SARFAESI Act, 2002


SARFAESI Act, 2002
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
loan default occurs, banks can seize the securities (except agricultural
land) without intervention of the court.
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
  • Sale ,lease or assign the right over the
  • Manage or
    appoint any person to manage the same
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
  1. The loan
    is secured
  2. The loan
    has been classified as an NPA by the banks
  3. The
    outstanding loan is one lakh and above and more than 20% of the principal
    loan amount and interest there on.
  4. The security charged to bank is not an Agricultural
of recovery
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.
Mortgaged House exempted? 
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

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