Legal Remedies for Recovery of Loan




Everyone uses money. We all want it, work for it and think about it. While the creation and growth of money seems somewhat intangible, money is the way we get the things we need and desire. Before the development of a medium of exchange – i.e., money – people would barter to obtain the goods and services they needed. Two individuals, each possessing some goods the other wanted, would enter into an agreement to trade.

In the current scenario of entering into a trade agreement, organizations/people adopt various methods to enter into business with each other. Companies purchase from other businesses on credit, take loans from banks and non-banking financial institutes to establish or run their business.

While they get into this contract, they vouch to comply with all the rules and regulations of this contract, which makes it binding on them. These rules also contain the legal clauses one might have to deal with in case of a breach or default. In this article we will briefly cover the legal remedies one can resort to against their borrowers/debtors in case there is default in paying the loan amount.

Legal remedies available to Banks and NBFCs for loan recovery

    • Where a bank or financial institution has to recover any debt from any person, it makes an application called Original Application (OA) to the Debt Recovery Tribunal against such person.
    • The secured lenders have a right to enforce Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act ( SARFAESI ACT,2002). It allows banks and other financial institution to auction residential or commercial properties to recover loans. The provision of the Act, 2002 is applicable only if the amount of the NPA loan account exceed Rupees One Lakhs and NPA loan account is more than twenty percentage of the principal and interest
    • Loan, being an agreement or understanding between the Bank and the borrower, the general laws like Law of Contract, Transfer of Property Act, Specific Relief Act, Specific Performance etc., are applicable to all banking transactions depending upon the nature of transaction.
    • The remedy available to lenders has been to file an ordinary money suit for recovery against the defaulting borrower for the outstanding amounts or to file a summary suit as provided for under Order 37 of Code of Civil Procedure.

Legal remedies available to corporates for loan recovery

  • If the borrower fails to repay then the company can take legal actions against the borrowers and a summary suit can be instituted under Order 37 of Civil Procedure Court (CPC) in a competent court lying under the jurisdiction.
  • Also the general laws like Law of Contract, Transfer of Property Act, Specific Relief Act, Specific Performance etc., are applicable to all corporate transactions depending upon the nature of transaction.
  • Matter can also be settled in an outside court settlement i.e through Arbitration, under the Arbitration and Conciliation Act, 1996.


Performance analysis of a bank and corporate entities cannot be conducted solely on the basis of resources mobilized or advances made. Resources mobilization, deployment of resources and recycling of resources are three main centers of banking and corporate business operations. Therefore, recovery is equally an important activity. Any delay in recovery hampers the recycling of funds and banks’ ability to return the loans to financial institutions is also impaired. As a result, good borrowers and prospective members suffer. Hence speedy recovery of loan for healthy functioning of a business is essential.

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Disclaimer – the above summary is based on the personal interpretation of the revised regulations, which may differ person to person. Hence, the readers are expected to take expert opinion before placing reliance on this article.


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