Everyone needs money. From industrialist to builder and entrepreneur to farmer; the best and the simplest way to arrange money is lending it from financial institutions.

When the receiver and the lender enter into a transaction where the money is given with an agreement of paying it back along with interest, it is called a loan.

Organizations and people may adopt any method for this. They may take a loan from banks, credit societies, non-banking financial institutes, and even individuals to fulfill their business needs.

When two parties get into the contract, they are forced to comply with the rules and regulations that make it binding on them.

If the borrower fails to repay and becomes a defaulter, then the lender has the rights to use legal actions.

What are the legal actions possible?


The blog talks about the legal actions the financial institution can take in case the debtor defaults in paying the loan amount.

  • First, the financial institution or bank needs to make an application to the DRT (Debt Recovery Tribunal). This application is called Original Application or OA.

  • If it is a secured loan, then the lender has a right to auction the commercial or residential properties to recover the loans under SARFAESI ACT 2002.

  • This provision is applicable only if the NPA loan amount is more than 100,000 Rupees and the NPA account is more than 20% of the principal amount and interest.

  • You must not forget that the general laws such as Law of Contract, Transfer of Property Act, etc. are applicable to all banking transactions depending upon the nature of the transaction.

  • The lender has the right to file a money suit to recover the money from the defaulting borrower. A summary suit can be instituted in a competent court under Order 37 of CPC.

  • There is a provision for doing a settlement outside court through Arbitration. The Arbitration and Conciliation Act 1996 allows that.


Speedy recovery of loan is essential for health functioning of a financial institution.

NCLT or National Company Law Tribunal


Another important aspect that needs consideration is the NCLT or National Company Law Tribunal that came into existence in 2002 under the framework of Companies Act, 1956 in India. However, it took almost a decade to get the constitutional validity due to several reasons. Ultimately it got notified under the Companies Act 2013.

NCLT is a quasi-judicial authority incorporated so that the corporate disputes of civil nature can be dealt well. However, there is a difference in the functions and powers of it as compared to the Companies Act.

Though the Supreme Court preserved the constitutional validity of NCLT, it rendered specific provisions as violation of the constitutional principles. Just like the normal Court of Law, the NCLT also obliged to deal the things fairly and without any bias. Also, it has to determine the facts of each case in accordance with principles of natural justice.

It offers conclusions in the form of orders. It assists in resolving a scenario, rectifies something done wrongly, and levies penalties and costs. It may alter the rights, obligations, privileges and duties of the concerned parties.

Hence, it is important that the lenders keep a close watch on it and take necessary actions timely before the loan becomes an NPA. The lesser is the percentage of loans converting into NPA, the better it is for a financial institution.

Though the law gives various ways to recover the loan, it is better that the situation doesn’t occur. As they say, “prevention is better than cure.”