SARFAESI ACT- KEY FEATURES
The Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act) allows banks and other financial institution to auction residential or commercial properties of defaulters to recover loans.
Key Features
- The act provides many rights to secured creditors for enforcement of security interest under section 13 of SARFAESI Act, 2002.
- If borrower defaults on repayment of a loan and their account is classified as Non-performing Asset (NPA) by secured creditor, then secured creditor may repossess the security asset before expiry of period of limitationby written notice.
- The provisions of this Act are applicable only for Non-Performing Asset (NPA) loans with outstanding above Rs.1 lakh. Further, NPA loan accounts where the amount is less than 20% of the principal and interest are not eligible to be dealt with under this Act.
- This law allowed the creation of asset reconstruction companies (ARC) and allowed banks to sell their non-performing assets to ARC’s. The first asset reconstruction company (ARC) of India, ARCIL, was set up under this act.
- Banks are allowed to take possession of the collateral property and sell it without the permission of a court.
Process of SARFAESI
The SARFAESI Act, 2002 grants the powers of ‘seizure’ to banks. Under these provisions, the banks may issue notices to the defaulting borrower insisting the discharge of liabilities within 60 days. If the borrower fails to respond the same, the concerned bank may:
- Take possession of the asset pledged (Agricultural property is exempted)
- Sell or lease or assign the right of the asset pledged.
SARFAESI Act empowers the Bank to:
- Issue notices under the act to the borrower,
- Recall the entire loan advance,
- Bring pledged assets to auction.
Applicability of the Act
The provisions of this Act apply to outstanding loans (above Rs. 1 lakh), which are classified as Non-Performing Assets (NPA). NPA loan accounts amounting to less than 20% of the principal and interest are not covered under this Act.
It is noted that the SARFAESI Act isn’t applicable for:
- Money or security issued under the Indian Contract Act or the Sale of Goods Act, 1930.
- Any conditional sale, hire-purchase, lease or any other contract in which no security interest has been created.
- Any rights of the unpaid seller under Section 47 of the Sale of Goods Act, 1930.
- Any properties are not liable to attachment or sale under Section 60 of the Code of Civil Procedure,
Rights of Borrower
- The borrowers can at any time remit the dues and avoid losing the security before the sale is concluded.
- Where any unhealthy or illegal act is done by the Authorized Officer, he/she will be subject to penal consequences.
- The borrowers will be allowed to get compensation for the defaults of an Officer.
- For rectifying the grievances, the borrowers can approach the DRT.
Recovery method
The Act makes provisions for three methods of recovery of the NPAs, which includes:
- Securitization- is the process of issue of marketable securities backed by a pool of existing assets such as home loan. After an asset is converted into a marketable security, it is sold.
- Asset Reconstruction– empowers the asset reconstruction companies in India, can be performed by managing the borrower’s business by acquiring it, by selling a partial or whole of the business or by the rescheduling of payments of debt.
- Enforcement of security without the interruption of the court– It also empowers banks and financial institutions to issue notices to any individual who has obtained any of the secured assets from the borrower to surrender the due amount to the bank. Claim any debtor of the borrower to pay any sum due to the borrower.
Amendments
The act was amended by “Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016.”
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