or takeover of management; sale or lease of part or whole of business; rescheduling of debts; enforcement of security interest; settlement of dues; taking possession of secured assets; conversion of debt into shares.
  3. State the control: the Reserve Bank determines policy and issues directions, and the ARC must take measures in accordance with them.
  4. State other functions under Section 10(1): agent for recovering dues for a bank or financial institution, manager under Section 13(4)(c), and receiver if appointed by a court or tribunal.
  5. State the limits: it cannot act as manager if this gives rise to any pecuniary liability, and needs prior RBI approval for any business other than securitisation or asset reconstruction.
  6. Conclude: the bank gets cash and cleaner books, and the ARC uses a wide set of tools to maximise recovery.

Answer: An ARC takes over NPAs and resolves them using the Section 9 measures, under RBI policy and directions. It may also act as agent, manager or receiver under Section 10(1), within the limits in Section 10(1) proviso and Section 10(2). The bank benefits by exiting the asset and improving its balance sheet.

Exam tips

  • Learn the Section 9 list of seven measures and the three Section 10(1) functions as two separate lists. MCQs often test which list an item belongs to.
  • For comparison questions on DRT versus Lok Adalat, use a two-column contrast in prose: adjudication versus compromise.
  • In numerical OTS questions, compute recovery percentage and net recovery after costs, then give a recommendation sentence.
  • Always add that a write-off does not waive the claim. This single line earns marks in short notes.
  • Keep this topic separate from IBC. If the question says outside IBC, do not discuss CIRP or Section 29A.

Practice questions from Management of Non-Performing Assets (NPAs)

Resolution and Recovery Mechanisms outside IBC in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Resolution and Recovery Mechanisms outside IBC: frequently asked questions

What is the role of an asset reconstruction company in NPA resolution?

An ARC acquires NPAs from banks and works to recover value using measures listed in Section 9 of the SARFAESI Act, such as management change, sale or lease of the business, rescheduling, settlement and debt-to-equity conversion. It must act in line with RBI policy and directions.

What is the difference between DRT and Lok Adalat recovery?

A DRT is a tribunal that hears the bank's recovery claim and decides it. A Lok Adalat is a conciliation forum where the bank and borrower reach a compromise. The Lok Adalat route is usually quicker but needs the borrower's agreement.

Does a write-off mean the borrower no longer owes the money?

No. A write-off removes the loan from the bank's balance sheet, usually against provisions. The borrower's liability continues and the bank can still try to recover the amount.

Can an ARC carry on any business?

No. Under Section 10(2), a registered ARC cannot start or carry on any business other than securitisation or asset reconstruction without prior approval of the Reserve Bank, except for the functions allowed in Section 10(1).