Recovery of Debts Due to Banks and Financial Institutions Act 1993: With the growing volume of Non-Performing Assets (NPAs), Banks and Financial Institutions were experiencing considerable difficulties in recovering loans and enforcement of securities charged to them. A significant portion of the bank's funds were blocked in non-productive assets/litigation. With advent of the Recovery of Debts Due To Banks and Financial Institutions Act, 1993 there was a great hope within the banking circle that most of the Non-Performing Assets (NPA) shall be easy to recover. The banks, under the conventional system of recovery of loans, had a considerable amount of money blocked in form of unproductive assets. This Act intended to provide for expeditious adjudication and recovery of debts due to banks and financial institutions.

However, the recovery process under this Act has been delayed by the intervention of civil courts and references to BIFR. BIFR was systematically misused by loan defaulting companies to stall loan recovery proceedings by banks and financial institutions under the RDDBFI Act. By claiming that accumulated losses were equal to or more than their net worth, companies took cover under the BIFR (under SICA) to frustrate and delay debt-recovery proceedings. The DRTs were expected to dispose of the recovery proceedings within 180 days. However, the proceedings were inordinately delayed. Hence, this Act was not enough and it was felt that banks required more powers.

Narasimham-II Committee: In 1998, the 2^nd Narasimham Committee Report highlighted that the huge backlog of NPAs was continuing to exert pressure on the banking sector and had severely impacted profitability. The report also recommended the creation of an asset recovery fund which would acquire and recover stressed assets and enable banks to focus on their core business.

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002: With an object to give the banks more powers and skill the government decided to bring in the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (popularly known as SARFAESI Act). The Act confers powers on secured creditors to take possession and sell assets kept as security if a default is committed by a borrower in repaying the secured debt.

The Constitutional validity of SARFAESI Act was upheld by the Supreme Court in Mardia Chemicals case.0

This Act has paved the way for establishment of asset reconstruction companies. ARCIL was the first ARC set up by the State Bank of India (SBI) and ICICI as the principal share-holders. In the last fifteen years ARCs have grown in number and size but the capital at their disposal is dwarfed by the size of Non-Performing Loans on bank balance sheets.

To facilitate the implementation of the SARFAESI Act without impediments stemming from the BIFR, SICA was amended in 2002. The amendments meant that after the commencement of SARFAESI Act, “no reference shall be made to BIFR”. Pending “reference shall abate if the secured creditors, representing not less than three-fourth in value of the amount outstanding” take measures allowed under the SARFAESI Act.

However, the elements of overlap between SARFAESI Act and SICA meant that there was continuing confusion about jurisdiction. In some cases, defaulting companies successfully argued that the expression, “reference is pending” does not apply to companies declared sick by BIFR. Therefore, creditor banks were not entitled, under law, to enforce the SARFAESI Act.