Friday, March 20, 2015

SARFAESI Act, 2002

Before reading this article, go through the article on - Non-performing Assets (NPA)

SARFAESI Act, 2002

The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), 2002 was enacted to empower the banks and financial institutions (lenders) to recover their bad loans / NPAs from the borrowers, without the intervention of the court.

Applicability of the Act

  • Secured Loans - SARFAESI Act is applicable only for the secured loans (meaning loans backed by underlying securities). In this case, banks or financial institutions can seize and/or sell the underlying securities, like hypothecation, pledge, mortgage, etc and recover the loan amount.
  • Unsecured Loans / Agricultural lands - For unsecured loans (not backed by underlying securities) or agricultural loans (where agricultural land is the underlying security), banks cannot seize or sell by itself. In these case, banks need to move to court and file Civil case against the defaulters.

Earlier to recover the bad loans / NPAs, banks needed to move to the courts - Debt Recovery Tribunal (DRT) and Debt Recovery Appellate Tribunals (DRAT), which made the recovery a long-term process, and there were several loopholes which could be misused by the borrowers.

Then Andhyarujina committee recommended to enact a new legislation for the establishment of Securitization and Reconstruction companies and empower the banks and financial institutions to take possession / seize the securities without moving to the courts.

Provisions of the Act
If any borrower fails to discharge his liability in repayment of any secured debt within 60 days (2 months) of Notice, the secured creditor is conferred with powers under the SARFAESI Act to -
  • Take possession of / seize / auction /sell the secured assets of the borrower
  • Takeover of the management of the business of the borrower
  • Appoint any person to manage the secured assets, etc.
Note that agricultural property is exempted from the provisions of the Act.

Some Securitization Companies and Reconstruction Companies in India
  • Asset Reconstruction Company (India) Ltd. (ARCIL)
  • Assets care & Reconstruction Enterprise Ltd. (ACRE)
  • ASREC (India) Ltd.
  • Pegasus Assets Reconstruction Pvt. Ltd.
  • Phoenix ARC Pvt. Ltd.

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