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Banking and Insurance - Laws and Practice · Performing and Non Performing Assets

NPA Recovery: SARFAESI, DRT and Asset Reconstruction Companies

Updated 11 October 2026 · Fact-checked

NPA recovery mechanisms are the legal routes a bank uses to recover a bad loan. Under SARFAESI, a secured creditor enforces security without going to court. Under the RDB Act, a Debt Recovery Tribunal decides the claim. ARCs buy NPAs and resolve them. Lok Adalats and IBC are other routes. Choose the route by facts.

Understand Recovery Mechanisms: SARFAESI, DRT and ARCs

A loan becomes a non-performing asset (NPA) when the borrower stops paying as per the classification norms. The bank must then recover the money. Ordinary civil suits are slow, so Parliament created special laws and forums.

The SARFAESI Act, 2002 lets a secured creditor enforce its security interest without the intervention of a court or tribunal. The bank issues a demand notice, then takes possession of the secured asset, and can sell or lease it, or take over management of the business. The Act applies to secured loans only. It does not cover every kind of asset: for example, agricultural land and certain small-value cases are excluded, so check the exclusions in the Act when a question gives such facts.

The Recovery of Debts and Bankruptcy Act, 1993 (RDB Act) sets up Debt Recovery Tribunals (DRTs) and Appellate Tribunals (DRATs). A bank or financial institution files an Original Application for recovery of debts above the notified threshold. The DRT issues a recovery certificate, and the Recovery Officer executes it. A borrower aggrieved by SARFAESI measures can file an application before the DRT, and then appeal to the DRAT, which has a pre-deposit condition.

An asset reconstruction company (ARC) is a company registered with the RBI under SARFAESI. It buys NPAs from banks and financial institutions, usually against cash or security receipts, and then recovers through reconstruction of the business, enforcement of security, settlement or sale. The bank gets its balance sheet cleaned. ARCs are regulated and supervised by the RBI.

Other routes also exist. Lok Adalats give a conciliatory, settlement-based forum under the Legal Services Authorities Act, 1987, and their award is final and binding. The Insolvency and Bankruptcy Code, 2016 (IBC) is a collective, time-bound resolution process triggered by default, and it can lead to resolution or liquidation. The RBI also provides resolution frameworks for stressed assets, which are studied separately.

Key rules to remember

SARFAESI enforcement sequence
Classify as NPA → Demand notice (60 days to pay) → Take possession → Sale/lease/management takeover → Apply proceeds
A secured creditor must give the borrower 60 days' notice under Section 13(2). Borrower objections and the creditor's reply are part of the process. Do not skip the notice step.
Borrower's remedy against SARFAESI measures
Application to DRT (Section 17) → Appeal to DRAT (Section 18)
Appeal to DRAT needs a pre-deposit of a part of the debt claimed. Check the current percentage in the Act before quoting.
Classic condition for SARFAESI enforcement
Secured creditor + secured debt + account classified as NPA + notice issued
Without a security interest, SARFAESI cannot be used. The creditor must be a bank, financial institution or other covered secured creditor.
Route selection
Secured and enforceable security → SARFAESI; Need adjudication or unsecured → DRT; Want to exit → sell to ARC; Small or compromise → Lok Adalat; Corporate default with collective claims → IBC
Routes may be combined where the law permits, but a bank must not double-recover.

How to solve Recovery Mechanisms: SARFAESI, DRT and ARCs questions

Use this method for any question on NPA recovery tools. The examiner wants provision, analysis of facts, and conclusion.

  1. 1Identify the facts: type of lender, whether the loan is secured, whether the account is an NPA, amount, and type of borrower.
  2. 2Name the possible routes: SARFAESI, DRT, ARC sale, Lok Adalat, IBC.
  3. 3State the governing law for each route in plain words, with the key condition.
  4. 4Apply the condition to the facts, such as the demand notice and the 60-day period, or the security interest.
  5. 5Cover the borrower's remedies: application to DRT and appeal to DRAT.
  6. 6Conclude with the best route and one practical compliance point, such as the notice, valuation, or documentation.

Quickest way: Four-question route test

When to use it: Use it for short-answer or case questions when time is limited.

  1. Is the loan secured? If yes, think SARFAESI. If no, think DRT or IBC.
  2. Has the account become an NPA and has a demand notice been issued?
  3. Does the bank want to exit? Mention sale to an ARC.
  4. Is a settlement possible? Mention Lok Adalat. Close with the borrower's DRT remedy.

Common mistakes in Recovery Mechanisms: SARFAESI, DRT and ARCs

  • Saying SARFAESI works for all loans, secured or unsecured.

    Students remember that no court is needed and forget the security requirement.

    Fix: Always write that SARFAESI enforces a security interest and needs a secured debt.

  • Treating DRT and SARFAESI as the same thing.

    Both are recovery tools and both appear in the same question.

    Fix: Say that SARFAESI is out-of-court enforcement by the creditor, while a DRT is a tribunal that adjudicates claims and also hears borrower challenges.

  • Forgetting the demand notice and the 60-day period.

    Students jump straight to possession.

    Fix: Write the sequence: NPA, notice under Section 13(2), then possession and sale.

  • Saying an ARC is a recovery agent of the bank.

    The word 'recovery' is confused with agency.

    Fix: State that an ARC buys the NPA, becomes the owner of the debt, and is registered and regulated by the RBI.

  • Ignoring the borrower's remedy.

    Answers focus only on the bank's rights.

    Fix: Add the application to the DRT and the appeal to the DRAT, with the pre-deposit condition.

Worked examples

Example 1

Mehta Textiles Pvt Ltd borrowed ₹5,00,000 from a bank against a mortgage of its factory. The account has been classified as an NPA. Advise the bank on how it can recover the dues without going to court.

Show the solution
  1. Facts: the loan is secured by a mortgage over the factory, and the account is an NPA.
  2. Law: under the SARFAESI Act, 2002, a secured creditor can enforce its security interest without the intervention of a court or tribunal.
  3. Application: the bank issues a demand notice under Section 13(2) and gives 60 days to repay.
  4. If the borrower does not pay, the bank can take possession of the factory and sell or lease it, or take over management of the business.
  5. The borrower can challenge the measures by an application to the DRT, and then appeal to the DRAT.
  6. Conclusion: SARFAESI is the fastest route because the debt is secured and the account is an NPA. Follow the notice and valuation formalities strictly.

Answer: The bank may use the SARFAESI Act: issue a 60-day demand notice, then take possession and sell or lease the mortgaged factory. No court is needed, but the borrower can approach the DRT and the DRAT.

Example 2

Explain how an asset reconstruction company helps in NPA resolution, and how it differs from a Debt Recovery Tribunal.

Show the solution
  1. Define an ARC: a company registered with the RBI under the SARFAESI Act that acquires NPAs from banks and financial institutions.
  2. Show the mechanism: the bank sells the NPA, often against cash or security receipts, and the ARC takes over the right to recover.
  3. Show the resolution tools: enforcement of security, reconstruction or change of management, settlement with the borrower, or sale.
  4. Benefit: the bank removes the asset from its books and frees capital for fresh lending.
  5. Define the DRT: a tribunal under the RDB Act that adjudicates recovery claims of banks and financial institutions and issues a recovery certificate.
  6. Difference: an ARC is a buyer and resolver of the debt. A DRT is an adjudicating forum and is not a participant in the debt.

Answer: An ARC buys NPAs and resolves them through enforcement, reconstruction or settlement, which cleans the bank's balance sheet. A DRT is a tribunal that decides recovery claims and borrower challenges. One is a market participant and the other is a forum.

Exam tips

  • Write the route in the order: law, condition, application, conclusion. Examiners reward the structure.
  • Never quote a section number or threshold unless you are sure. Write the rule in words if you are not.
  • In a case question, always check whether the loan is secured before choosing SARFAESI.
  • Add a line on borrower remedies in every answer: DRT application and DRAT appeal.
  • Differences between SARFAESI and DRT are a favourite. Prepare a short comparison on forum, trigger and nature of process.

Practice questions from Performing and Non Performing Assets

Recovery Mechanisms: SARFAESI, DRT and ARCs in other exams

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

Recovery Mechanisms: SARFAESI, DRT and ARCs: frequently asked questions

What is the difference between DRT and SARFAESI enforcement?

SARFAESI lets a secured creditor enforce its security without going to a court or tribunal. A DRT is a tribunal under the RDB Act that decides recovery claims and hears borrower challenges to SARFAESI action. SARFAESI is faster but limited to secured debts.

Can a bank use SARFAESI for an unsecured loan?

No. SARFAESI works only where there is a security interest in an asset. For unsecured dues, the bank can approach a DRT or use other routes like IBC if the conditions are met.

What does an asset reconstruction company do?

An ARC is registered with the RBI and buys NPAs from banks and financial institutions. It then recovers the dues by enforcing security, reconstructing the business, settling with the borrower or selling the asset.

How do Lok Adalats help in NPA recovery?

Lok Adalats offer a settlement forum where the bank and borrower can compromise. The award is final and binding. They suit cases where the borrower wants to settle and the amount is within the limit of the forum.