The financial sector has been one of the key handlers in India’s efforts to achieve success in rapidly developing its economy. The legal framework relating to commercial transactions was not in pace with the changing commercial practices and financial sector reforms. It slowed down the pace of recovery of defaulting loans and escalated levels of nonperforming assets of banks and financial institutions.
Narasimham Committee I and II and Andhyarujina Committee was constituted by the Central Government for the purpose of examining banking sector reforms and considering the need for changes in the legal system in respect of these areas.
Sarfaesi Act 2002
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act India) empowers Banks and Financial Institutions to recover their non-performing asset (NPA) loan dues without the intervention of the Court. 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.
The SARFAESI Act full form is – “Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act”. The SARFAESI Act allows banks and other financial institutions for auctioning commercial or residential properties to recover a loan when a borrower fails to repay the loan amount. Thus, the SARFAESI Act, 2002 enables banks to reduce their Non-Performing Assets (NPAs) through recovery methods and reconstruction.
The SARFAESI Act provides that banks can seize the property of a borrower without going to court except for agricultural land. SARFAESI Act, 2002 is applicable only in the cases of secured loans where banks can enforce underlying securities such as hypothecation, mortgage, pledge etc. An order from the court is not required unless the security is invalid or fraudulent. In the case of unsecured assets, the bank would have to go to court and file a civil case against the defaulters.
Formation of SARFAESI Act, 2002
- To regulate securitization and reconstruction of financial assets.
- Enforcement of the security interest for.
- Matters connected therewith or incidental thereto.
It extended to the whole of India. Amendment in the (SARFAESI) Act, 2002 vide the enforcement of the Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016. It is an Act to further amend four laws:
- Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI).
- Recovery of Debts due to Banks and Financial Institutions Act, 1993 (RDDBFI).
- Indian Stamp Act, 1899.
- Depositories Act, 1996, and for matters connected therewith or incidental thereto.
Applicability Of SARFAESI Act, 2002
- Registration and regulation of Asset Reconstruction Companies (ARCs) by the Reserve Bank of India.
- Facilitating securitization of financial assets of banks and financial institutions with or without the benefit of underlying securities.
- Promotion of seamless transferability of financial assets by the ARC to acquire financial assets of banks and financial institutions through the issuance of debentures or bonds or any other security as a debenture.
- Entrusting the Asset Reconstruction Companies to raise funds by issue of security receipts to qualified buyers.
- Facilitating the reconstruction of financial assets which are acquired while exercising powers of enforcement of securities or change of management or other powers which are proposed to be conferred on the banks and financial institutions.
- Presentation of any securitization company or asset reconstruction company registered with the Reserve Bank of India as a public financial institution.
- Defining ‘security interest’ to be any type of security including mortgage and change on immovable properties given for due repayment of any financial assistance given by any bank or financial institution.
- Classification of the borrower’s account as a non-performing asset in accordance with the directions given or under guidelines issued by the Reserve Bank of India from time to time.
- The officers authorized will exercise the rights of a secured creditor in this behalf in accordance with the rules made by the Central Government.
- An appeal against the action of any bank or financial institution to the concerned Debts Recovery Tribunal and a second appeal to the Appellate Debts Recovery Tribunal.
- The Central Government may set up or cause to be set up a Central Registry for the purpose of registration of transactions relating to securitization, asset reconstruction and creation of the security interest.
- Application of the proposed legislation initially to banks and financial institutions and empowerment of the Central Government to extend the application of the proposed legislation to non-banking financial companies and other entities.
- Non-application of the proposed legislation to security interests in agricultural lands, loans less than rupees one lakh and cases where eighty per cent, of the loans, is repaid by the borrower
FAQs
How SARFAESI Act, 2002 works?
SARFAESI Act, 2002 provides power to a bank or financial institution to seize the property of a defaulting borrower. If the loan borrowers make any default in repayment of a loan or a loan installment, the financial institution can classify the account as Non-Performing Asset (NPA). The banks or financial institution can issue notices to the defaulting borrowers to discharge their liabilities within 60 days period. When the defaulting borrower fails to comply with the bank or financial institution notice, then the SARFAESI Act gives the following recourse to a bank:
- Take possession of the loan security
- Lease, sell or assign the right to the security
- Manage the same or appoint any person to manage the same.
Right of Borrwer Under SARFAESI Act, 2002?
- Borrowers can remit the dues and avoid losing their securities before the sale is concluded.
- Borrowers will get compensation for the default of an officer.
- SARFAESI Act Section 17 provides that borrowers can approach the Debt Recovery Tribunal to rectify their grievances against the creditor or authorised officer.