SARFAESI Act 2002

The full form of SARFAESI Act as we know is Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Banks utilize this act as an effective tool for bad loans (NPA) recovery. It is possible where non-performing assets are backed by securities charged to the Bank by way of hypothecation or mortgage or assignment.

  • Upon loan default, banks can seize the securities (except agricultural land) without intervention of the court.
  • SARFAESI is effective only for secured loans where bank can enforce the underlying security eg hypothecation, pledge and mortgages. In such cases, court intervention is not necessary, unless the security is invalid or fraudulent. However, if the asset in question is an unsecured asset, the bank would have to move the court to file civil case against the defaulters.

How it works?

The SARFAESI Act, 2002 gives powers of “seize and desist” to banks. Banks can give a notice in writing to the defaulting borrower requiring it to discharge its liabilities within 60 days. If the borrower fails to comply with the notice, the Bank may take recourse to one or more of the following measures:

  • Take possession of the security for the loan
  • Sale or lease or assign the right over the security
  • Manage the same or appoint any person to manage the same

The SARFAESI Act also provides for the establishment of Asset Reconstruction Companies (ARCs) regulated by RBI to acquire assets from banks and financial institutions. The Act provides for sale of financial assets by banks and financial institutions to asset reconstruction companies (ARCs). RBI has issued guidelines to banks on the process to be followed for sales of financial assets to ARCs.

Background of the act

The previous legislation enacted for recovery of the default loans was Recovery of Debts due to Banks and Financial institutions Act ,1993. This act was passed after the recommendations of the Narsimham Committee – I were submitted to the government. This act had created the forums such as Debt Recovery Tribunals and Debt Recovery Appellate Tribunals for expeditious adjudication of disputes with regard to ever increasing non-recovered dues. However, there were several loopholes in the act and these loopholes were mis-used by the borrowers as well as the lawyers. This led to the government introspect the act and this another committee under Mr. Andhyarujina was appointed to examine banking sector reforms and consideration to changes in the legal system .

  • This committee recommended to enact a new legislation for the establishment of securitisation and reconstruction companies and to empower the banks and financial institutions to take possession of the Non performing assets.

Thus, via the Sarfaesi act, for the first time, the secured creditors were empowered to recover their dues without the intervention of the court.

  • However, as soon as the act was passed, its implementation was challenged in the court and this delayed its coming into force for 2 years. In the Mardia Chemicals v. Union of India, the Supreme Court upheld the validity of the SARFAESI act was upheld.

Rights of Borrowers

The above observations make it clear that the SAFAESI act was able to provide the effective measures to the secured creditors to recover their long standing dues from the Non performing assets, yet the rights of the borrowers could not be ignored, and have been duly incorporated in the law.

  • The borrowers can at any time before the sale is concluded, remit the dues and avoid loosing the security.
  • In case any unhealthy/illegal act is done by the Authorised Officer, he will be liable for penal consequences.
  • The borrowers will be entitled to get compensation for such acts.
  • For redressing the grievances, the borrowers can approach firstly the DRT and thereafter the DRAT in appeal. The limitation period is 45 days and 30 days respectively

Pre-conditions

The Act stipulates four conditions for enforcing the rights by a creditor.

  • The debt is secured
  • The debt has been classified as an NPA by the banks
  • The outstanding dues are one lakh and above and more than 20% of the principal loan amount and interest there on.
  • The security to be enforced is not an Agricultural land.

Methods of Recovery

According to this act, the registration and regulation of securitization companies or reconstruction companies is done by RBI. These companies are authorized to raise funds by issuing security receipts to qualified institutional buyers (QIBs), empowering banks and Fls to take possession of securities given for financial assistance and sell or lease the same to take over management in the event of default.

This act makes provisions for two main methods of recovery of the NPAs as follows:

  • Securitisation: Securitisation is the process of issuing marketable securities backed by a pool of existing assets such as auto or home loans. After an asset is converted into a marketable security, it is sold. A securitization company or reconstruction company may raise funds from only the QIB (Qualified Institutional Buyers) by forming schemes for acquiring financial assets.
  • Asset Reconstruction: Enacting SARFAESI Act has given birth to the Asset Reconstruction Companies in India. It can be done by either proper management of the business of the borrower, or by taking over it or by selling a part or whole of the business or by rescheduling of payment of debts payable by the borrower enforcement of security interest in accordance with the provisions of this Act.

Further, the act provides Exemption from the registration of security receipt. This means that when the securitization company or reconstruction company issues receipts, the holder of the receipts is entitled to undivided interests in the financial assets and there is not need of registration unless and otherwise it is compulsory under the Registration Act 1908.

However, the registration of the security receipt is required in the following cases:

  • There is a transfer of receipt
  • The security receipt is creating, declaring, assigning, limiting, extinguishing any right title or interest in a immovable property.

Is Mortgaged House exempted?
The Sarfaesi act covers any asset, movable or immovable, given as security whether by way of mortgage, hypothecation or creation of a security interest. There are some exceptions in the act such as personal belongings. However, only that property given as security can be proceeded under the provisions of SARFAESI Act. If the property of the borrower is his own mortgaged residential house, it is also NOT exempted from the Sarfaesi act.

Powers of Debt Recovery Tribunal

The debt Recovery Tribunals have been empowered to entertain appeals against the misuse of powers given to banks. Any person aggrieved, by any order made by the Debts Recovery Tribunal may go to the Appellate Tribunal within thirty days from the date of receipt of the order of Debts Recovery Tribunal.

Role of Chief Metropolitan Magistrate or District Magistrate

The Chief Metropolitan Magistrate or District Magistrate has been mandated to assist secured creditor in taking possession of secured asset. These officers will make sure that once the creditor has given him in writing that all other formalities of the act have been done, the CMM or DM will take possession of such asset and documents relating thereto; and forward such assets and documents to the secured creditor. Now, here, you have to note that such an act of the CMM or DM can not be called in question in any court or before any authority.

Role of High Court:

The act allows taking the matter to high courts only in some matters related to the implementation of the act in Jammu & Kashmir. However, High Courts have been entertaining writ petitions under article 226 (Power to issue writs) of the constitution of India.

Proposed amendments to the Act

The government had approved bill to amend the act. The Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Bill, 2011, amends two Acts — Sarfaesi Act 2002, and Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (DRT Act). Via these amendments:

  • Banks and asset reconstruction companies (ARCs) will be allowed to convert any part of the debt of the defaulting company into equity. Such a conversion would imply that lenders or ARCs would tend to become an equity holder rather than being a creditor of the company.
  • The amendments also allows banks to bid for any immovable property they have put out for auction themselves, if they do not receive any bids during the auction. In such a scenario, banks will be able to adjust the debt with the amount paid for this property. This enables the bank to secure the asset in part fulfillment of the defaulted loan.
  • Banks can then sell this property to a new bidder at a later date to clear off the debt completely.

However lenders will be able to carry this property on their books only for seven years, as per the Banking Regulation Act, 1949.

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Comments

  • Anonymous
    Reply

    laudable presentation of topic…..

    hats off to GK today team….

  • SANGAMESWARA RAO DHUPAM
    Reply

    I have got doubt whether under SARFAESI Act can the Bank/financial Institutions execute a Sale Certificate under Section 89 of the Registration Act, 1908 as the section provides to execute a Sale Certificate only to Courts under C.P.C. or by Revenue Officials or by Debt Recovery Tribunal. Under this Act a Bank/Financial Institution, in my opinion, is not a court to execute the same. Please enlighten me in this regard.

  • anil
    Reply

    WHAT TYPE OF NEWS PAPERS THESE NOTICES SHOULD BE PUBLISHED?

    • kishor vig, advocate

      any two local leading news papers; one in english and other vernacular

  • rohit khajuria
    Reply

    Can we enforce this act for NPA car loans and other personal loans.

    • kishor vig, advocate

      the recovery amount should be more than Rs. 1.00 lacs and not below the 20% of total disbursed loan. the car sought to be enforced should form security whilst disbursing the loan.
      secondly, you cannot enforce this act for recovery of personal loans as there is no any security offered in such loans.

  • nash
    Reply

    i think the new papers is Business line.

  • R.K.Menon
    Reply

    I have till date paid all my installments on time fir a home loan taken from idbi bank – never defaulted

    I have only outstanding of 2.26 lacs against loan of 19 lacs I had taken in 2002

    Bank has sent me documents which state sarfesi act and asking me to sign and give it to them

    Should I sign and give ? Will it be misused by the bank ?

    • Santosh

      No, As per law only applicable on those loan account which is NPA (i.e. no repayment within 90 days).

  • SAMUEL ANAND KUMAR
    Reply

    The Bank failed to reply to my objections and sold away the property on 18.10.2012 violating Section 13-3A of the Sarfaesi Act 2002.
    Limitation period exceeded as I did not proceed due to paucity of funds.
    Can I challenge this now?

    • Sridhar

      In corrupted India, all acts are on paper only. Practically nothing will workout. Discussing about banking and RBI policies is no value. It is waste.

    • KSVPrasad

      Approach Ombudsmen

  • Nishant
    Reply

    Thank you GK today

  • Vaibhav Agarwal
    Reply

    Is a Barren Land SARFAESI Complaint?? Can a Bank Make commercial loans on the Barren Land.

  • Santosh
    Reply

    As per Act what is the area covered by this law.
    Is the Act applicable on all banks(i.e RRBs, Co-OP Banks,Foreign banks etc. ) in all states ?
    Pl. clarify the issue.

  • kalyan maheshwari
    Reply

    Can Banks sale any property security at a price much below the market price? A house property which is worth Rs. 200.00 lacs as per the market price but bank proposed to sale it for Rs. 120.00 lacs. Is there any option available to the borrower.

    • S. Iliyas

      No. U can challenge it before high court n obtain stay till u sell at ur own to market price n discharge the loan.

  • sumit
    Reply

    Dear sir plz tell me that any person (owner of property) can challenge that sale deed which had done by bank/NBFC to the third person ( new owner) in sarfaesi act.

    thanks

  • ALOKKUMAR KASLIWAL
    Reply

    Some Banks & Financial Institutions themselves create loopholes to safeguard interest of the creditors who are paid handsomely under the table. When a corporate takes loan and mortgages one’s property to one bank and when the same corporate appears another bank and mortgages the same property previously mortgaged to the previous bank, then why does the latter bank give loan against the already mortgaged property and when dispute arises, both the banks do not give noc to each other and the culprits continue to enjoy. Is this not a conspiracy between banks and the corporate taking loans against same property from two or more banks. SKUMARSSHRI ALOKKUMAR KASLIWAL 9820081968

    • Parminder Singh

      On the time of loan borrower has to submit the original registry to the bank
      how can 2 copies of one property….
      bank does nt accept photocopies of of registery,,,

    • anil

      actually rbi created central registry to overcome this loophole, banks need to provide those mortage asset details to that registry so if a person approach any other bank with same mortage details they can caught ..

  • nitish pandey
    Reply

    thank you GK today good information

  • KSVPrasad
    Reply

    Sir
    My self and my brother staying in two portions side by side in the first floor of a residential house.Owner resides in the 1st floor.Because our land lord is default
    borrower bank got 14(1) section permission on the house.Vacating the house will take three months.Whom we have to approach to safeguard ourselves.Very urgent suggestion is required
    Thanking you
    KSVPrasad
    Cell:9440276121

  • Nalluru Ravikumar
    Reply

    Respected sir
    Land lord of 15 portioned apartment is not repaying the loan to the bank.The bank collection agents threatening the tenants to vacate the portions since the bank got the physical possession pemission from District Magistrate.The auction sale was not performed.How the DM pass the possession permission to the bank before auction sale.Please suggest a solution
    Thanks
    NRavikumar

  • naren
    Reply

    after publishing in newspaper how many days after will the bank post a sarfaesi sticker to house. And after posting the sarfaesi sticker on wall what are the legal things done by banks and duration of each. Plz

  • Ashwani
    Reply

    Although the article is commendable, but the website author’s mentality is damn poor, you have locked the whole webpage so that no one is able to copy or print the content here, what type of sharing of knowledge is this? You are a really sick person.!

  • B.N.Chandra sekhar
    Reply

    This is regarding a legal question on bankers who have done an e auction after proper notices to the defaulters and done through adv. We have been declared as the successful bidder by the bankers after auction.later on the defaulter has gone to hon court and got a stay and time to pay the balance..we the official bidders who were declared officially and now the bankers are colliding with the other party and rendering time to the defaulters showing the court orders.pls suggest the ways to move on the bankers in a legal way…and the rights of the successful bidder …

  • G V B MURTY
    Reply

    If any bank finances, construction of Building and furniture in the new building, if that a/c becomes NPA, what is the position of the Banker. Because Sarfaesi act is applicable only for Immovable goods

  • deepak kumar
    Reply

    how to recive order to d.m in fast action

  • Ashim
    Reply

    I have invested in a apartment in Bangalore , when apartment is 80 % complete , Builder asked for 40% escalation charges , Due to which consumers put a case in consumer court , While case was going builder defaulted the bank loan , Now bank is acquriring the property under sarfaesi act 2002 , In case bank is successful in acquiring the property from builder .what is the safe gaurd for the 1000 + appartment owners , what will be their status.

  • SUBRATA DUTTA
    Reply

    WHETHER SARFAESI ACT APPLICABLE TO URBAN COOPERATIVE BANK

    • subrata dutta

      WHETHER SARFAESI ACT APPLICABLE TO URBAN COOPERATIVE BANK

  • Raja
    Reply

    I have availed home loan from nationalised bank.
    My account classified NPA and sarfeasi notice issued than I have paid overdue amount completly..
    account has been regular.After one year same sarfeasi notice again sent to me I am unable to repay the amount
    Than possesion notice sent to me by the bank…till now unable to pay the amount ..so how to appeal tribunal court such amount reduce my account than I wish to OTS scheme..
    Pls give suggesion

  • RAJA
    Reply

    While SA cases are supposed to be disposed within 6 months, cases are dragged by filing IAs by defaulters. What is the remedial action to be taken by creditors?

  • BABU
    Reply

    One of the property is leased to a private Bank which is unregistered for a period of 10 years and is under mortgage in other bank by the landlord. Can it be enforceable when the borrower defaulted!

    • Manojkumar G

      Yes!! Whene ever it was mortgaged, the rights of property are vested with the bank. So it can take any type of decision.

  • vicky
    Reply

    i got the possession notice from the bank. and cmm ordered and appointed a advocate to take possession .. can i still pay half or full amount and come over this trouble? please suggest the best way.. the circle rate of the property is five times higher then the loaned amount and market value is 10 times higher…

    • Manojkumar G

      Yes.. U can still repay and stop all the processes… no need to pay the entire amount even. Regularise the account first and then continue by repaying EMIs

  • G.R.Krishna
    Reply

    Is it safe to buy a auctioned flat were the borrower has absconded and I am the lesse of the flat since 9 years. What are the implications.

  • r c garg
    Reply

    1.can the appeal before d.r.t. be filed after the date of auction for sale under sarfaesi act2002 ? 2. can d.r.t. cancel the sale deed already registered under sarfaesi act ?

  • hemant khadke
    Reply

    Sir, if memorandum of deposdeposits title is not executed in that case can bank issue a demand notice and further action like physical possession under SARFAESI Act . please reply on mail id

  • Mahaveer
    Reply

    I am pursuing a property which was purchased from the bank under surface act now there was a typographical error while issuing the sale certificate as the survey number was wrongly mentioned on it . Now after six years of fighting with the bank they are finally ready to give an addendum but based on the rules the sale certificate needs to be registered within 120 days now since there was this typographical error the sub registrar refused to register the same. Now my doubts are
    a.can this document still be registered..????
    b.What if the said document couldn’t be registered how can i posses the same. what would be the procedure to follow.
    c.Will there be any complications as the property is not yet transferred to the rightful owners due to the negligence of the bank, also the bank is not ready to issue a fresh certificate they said they can just issue an addendum.

    I am desperately in need of the property but need to follow the rules and then acquire please help

  • rishi raj
    Reply

    in year 2002 i had given a guarantee to a company for the value of property worth 30cr . it was a continuing guarantee , in year 2009 given notice to bank to withdraw my guarantee ,on the day of notice bank didnt apply CLYTON rule and adamant that a continuing guarantee cannot be revoked . later on inspection of documents in the bank it was discovered that my signature on guarantee deed yr 2009 and some other concerned documents were found to be forged . forgery also proven by govt lab . FIR against the bank officials also lodged and investigation in process. year 2013 CDR package proposed and i didnt participate and sign . case in DRT . we also approached civil court . recently bank given auction notice in newspaper to sell property without informing me . please comment . what is jurisdiction of court ?

  • rj
    Reply

    In case of assets sold under the ACT what happens to the employees working in the asset (immovable property) prior to the sale?

  • B S Raja
    Reply

    Sir,
    Our’s is a Pvt Ltd our account in Andhra bank has became NPA due to Fraud and Misappropriation of one Director for which FIR has filed and it is under investigation with CCB, Bangalore. NPA amount is 3.75Cr mortgaged property is about 9.81Cr as per reserve price.
    My question is there are 7 different mortgaged properties which consists of Vacant sites, Shops and Dwelling house. Is there any guidelines for actioning the different properties? Dwelling houses can be considered in last? or any priority wise? As NPA amount is less then the Reserve price? Whom to contact ? Any RBI guidelines regarding priority of auctions??

  • Pawar Sandeep
    Reply

    good information regarding complete things about law and very fluently written up for guise to undrstand only by reading.

  • Puneet Purbi
    Reply

    Hello sir,
    1) if we got the district magistrate order for taking physical possession in 2010 but due to some reasons we didn’t able to execute at that time, and now bank want to execute the same in 2015,
    so bank can do the same after passing 5 years?? or there is some validity of d.m order,

    2) secondly, during the process of taking physical possession, police force want to deposit their one day salary into treasury deptt. for providing police protection to bank. is this in right direction ?? or their demand is illogical

    kindly suggest me