SARFAESI Act 2002 - General Knowledge Today

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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Last Updated: December 15, 2013

Comments

  1. Anonymous says:

    laudable presentation of topic.....

    hats off to GK today team....

  2. SANGAMESWARA RAO DHUPAM says:

    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.

  3. anil says:

    WHAT TYPE OF NEWS PAPERS THESE NOTICES SHOULD BE PUBLISHED?

  4. rohit khajuria says:

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

    • kishor vig, advocate says:

      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.

  5. nash says:

    i think the new papers is Business line.

  6. R.K.Menon says:

    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 ?

  7. SAMUEL ANAND KUMAR says:

    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 says:

      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.

  8. Nishant says:

    Thank you GK today

  9. Vaibhav Agarwal says:

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

  10. Santosh says:

    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.

  11. kalyan maheshwari says:

    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.

  12. sumit says:

    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

  13. ALOKKUMAR KASLIWAL says:

    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

  14. nitish pandey says:

    thank you GK today good information