Kathmandu. Nepal’s bank and financial institution sector plays an important role in savings mobilization, investment expansion, entrepreneurship promotion, and economic development. However, delays in loan repayment, increase in passive loans, lack of buyers in mortgage auctions, obstacles in transfer of ownership or actual possession after the auction process, and social and legal disputes complicate loan recovery. Legal authority alone is not enough for debt recovery to be effective; The process of execution of decisions, asset possession, transparent auction and adjustment of funds should also be clear and timely. This article discusses Nepal’s existing legal framework, practical challenges, and a comparison of some practices in India, the UK, Singapore and Canada and proposes possible reforms for Nepal.

Key Terms: Banks and Financial Institutions, Debt Recovery, Passive Loans, Mortgage Auction, Asset Seizure, Occupancy, Legal Implementation, Policy Reforms.

1. Introduction: Why is debt recovery important?

The main job of banks and financial institutions is to mobilize deposits and disburse loans to productive sectors and get principal and interest as per the prescribed conditions. If the loan is not repaid on time, its impact is not limited to the borrower and the concerned institution. Liquidity management, loan loss management, profits, capital management, and the ability to issue new loans may also be affected. The economic use of idle land, buildings, industries or other collateral may also be disrupted, affecting the overall economy.

However, not all borrowers who have problems with loan repayment can be seen as intentional defaulters. A business downturn, natural disaster, market volatility or project failure can also weaken the ability to repay. Therefore, an effective system should provide an opportunity for genuine hardship borrowers to restructure or reschedule in accordance with the law, as well as address situations where there is deliberate avoidance of obligations and undue obstruction of legitimate enforcement.

The key question in this context is: How do banks and financial institutions resolve the situation where they are unable to get the actual possession or possession of the property even after completing the legal process and auctioning the collateral?

2. Existing legal structure of Nepal

There is a legal framework for debt recovery in Nepal. The Debt Recovery of Banks and Financial Institutions Act, 2058 provides for the Debt Recovery Tribunal and the Debt Recovery Officer to dispose of the cases of debt recovery falling within the prescribed jurisdiction in a speedy manner. The scope of the Act, the extent of the amount, the time limit and the procedure should be examined according to the nature of the case and the amended amendments applied.

The Debt Recovery Regulations regulate the process of possession of property, preparation of records, collection of interests, and auction and sale. However, the process mentioned in the law and its effective implementation in each case are different matters. Delay in transfer of possession may occur due to the rights of the borrower or a third party, the family residing therein, local opposition, problems with the ownership record or lack of coordination among the concerned authorities.

Property laws, including the Secured Transaction Act, 2063, may also be relevant in determining the security and rights of the loan. However, the protection of movable property, auction of land or building, registration of ownership and transfer of actual possession are not all the same legal process. Therefore, the law that applies according to the nature of the loan, the type of collateral and the stage of execution should be separated.

3. Major Problems After Mortgage Auctions

3.1 Difference between legal possession and actual possession

It is not the same thing as obtaining documents of auction decisions or transfer of ownership and being able to enter and use the property unhindered. For example, even after purchasing a building through auction, the debtor or family members may still be living there and refuse to vacate the building. In such a situation, the bank or financial institution or the buyer should obtain an order to transfer possession or vacate the property from the competent authority in accordance with the applicable law instead of using force on its own.

3.2 Social and local barriers

Real estate is not only a financial asset but also a family settlement, social prestige and livelihood. Therefore, opposition to auction may arise due to settlement problems, disagreements with valuations, co-ownership or other entitlements, procedural errors or local pressures. All these situations cannot be put in the same category. Genuine legal claims need to be heard fairly; but unfair barriers aimed at neutralizing legitimate auctions should also be addressed in accordance with the law.

3.3 Lack of coordination between agencies

Depending on the nature of the case, the role of the Debt Recovery Officer, the court, the local administration, the police, the Land Revenue Office, the Survey Office and other agencies may be required. If there is no clarity on which agency should do what at which stage, how to provide security and who will be accountable if the order is not implemented, the process may be prolonged.

3.4 Not finding a buyer or getting a low price in the auction

Buyers may not come to the auction due to the difference between the valuation of the property and the market value, disputes over ownership or possession, road or boundary issues, inadequate publicity, and immediate maintenance costs. This may require a transparent valuation, clear information about the legal and physical condition of the property, extensive digital publicity, and re-evaluation or alternative sale methods in the event of repeated failure of auctions.

3.5 When banks and financial institutions accept assets

Mortgages that are not sold at auction may have to be accepted or accepted in accordance with the relevant laws and regulatory directives. Responsibility for the preservation, maintenance, security, insurance, tax and other applicable expenses, record management and resale of the property may arise. If the property is not actually in possession, the risk becomes more complicated. Therefore, the process of accepting the property, valuation, ownership registration, actual possession and resale should be clear.

4. Lessons learned from international practice

4.1 India: SARFAESI Act, 2002

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) of India provides for the implementation of the security rights over the collateral on secured loans that meet the specified conditions. Section 13 deals with the measures to enforce the secured loan and Section 14 deals with the assistance of the Chief Metropolitan Magistrate or District Magistrate in obtaining possession of the secured property. There is also a provision for legal challenge to the affected party. The possible lesson for Nepal is to develop a clear mechanism to seek the assistance of public authorities to obtain possession after the completion of the lawful process. The Indian law also applies within the bounds of conditions, notices and legal challenges.

4.2 UK: Possession orders and judicial oversight

In the UK, the role of the court is important in the case of residential mortgage loan arrears and possession disputes in accordance with applicable law. The pre-proceeding protocol on mortgage arrears gives importance to the process of liaison between the parties and the process of finding a possible resolution before filing a lawsuit. The lesson for Nepal is to create a clear process for transfer of possession while maintaining a fair hearing in a genuine dispute. The opportunity to seek a solution should not lead to indefinite delays.

4.3 Singapore: Decision Implementation Officer

In Singapore, there is a provision for officers such as the sheriff and the bailiff to enforce the orders of the court. According to the court order, the property can be confiscated and sold and the execution process is systematic. For Nepal, lessons can be taken from this to combine the business mechanism for implementing the judgment, the record of the property, the transparent auction and the transfer of possession into a single process.

4.4 Canada: Balance between secured creditors and other stakeholders

Canada’s Bankruptcy and Insolvency Act addresses the bankruptcy situation, asset management, the rights of secured creditors and other claimants within the legal framework. A possible lesson for Nepal is to provide a suitable opportunity for businesses that can be resettled and to clarify the process for managing the assets of borrowers who are financially unsuccessful or uncooperative in accordance with the law.

It is not appropriate to say that the law of any one country is objectively the most powerful in the world. The effectiveness of debt recovery depends on the legal authority as well as the capacity of the courts, public administration, property records, market liquidity and legal protection of the debtor.

5. Proposed Policy and Legal Reforms for Nepal

5.1 Clear provisions regarding the transfer of possession after auction

There is a need to develop a clear, time-bound and enforceable legal process for handing over the actual possession after the mortgage auction. For this, a suitable option can be studied between a separate Act, amendment to the existing Act or an integrated procedure. The process should include the filing agency, the necessary documents, the time limit for the decision, the hearing of the actual claim of the third party, the competent authority for the transfer of possession and the provision of accountability in case of undue delay.

5.2 Specialized implementation mechanism

Adjudicating debt recovery and implementing it in practice are different tasks. Therefore, efficient and accountable mechanisms can be developed for asset seizure, records, bonds, security coordination and transfer. It can be useful to disclose the reasons for the delay in digital records, monitoring of cases and implementation of valid orders.

5.3 Improvement in the Valuation and Auction Process

• Conduct independent valuation as required before the auction and keep the basis of the valuation on record.

• Disseminate the auction information to potential buyers through digital means.

• Clearly disclosing available information about ownership, way, possession and known disputes.

• Re-evaluation and consideration of alternative sales methods in case of repeated unsuccessful auctions.

• Make the auction pricing and sale process transparent and auditable.

5.4 Asset Acceptance and Management

If banks and financial institutions accept unsold collateral at auction, the procedures for independent valuation, transfer of ownership, actual possession, accounting for tax and preservation expenses, and resale should be clear. Guidelines on the right to accept assets, risk management, and regulatory reporting should also be uniform.

5.5 Recovery strategy according to the situation of the borrower

• Consider restructuring or rescheduling in accordance with law for eligible borrowers who have temporary cash flow problems.

• Formulate a cash flow-based payment plan for borrowers whose installments are irregular even though the business is in operation.

• Provide an opportunity for transparent sales and adjustment of funds for borrowers who want to sell property on an agreed basis.

• In the case of borrowers who do not cooperate even after adequate notice and opportunity, the recovery process will be initiated as per the prevailing laws.

• Examine the genuine legal claims and execute them in a time-bound manner in case the mortgage has already been auctioned but possession is disputed.

5.6 Residential and Human Sensitivity

In the event that a real estate auction has a direct impact on the settlement of the family, a provision can be considered for clear notice, an opportunity to present a valid claim and a reasonable time for voluntary transfer as per the need. However, humanitarian concessions should not be a means of stopping a valid auction or order indefinitely. The basis, duration and decision-making body of the concession should be clear in law.

5.7 Rapid Hearing and Digital Monitoring

Hearing of the validity of auctions, errors of valuation, procedural violations in third-party ownership claims and transfer of possession can be categorized to reduce unnecessary delays in undisputed implementation. Digital documents, timely orders, clear review procedures and monitoring systems of implementation can be developed.

6. Possible steps to implement the reform

1. First phase: Legal and factual study. A group comprising Nepal Rastra Bank, Ministry of Finance, Ministry of Law, Debt Recovery Tribunal, representatives of banks and financial institutions and legal experts will study the actual obstacles in the transfer of possession.

2. Step 2: Draft legal amendments or procedures. Preparation of provisions regarding auction, transfer of possession, third party entitlement, powers of the implementing officer, security coordination and timelines.

3. Step 3: Trial in a limited area. Measure time, cost, complaint, and possession recovery rate by conducting clear workflow tests in undisputed auction and possession transfer cases.

4. Phase IV: Independent evaluation and expansion. Evaluate the results of the trial and expand it nationwide, with necessary improvements.

These phases and periods are examples for policy proposals; they are not the current government schedule or the deadlines set by the law.

7. Indicator measuring the impact of improvement

8. Conclusion

The problem of loan recovery of Nepal’s banks and financial institutions is not limited to the issue of borrowers not repaying loans. These include loan evaluation, quality of collateral, effectiveness of auction process, judicial implementation, property possession, local social conditions and coordination between the concerned authorities.

Lessons can be drawn from India’s SARFAESI Act on conditional secured loan implementation and cooperation from public officials, judicial process from the UK, implementation of commercial judgments from Singapore and the balance between secured creditors and other stakeholders from Canada. Nepal should develop appropriate mechanisms according to its constitutional, social, administrative and property legal framework instead of copying these practices as is.

The success of debt recovery lies not only in judgment, auction or paper ownership, but also in the actual recovery and effective management of assets in a lawful manner. It requires a balanced combination of clear legal authority, competent enforcement mechanisms, accountable administration and human sensitivity.

Sabir Ali’s article