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Banks and financial institutions have often faced a tough time in recovering loans, on which the borrowers have defaulted. To expedite the recovery process, the Committee on the Financial System, headed by Mr. Narasimham considered the setting up of special tribunals, with special adjudicator powers. This was felt to be necessary to carry through financial sector reforms. Since there is an immense overload on the Indian legal system at present, recovery of many unpaid debts, due to banks or financial institutions, are held up, indefinitely. This affects the balance sheets of the banks as the amounts involved are very large.
It was thought that an independent forum was needed to deal with debts of these types. Thus, in 1993 the Recovery of Debts Due to Banks and Financial Institutions Act’ was passed. The Act, however, imposes a limitation and states that only those debts which are in excess of Rs. 10 lakhs (or upto Rs. 1 lakh, where the Central government specified certain types of debts) would come under its purview.