Banking & Finance Disputes in India: SARFAESI, DRT & IBC

Part of Banking & Financial Disputes: UAE & India – the overview that links the banking-recovery and mis-selling guides across the UAE and India.

A banking dispute in India usually turns on one question: which recovery or defence route applies. For a lender, recovery runs through three overlapping regimes – SARFAESI 2002 (secured-creditor self-help, no court needed to start), the Debt Recovery Tribunals under the Recovery of Debts and Bankruptcy Act 1993 (recovery suits of ₹20 lakh and above), and the Insolvency and Bankruptcy Code 2016 (collective insolvency, on a default of ₹1 crore or more) – alongside cheque-dishonour prosecutions under section 138 of the Negotiable Instruments Act 1881 and the RBI’s wilful-defaulter framework (the Master Direction of 30 July 2024). For a borrower, guarantor or customer, the defences track the same statutes, with distinct tribunals and tight timelines. Two recent reforms matter: the IBC (Amendment) Act 2026 (Presidential assent 6 April 2026) introduced a creditor-initiated insolvency resolution process (CIIRP) and group and cross-border insolvency, its provisions being commenced in stages; and a new RBI Integrated Ombudsman Scheme notified to take effect on 1 July 2026 replaces the 2021 scheme. Confirm the commencement of specific provisions and the applicable scheme version by date. Figures, thresholds and the status of pending reforms should be confirmed at the time of advice.

A single guide to how banking and finance disputes are run in India – the lender’s recovery toolkit, the borrower’s and guarantor’s defences, cheque-bouncing, wilful default, and customer and cross-border disputes.

At a glance

• Three recovery regimes: SARFAESI 2002 (enforce security without court), DRT/DRAT under the RDB Act 1993 (recovery suits ≥ ₹20 lakh), and the IBC 2016 (corporate insolvency on default ≥ ₹1 crore) – often used in sequence or in parallel
• SARFAESI mechanics: 60-day demand notice (s.13(2)), enforcement measures (s.13(4)), District-Magistrate assistance for possession (s.14); the borrower’s challenge lies to the DRT under section 17, then the DRAT (with a deposit)
• Insolvency interface: once a CIRP is admitted, the section 14 moratorium stays SARFAESI and DRT action; homebuyers are financial creditors; personal guarantors to corporate debtors fall under the IBC
• Cheque dishonour: s.138 NI Act – up to two years’ imprisonment or twice the cheque amount; interim compensation up to 20% (s.143A, discretionary per the Supreme Court) and an appellate deposit of at least 20% (s.148)
• Wilful default: RBI Master Direction on Wilful Defaulters and Large Defaulters (30 July 2024, in force 28 October 2024) – classification within 180 days of an account turning NPA, with serious credit and reputational consequences
• Customers: internal grievance redressal then the RBI Integrated Ombudsman Scheme (free; a new scheme applies from 1 July 2026); service deficiencies may also go to the consumer forums
• Cross-border / NRI: FEMA-regulated accounts, and enforcement of foreign judgments and awards – coordinated with the UAE banking-disputes page

1. The banking-disputes landscape in India

Most banking and finance disputes in India fall into one of two postures: a lender pursuing recovery, or a borrower, guarantor or customer resisting an action taken against them. The same handful of statutes governs both sides, so the first analytical step is almost always to identify the right forum and route, because each carries its own thresholds, timelines and defences. A secured lender will usually reach first for SARFAESI, which allows it to enforce its security without going to court; for the unsecured balance, or where there is no security, it turns to the Debt Recovery Tribunal; and where the borrower is a company in financial distress, the Insolvency and Bankruptcy Code offers a collective, time-bound process that can override individual enforcement. These routes are not mutually exclusive – a lender frequently runs SARFAESI and a DRT recovery action together, and an insolvency petition can be filed while they are pending – which is why sequencing and strategy matter as much as the underlying debt. Running alongside the recovery regimes are the cheque-dishonour jurisdiction under the Negotiable Instruments Act, the RBI’s wilful-defaulter machinery, and the customer-grievance and regulatory channels. The sections below take each in turn.

2. Loan recovery and enforcement of security

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI) is the lender’s fastest tool. Once a borrower’s account is classified a non-performing asset, a secured creditor may issue a demand notice under section 13(2) requiring payment within 60 days; if the borrower’s representation under section 13(3A) is rejected and the dues remain unpaid, the creditor may take enforcement measures under section 13(4) – taking possession of the secured asset, selling it, or taking over the management of the business – and may seek the District Magistrate’s assistance under section 14 to take physical possession. The borrower’s remedy is not a civil suit (section 34 bars the civil court) but an application to the Debt Recovery Tribunal under section 17, with a further appeal to the Debt Recovery Appellate Tribunal under section 18 on deposit of a portion of the amount due. SARFAESI does not reach every debt – it does not apply to a security interest securing less than ₹1 lakh, and it is a route for secured creditors only.

Where SARFAESI is unavailable or insufficient, recovery proceeds before the Debt Recovery Tribunal under the Recovery of Debts and Bankruptcy Act 1993, which hears banks’ and financial institutions’ recovery applications of ₹20 lakh and above; below that figure a recovery suit lies in the ordinary civil court. The DRT issues a recovery certificate enforced by its Recovery Officer. Overlaying both is the Insolvency and Bankruptcy Code 2016: on a default of ₹1 crore or more, a financial creditor (section 7) or operational creditor (section 9) can trigger a corporate insolvency resolution process, and once it is admitted the section 14 moratorium stays SARFAESI action, DRT proceedings and other enforcement while the collective process runs. The choice between enforcing security and pushing for insolvency is a strategic one, turning on the value of the security, the conduct of the borrower and the likely recovery. A significant reform has now landed: the IBC (Amendment) Act 2026 (Presidential assent 6 April 2026) adds a creditor-initiated insolvency resolution process (CIIRP), enables group and cross-border insolvency and tightens timelines – its provisions are being commenced in stages, so the commencement of a specific provision should be confirmed before it is relied on.

3. Facility, guarantee and security disputes

Many banking disputes are really disputes about the documents. A lender’s claim depends on a valid facility agreement, properly created and registered security (a mortgage, hypothecation, pledge or charge), and – very often – a guarantee. Borrowers resist on familiar grounds: that the facility was mis-sold or its terms varied without consent, that interest or penal charges were wrongly applied, or that the security was defective or wrongly enforced. The guarantor’s position is its own battleground. Under section 128 of the Indian Contract Act 1872 a surety’s liability is co-extensive with the principal debtor’s, so a lender can usually proceed against the guarantor directly; and the Supreme Court has confirmed that the IBC moratorium protecting a corporate debtor does not shield its personal guarantor (State Bank of India v V. Ramakrishnan, 2018), with personal-guarantor insolvency itself brought within the Code (Lalit Kumar Jain v Union of India, 2021). Disputes commonly arise over whether a guarantee was validly given, whether the guarantor was discharged by a variation of the principal contract or release of security, and how far the lender must first exhaust the security. Clear documentation, properly registered charges (including CERSAI registration for security interests) and disciplined drafting of guarantees are what decide most of these cases before they are argued.

These guarantee disputes increasingly turn on the difference between personal and corporate guarantees. A personal guarantee – typically from a promoter, director or owner-manager – puts the individual’s own assets on the line: building on the co-extensive liability above, the lender can pursue that person directly through the DRT, enforce any security the guarantor has given under SARFAESI, and, for a personal guarantor to a corporate debtor, proceed under the IBC. A corporate guarantee – a parent or group company standing behind an affiliate’s borrowing – turns instead on authorisation and corporate benefit: whether the board and, where required, shareholders approved it under sections 185 and 186 of the Companies Act 2013, a guarantee given beyond the company’s powers or without authority being open to challenge.

4. Cheque dishonour and negotiable instruments

The dishonour of a cheque for insufficiency of funds is both a civil and a criminal matter. Under section 138 of the Negotiable Instruments Act 1881, a payee who has received a cheque that is returned unpaid may, after sending a demand notice within 30 days of the dishonour and allowing the drawer 15 days to pay, file a complaint; the offence carries imprisonment of up to two years, or a fine of up to twice the cheque amount, or both. Because section 138 prosecutions are a high-volume, high-leverage recovery tool, two provisions added in 2018 matter in practice. Section 143A allows the trial court to order the drawer to pay the complainant interim compensation of up to 20% of the cheque amount during the trial – and the Supreme Court has held that this power is discretionary, not mandatory, to be exercised on a reasoned assessment rather than as a matter of course. Section 148 allows the appellate court, when a convicted drawer appeals, to require a deposit of at least 20% of the fine or compensation as a condition of the appeal. Used well, a cheque-bouncing complaint is faster and cheaper than a civil suit; used carelessly, it founders on the strict notice and limitation requirements, which the courts apply rigorously.

5. Fraud, wilful default and related proceedings

Where a default is not merely commercial misfortune but involves diversion of funds, deception or refusal to pay despite capacity, a different machinery engages. The RBI’s Master Direction on Treatment of Wilful Defaulters and Large Defaulters, issued on 30 July 2024 and in force from 28 October 2024, replaced the earlier framework and now requires a lender to complete classification of an account as a wilful default within 180 days of it becoming a non-performing asset, following a process that observes natural justice – an identification committee, a show-cause notice, an opportunity to be heard and a reasoned review-committee decision (the procedural safeguards the Supreme Court insisted on in SBI v Jah Developers, 2019). The consequences are severe: a wilful defaulter is barred from further credit facilities, may be debarred for five years from floating new ventures, and faces reputational and, in appropriate cases, criminal exposure. The Direction also introduces a separate “large defaulter” category – an outstanding of ₹1 crore or more where a suit has been filed or the account is classified loss or doubtful – with its own reporting to credit information companies. Parallel fraud classification under the RBI’s fraud-reporting framework, and proceedings under the general criminal law or the Prevention of Money Laundering Act, may run alongside, and the borrower’s ability to challenge an unfair or procedurally flawed classification by writ petition is an important counterweight.

6. Banking-regulatory disputes

Banks in India operate under the close supervision of the Reserve Bank of India under the Banking Regulation Act 1949 and the RBI Act 1934, and disputes sometimes run vertically – between a bank (or its customer) and the regulator – rather than between commercial parties. The RBI exercises wide powers of inspection, direction and penalty, and can act against a bank for breaches of prudential, KYC/AML or conduct norms; a regulated entity aggrieved by such action typically challenges it through representation and, where a legal question arises, by writ petition before the High Court. For customers, regulatory expectations are increasingly enforced through the RBI’s conduct framework and the ombudsman channel described below rather than through direct litigation. Distinguishing a genuinely regulatory dispute (the province of the RBI and the constitutional courts) from a commercial banking dispute (recovery, security, guarantees) is important, because it determines both the forum and the remedy – and because the detailed prudential and licensing regime is a moving target that should be checked against the current RBI Master Directions for the specific issue.

7. Customer and account disputes; freezing and attachment

Not every banking dispute is about recovery. Customers raise disputes over unauthorised or fraudulent transactions, wrongful dishonour, mis-selling of investment or insurance products, and deficient service. The first stage is the bank’s internal grievance-redressal mechanism; if that fails, the customer may approach the RBI Integrated Ombudsman Scheme, a free, “one-nation-one-ombudsman” channel that consolidated the earlier banking, NBFC and digital-transaction schemes – and which is being replaced by a new Integrated Ombudsman Scheme taking effect on 1 July 2026, so the applicable version should be confirmed by date. Service deficiencies may, in parallel, be pursued before the consumer forums under the Consumer Protection Act 2019. Account freezes are a recurring flashpoint: a bank may freeze or debit-freeze an account on its own risk assessment, on a regulatory direction, or on the order of a court or investigating agency (including under the PMLA or on a garnishee/attachment order in execution). Because a freeze can paralyse a business, the disputes here are often urgent and turn on whether the freeze was lawfully imposed and proportionately maintained, with relief sought from the authority that ordered it or, where appropriate, by writ.

8. Cross-border and NRI banking disputes

For the firm’s India–UAE client base, a banking dispute is frequently cross-border. Non-resident accounts (NRE, NRO and FCNR) are governed by the Foreign Exchange Management Act 1999 and RBI regulation, and disputes arise over permissible credits and debits, repatriation, and the freezing of accounts on residency or source-of-funds questions. Where a loan, guarantee or judgment has an Indian and a foreign leg – an Indian borrower with UAE assets, or a UAE facility secured on Indian property – recovery may require enforcing a foreign judgment or arbitral award in India, or an Indian decree abroad, which engages the framework covered on our Cross-Border Enforcement page (sections 13 and 44A of the Civil Procedure Code for judgments, and the Arbitration and Conciliation Act for awards). NRI customers also bring service and freezing disputes that mirror the domestic position but are complicated by distance and documentation. These matters are run in coordination with our UAE banking-disputes practice so that enforcement on both sides of the corridor is planned together rather than in sequence.

This page deals with disputes. Banking-regulatory advisory and licensing – the conduct of business as a regulated entity – is addressed separately, and creditor enforcement that is purely about recovery of a debt is dealt with on our Debt Recovery page; the two are cross-linked because most matters touch both.

Key points at a glance