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The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) empowers Banks / Financial Institutions to recover their non-performing assets without the intervention of the Court. The Act provides three alternative methods for recovery of non-performing assets, namely: -

  • Securitisation
  • Asset Reconstruction
  • Enforcement of Security without the intervention of the Court

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What is SARFAESI Act?

The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (also known as the SARFAESI Act) allows banks and other financial institution to auction residential or commercial properties (of Defaulter) to recover loans.

Under this act secured creditors (banks or financial institutions) have many right for enforcement of security interest under section 13 of SARFAESI Act, 2002. If borrower of financial assistance makes any default in repayment of loan or any installment and his account is classified as Non performing Asset by secured creditor,then secured creditor may require before expiry of period of limitation by written notice.

The main purpose behind enactment of this act was to help the banks to efficiently and rapidly recover the NPAs and allow them to auction such movable or immovable property mortgaged by the borrower when he/she fails to pay the loan.

The SARFAESI cover any movable or immovable property given as a security at the time of borrowing such loan and excludes property provided under section 31 of the Act.

Applicability of SARFAESI Act?

The act deals in following:

  1. Regulation and registration of Assets Reconstruction Companies by the Reserve Bank of India.
  2. Facilitating securitization of financial assets of banks and financial institutions with or without the benefit of underlying securities.
  3. Defining security interest as 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.
  4. Classification of the borrower’s account as the non-performing assets in accordance with the directions given or under guidelines issued the Reserve bank of India from time to time.
  5. Appeal to the DRTs and DRATs against the inappropriate actions by any bank or financial institutions.

Procedure provided under the SARFAESI Act for recovery of loan?

  1. Once the account is classified as an NPA, the authorized officer by the secured creditor issued a demand notice under section 13(2) if the act for repayment of loan within 60 days.
  2. The borrower may can raise an objection to the demand notice within the period of 60 days and the creditor has to consider and reply to the objection according to section 13(3A).
  3. In case the payment is not done by the borrower within the prescribed period of 60 days, then the authorised officer shall be entitled to take possession of such mortgaged property under section 13(4).
  4. The officer shall make a panchnama and publish it as a possession notice.
  5. On the sale of such property, the authorised officer shall issue the sale certificate.

What all remedies does the borrower has under the Act?

  1. Primarily, the borrower can raise objections by the way of notice and application to the secured creditor who has to reply back to the same.
  2. Secondly, the borrower can file an application under section 17 of the act to the DRT (Debt Recovery Tribunal) to challenge such action of such possession by the creditor within 45 days of action taken.

If the borrower is facing problem, harassment, and/or humiliation by the recovery agents, then one can go for the following remedies:

  1. File a Complaint at the police station or Magistrate against the bank and recovery agents.
  2. Injunction Suit with ad interim relief can be filed in the civil court against the bank and recovery agency to protect the borrower from recovery agents visiting their homes.
  3. One can also file a legal complaint with the RBI if the defaulter feels threatened. The RBI issued guidelines for the recovery agent to approach the defaulters after getting many threatening complaints.
  4. One can also file a defamation suit against the recovery agent or the bank if the borrower suffers a loss in CIBIL score after the debt recovery is based on erroneous information.
  5. One can file a tort case of trespass if the agent or the bank person trespasses illegally on to the borrower’s house without authorised permission.
  6. A case of extortion can also be filed if the money is recovered forcefully from the borrower.

It is a process of issuing marketable securities backed by the secured assets. After assets are converted into the securities they are sold. The process involves three steps:

  1. Identification Process: The Banks and financial Institutions that decided to go for securitisation are called ‘Originators’. The process of selecting various loans and receivable from asset portfolio to convert them into securities is called Identification Process.
  2. Transfer Process: The originators after selecting pool of assets pass it on to the Special Purpose Vehicle or the trust. This is by the way of sale agreement. After transferring the assets the originators removing it from balance sheets.
  3. Issuing Securities: The SPV then convertors the assets to securities.  They will issue it to the investors.
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The DRTs has to provide the order within a period of 4 months from the date of receiving of application from aggrieved party.

No, only those property can be taken as NPA or into consideration which have been provided as a security against such borrowing.

No, only the property excluded under the SARFAESI Act is provided under section 31 of the Act.

No. According to section 13(13), you cannot transfer the mortgaged asset to anyone else once you have got the notice in relation with that asset under section 13(2).

After the expiry of 60 days from serving the notice under section 13(2), if the borrower has still not paid the loan, then the creditor can take the possession under section 13(4).

It is not compulsory to take the physical possession.

An asset reconstruction means acquisition by an Asset Reconstruction Company (ARC) of any right or interests of any Bank or Financial Institution in any financial assistance for the purpose of realisation of such financial assistance.

The SARFAESI Act provides some rights to the borrower to protect them from any illegal and fraudulent act of the Banks and Financial institutions. The borrowers can remit the dues any time before the sale is concluded. The borrowers are entitled for compensation for any illegal act done by authorised officers. They can also approach DRT for any grievances.

First of all, immovable property definition includes standing timber, growing crops or grass, and shall also include land, benefits arising out of land and the things attached to it.

In judgement of Duncans Industries Ltd. Vs State of UP, the Supreme court made it clear that a movable machinery if cemented and is attached to the earth, then it becomes an immovable property.

if any machinery has been attached for operational eddiciency as temporary arrangement, then it cannot be termed as immovable property. (Sirpur Paper Mills ltd vs Collector of Central Excise, Hyderabad)

A sale deed contains indemnity where the seller undertakes to indemnify the purchaser to make good the loss in the event of defect in the tittle to the property mortgaged to the secured creditor whereas sale certificate does not contain such indemnity to answer the purchaser in such event.

  • Lease should commence within a period of six month form the date it is made.
  • Possession should be with the mortgagor
  • Lease period cannot exceed 3 years
  • Condition of payment of rent on default of pay rent within time shall be specified in the lease deed
  • No renewal is permissible
  • No premium shall be paid
  • No advance rent shall be paid
  • Mortgaged deed should contain contrary intention to modify the terms above specified.