SARFAESI Act 2002 – Importance, Working, Borrower Rights

One of the main handlers in India’s endeavour to develop its economy rapidly is the financial sector. With the financial sector reforms and the changing commercial practices, the legal framework related to commercial transactions was not pacing. All this slowed down the recovery pace of defaulting loans and escalated the non-performing levels of financial institutions. 

Andhyarujina Committee and Narasimham Committee I and II were constituted by the Central Government to examine the reforms related to the banking sector and consider the requirement for alterations in the legal system concerning these aspects. Among other committees, suggestions to create new legislation for the empowerment and securitisation of banks and other financial institutions so that they gain possession of the securities and sell those without any intervention from the court. 

What is SARFAESI Act 2002?

The full form of the SARFAESI Act is the “Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act”. It allows financial institutions, including banks, to auction residential or commercial properties so that a loan is recovered when a borrower fails to repay the loan amount. Therefore, this Act enables financial institutions to reduce their non-performing assets through recovery and reconstruction methods. 

This Act enables the banks to seize a borrower’s property without them having to go to court for the same. The SARFAESI Act 2022 only applies to secured loans where the banks can enforce underlying securities like mortgages, hypothecation, and pledge. A court order is not required unless the security is fraudulent or invalid. The bank must go to court for unsecured assets and file a civil case against the defaulters.  

Applicability Of SARFAESI Act, 2002

The SARFAESI Act applies to the following:

  • Regulation and Registration of Asset Reconstruction 
  • Facilitation of the financial assets of financial institutions with or without the benefit of underlying securities 
  • Companies (ARCs) by the RBI
  • Promotion of easy mobility of financial assets by the Asset Reconstruction Companies to attain the financial assets of financial institutions through the issuance of bonds or debentures or any other security as a debenture. 
  • Entrusting the ARCs to solicit donations by issuing security receipts to qualified buyers.
  • Facilitation of the financial asset reconstruction obtained while exercising powers of security enforcement or change of management or other powers proposed to be conferred on the financial institutions.
  • Presenting any asset reconstruction or securitisation company registered with the RBI as a public financial institution. 
  • Describing ‘security interest’ as any form of security including mortgage and alteration on immovable property given for due repayment of any financial assistance from any financial institution.
  • Categorisation of the borrower’s account as a non-performing asset according to the directions given or under the guidelines established by the RBI from time to time.
  • The authorised officers will exercise secured creditors’ rights on this behalf according to the rules and regulations made by the Central Government of India.
  • An appeal against any financial institutions’ action to the respective Debts Recovery Tribunal and a second appeal to the Appellate Debts Recovery Tribunal.
  • The Central Govt. may set up a Central Registry for registering the transactions associated with asset reconstruction, securitisation, and creation of security interest. 
  • Application of the legislation proposed initially to financial institutions, including banks, and empowerment of the Central Govt. increase the implementation of the proposed legislation to non-banking financial institutions.
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How does the SARFAESI Act 2002 work?

The SARFAESI Act 2022 gives a financial institution the power to seize the property of a borrower who fails to repay the loan amount. According to the procedure, notices are issued to such borrowers by the banks to discharge their liabilities within 60 days. When the borrower fails to act in accordance with the notice, then this Act provides the following options to the bank:

  • Sell, lease, or assign the security right.
  • Take possession of the loan collateral property.
  • Appoint a person to manage the same

Objectives of SARFAESI Act, 2002

The following are the main objectives of the SARFAESI Act:

  • Rapid and efficient recovery of the non-performing assets of financial institutions.
  • Allows financial institutions, including banks, to auction residential and commercial properties when the borrower cannot repay their loan in time. 

What is the right of the borrower under the SARFAESI Act?

The following are the rights of a borrower under the SARFAESI Act:

  • The defaulting borrower can clear the dues and avoid losing their assets before the sale is concluded.
  • For the default of an officer, compensation will be provided to the borrower.
  • According to Section 17 of the SARFAESI Act, borrowers can approach the Debt Recovery Tribunal to request an address to their grievances against the authorised officer or the creditor. 

Methods of Recovery Under SARFAESI Act, 2002

The following three methods can be provided by the SARFAESI Act for the recovery of NPAs:

Securitisation

It is a process by which marketable securities that are bolstered by a blend of existing properties like auto loans or home loans are issued. After an asset is transformed into a marketable security, it can be sold. Funds can be raised by an asset reconstruction company or a securitisation company only by forming schemes for obtaining financial assets. 

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Asset Reconstruction

This aspect of the Act empowers asset reconstruction companies. It can be performed by administering the business of the borrower by acquiring or selling it or by rescheduling the debt repayments according to the provisions of the Act.

Security enforcement without the interruption of the court

The Act empowers financial institutions to issue notices to those people who have attained a secured property from the defaulting borrower for the payment of the due amount and claim to the debtor to repay the sum due to the borrower. 

FAQs

1. What are the assets covered by the SARFAESI Act?

The SARFAESI Act covers any movable or immovable asset kept as a security through a mortgage, hypothecation, or formation of a security interest in any way except those excluded under Section 31 of the Act. 

2. Does the SARFAESI Act apply to NBFCs?

According to the notification of the Ministry of Finance dated 24th Feb 2020, Non-Banking Financial Companies with an asset size of Rs. One hundred crores or more are eligible to be covered under the Act to enforce security interests on loan amounts of at least Rs. 50 lakhs. 

3. Are cooperative banks covered under the SARFAESI Act?

Yes. According to the Supreme Court, the cooperative banks established under multi-state level societies are covered by the SARFAESI Act, 2022. 

4. What is the SARFAESI Act limitation period?

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