SARFAESI Act, 2002: Download Notes

SARFAESI Act, 2002: Overview, Objectives, and Key Features

The financial sector has played a pivotal role in India’s economic development. However, outdated legal frameworks for commercial transactions failed to keep up with evolving financial practices, slowing the recovery of defaulted loans and escalating non-performing assets (NPAs).

Recommendations from the Narasimham Committee I & II and the Andhyarujina Committee prompted the creation of new legislation, empowering banks to recover loans efficiently without court intervention.

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What is the SARFAESI Act of 2002?

The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, allows banks and financial institutions to auction residential or commercial properties to recover loans when borrowers default. This Act provides an efficient framework to reduce NPAs through recovery and reconstruction processes.

Key Features:

• Banks can seize properties without court intervention, except for agricultural land.
• Applicable only to secured loans (e.g., hypothecation, mortgage, pledge).
• For unsecured assets, banks must file civil cases in court.

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Formation and Amendments

Formation of the SARFAESI Act:
The Act was established to:

1. Regulate securitization and reconstruction of financial assets.
2. Enforce security interests.
3. Address related matters.

Amendments via the Security Interest and Recovery of Debts Laws Act, 2016:

• Empowered banks and financial institutions further by amending:
  • SARFAESI Act, 2002
  • Recovery of Debts Due to Banks and Financial Institutions Act, 1993
  • Indian Stamp Act, 1899
  • Depositories Act, 1996

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bjectives of the SARFAESI Act, 2002

1. Facilitate efficient and rapid recovery of NPAs.
2. Empower banks to auction properties of defaulters.

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Applicability of the Act

The SARFAESI Act covers:

1. Registration and regulation of Asset Reconstruction Companies (ARCs) by the Reserve Bank of India (RBI).
2. Securitization of financial assets by banks and financial institutions.
3. Promotion of the transfer of financial assets to ARCs.
4. Empowering ARCs to raise funds through security receipts issued to qualified buyers.
5. Defining “security interest” to include mortgages, charges, or any other security on immovable properties.
6. Allowing appeals to the Debt Recovery Tribunal (DRT) and Appellate Debt Recovery Tribunal for grievances.
7. This excludes applications to agricultural lands, loans under ₹1 lakh, or loans with 80% repayment completed.

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How the SARFAESI Act Works

1. Banks can classify a borrower’s account as an NPA after loan repayment default.
2. Notices are issued to borrowers to clear their dues within 60 days.
3. If the borrower fails to comply, banks can:
   • Take possession of secured assets.
   • Lease, sell, or assign rights to the security.
   • Appoint managers to handle the asset.

Asset Reconstruction Companies (ARCs):

• Regulated by RBI, ARCs acquire assets from banks to manage or recover them efficiently.

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Borrower’s Rights Under the Act

1. Borrowers can repay dues before the sale to prevent losing their securities.
2. Borrowers can seek compensation for any wrongful actions by officers.
3. Under Section 17, borrowers can appeal to the Debt Recovery Tribunal (DRT) to address grievances.

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Key Amendments to the SARFAESI Act (2016)

1. Banks and ARCs can convert part of a borrower’s debt into equity to gain ownership stakes in defaulting companies.
2. Banks can acquire the property and adjust the loan amount if no buyers emerge during auctions.
3. Banks can sell acquired properties to new buyers with deferred payment options.

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Methods of Recovery Under the Act

1. Securitization:

   • Converting loans into marketable securities backed by a pool of assets.
   • ARCs raise funds from Qualified Institutional Buyers (QIBs) to acquire financial assets.

2. Asset Reconstruction:

   • ARCs can manage or restructure borrowers' businesses, reschedule debts, or sell assets.

3. Enforcement of Security:

   • Banks can enforce security interests without court intervention, requiring borrowers or related parties to settle dues.

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Assets Not Covered by the Act

The following are excluded:

1. Assets covered under the Sale of Goods Act, 1930 or Indian Contract Act, 1872.
2. Under Section 47 of the Sale of Goods Act of 1930, the rights of unpaid sellers are.
3. Properties are protected from attachment under Section 60 of the Code of Civil Procedure, 1908.

Conclusion:

Financial institutions registered with the Reserve Bank of India (RBI), the apex regulatory body, play a crucial role in granting loans to eligible individuals and institutions. This process benefits both the lender and the borrower. The lender is empowered to recover dues, while the borrower has the right to safeguard their financial assets in cases where the lender is unreliable or engages in fraudulent practices. By maintaining electronic and non-electronic records, the central authority ensures transparency and accountability, thereby protecting both parties from potential fraud.