sarfaesi SARFAESI Act, 2002 The full form of SARFAESI Act as we know is Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Banks use this act as an effective tool for bad loans/non-performing assets (NPA) recovery. It is possible where non-performing assets are secured by securities that are charged to the Bank by way of hypothecation or mortgage or assignment. · When loan default occurs, banks can seize the securities (except agricultural land) without intervention of the court. · SARFAESI Act is useful only for secured loans. The SARFAESI Act, 2002 gives powers of seize to the banks. Banks can serve a notice in writing to the defaulting borrower asking it to discharge its liabilities within 60 days. If the borrower fails to comply , the Bank may take recourse to one or more of the following measures: Take possession of the security given for the loan Sale ,lease or assign the right over the security Manage or appoint any person to manage the same The SARFAESI Act also provides for the establishment of Asset Reconstruction Companies (ARCs). ARCs are regulated by RBI to acquire assets from banks and financial institutions. The rights of the borrowers have also been duly incorporated in the law. · The borrowers can at any time before the sale is concluded, discharge liability by remitting the dues and avoid losing the security charged to the bank. · In case any unethical/illegal act is done by the Authorized Officer, he will be liable for penal consequences. · The borrowers will also be entitled to get compensation for such acts. · For redressal of the grievances, the borrowers can move firstly to the DRT and thereafter the DRAT in appeal. The limitation period is 45 days for DRT and 30 days for DRAT. The following are the four conditions for enforcing the rights by a creditor under SARFAESI Act. The loan is secured The loan has been classified as an NPA by the banks The outstanding loan is one lakh and above and more than 20% of the principal loan amount and interest there on. The security charged to bank is not an Agricultural land. Methods of recovery This act makes provisions for two important methods of recovery of the NPAs: · Securitization: Securitization is the method of issuing marketable securities backed by a pool of existing assets such as auto or home loans. After an asset is converted into marketable security, it is sold. A securitization or reconstruction company may raise funds from the QIB (Qualified Institutional Buyers) by forming schemes for acquiring financial assets. · Asset Reconstruction: SARFAESI Act has given birth to the Asset Reconstruction Companies in India. It can be done by proper management of the business of the borrower, or by taking over it or selling a part or whole of the business or by rescheduling of payment of loan payable by the borrower enforcement of security interest in accordance with the provisions of this Act. Is Mortgaged House exempted? The SARFAESI Act covers any asset, movable or immovable, given as security whether by way of mortgage, hypothecation or creation of a security interest. There are some exceptions in the act such as personal belongings of the borrower. However, only that property charged as security can be proceeded under the provisions of SARFAESI Act. If the property of the borrower is his own mortgaged residential house, the same is NOT exempted from the SARFAESI Act. Role of Chief Metropolitan Magistrate or District Magistrate The Chief Metropolitan Magistrate or District Magistrate is the officer that has been mandated to assist secured creditor in taking possession of secured asset. These officers will ensure that once the creditor has given him in writing that all other formalities of the act have been done, the CMM or DM will take possession of such asset and documents relating thereto and forward the same to the secured creditor. Such an act by the CMM or DM cannot be called in question in any court or before any authority.
