SARFAESI – Brief introduction

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act was put in place to allow banks and FIs to take possession of securities and sell them, with an aim to provide a structured platform to the Banking sector for managing its mounting NPA stocks and keep pace with international financial institutions.

As stated in the Act, it has “enabled banks and FIs to realise long-term assets, manage problems of liquidity, asset-liability mismatches and improve recovery by taking possession of securities, sell them and reduce non performing assets (NPAs) by adopting measures for recovery or reconstruction.”

Prior to the Act, the legal framework relating to commercial transactions lagged behind the rapidly changing commercial practices and financial sector reforms, which led to slow recovery of defaulting loans and mounting levels of NPAs of banks and financial institutions.

SARFAESI Act empowers Banks and Financial Institutions to resolve their non-performing assets without the intervention of the Court.

The Act provides three alternative methods for resolution of non-performing assets, namely :

  1. Securitisation: It means issue of security by raising of receipts or funds by SCs/ARCs. A securitisation company or reconstruction company may raise funds from the QIBs by forming schemes for acquiring financial assets. The SC/ARC shall keep and maintain separate and distinct accounts in respect of each such scheme for every financial asset acquired, out of investments made by a QIB and ensure that realisations of such financial asset is held and applied towards redemption of investments and payment of returns assured on such investments under the relevant scheme.
  2. Asset Reconstruction: The SCs/ARCs for the purpose of asset reconstruction should provide for any one or more of the following measures:
    • the proper management of the business of the borrower, by change in, or take over of, the management of the business of the borrower
    • the sale or lease of a part or whole of the business of the borrower
    • rescheduling of payment of debts payable by the borrower
    • enforcement of security interest in accordance with the provisions of this Act
    • settlement of dues payable by the borrower
    • taking possession of secured assets in accordance with the provisions of this Act.
  3. Exemption from registration of security receipt: The Act also provides, notwithstanding anything contained in the Registration Act, 1908, for enforcement of security without Court intervention: (a) any security receipt issued by the SC or ARC, as the case may be, under section 7 of the Act, and not creating, declaring, assigning, limiting or extinguishing any right, title or interest to or in immovable property except in so far as it entitles the holder of the security receipt to an undivided interest afforded by a registered instrument; or (b) any transfer of security receipts, shall not require compulsory registration.

The provisions of this Act are applicable only for NPA loans with outstanding above Rs. 1.00 lac. 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.

Non-performing assets should be backed by securities charged to the Bank by way of hypothecation or mortgage or assignment. Security Interest by way of Lien, pledge, hire purchase and lease not liable for attachment under Sec.60 of CPC, are not covered under this Act

The Act empowers the Bank:

  • To issue demand notice to the defaulting borrower and guarantor, calling upon them to discharge their dues in full within 60 days from the date of the notice.
  • To give notice to any person who has acquired any of the secured assets from the borrower to surrender the same to the Bank.
  • To ask any debtor of the borrower to pay any sum due or becoming due to the borrower.

Any Security Interest created over Agricultural Land cannot be proceeded with.

If on receipt of demand notice, the borrower makes any representation or raises any objection, Authorised Officer shall consider such representation or objection carefully and if he comes to the conclusion that such representation or objection is not acceptable or tenable, he shall communicate the reasons for non acceptance WITHIN ONE WEEK of receipt of such representation or objection.

A borrower / guarantor aggrieved by the action of the Bank can file an appeal with DRT and then with DRAT, but not with any civil court. The borrower / guarantor has to deposit 50% of the dues before an appeal with DRAT.

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
  • Sale or lease or assign the right over the security
  • Manage the same or appoint any person to manage the same