SARFAESI Act

2022 JAN 14

Preliminary   > Economic Development   >   Indian Economy and Issues   >   NBFCs and other banking

Why in news?

  • The Supreme Court recently said borrowers, aggrieved by proceedings initiated under the SARFAESI ACT by the bank or the assets reconstruction company (ARC), have to avail the remedy under this law and no writ petition would be maintainable.

About SARFAESI Act:

  • SARFAESI Act stands for Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
  • It empowers Banks and Financial Institutions to recover their non-performing asset (NPAs) without the intervention of the Court.
  • The Act promotes the setting up of asset reconstruction companies (ARCs) and asset securitization companies (SCs) to deal with NPAs accumulated with the banks and financial institutions.
  • The provisions of this Act are applicable only for Non-Performing Asset (NPA) loans with outstanding above Rs.1 lakh.
  • Further, 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.
  • The Act is effective only against secured loans where banks can enforce the underlying security. The Act is not applicable to unsecured creditors.

Objectives:

  • Provides the legal framework for securitization activities in India.
  • It gives the procedures for the transfer of NPAs to asset reconstruction companies for the reconstruction of the assets.
  • Enforces the security interest without Court’s intervention.
  • Gives powers to banks and financial institutions to take over the immovable property that is pledged to enforce the recovery of debt.

Methods for recovery of non-performing assets under the Act

  • Securitisation
    • Securitization is the practice of pooling together various types of debt instruments (assets) such as mortgages and other consumer loans and selling them as bonds to investors.
  • Asset Reconstruction
    • Asset reconstruction is the activity of converting a bad or non-performing asset into performing asset with the help of Asset reconstruction companies.
  • Enforcement of Security without the intervention of the Court.
    • If the borrower defaults, the bank may enforce security interests by:
      • Take possession of the security
      • Sale or lease or assign the right over the security
      • Appoint Manager to manage the security
      • Ask any debtors of the borrower to pay any sum due to the borrower.

How it works?

???????

Add ons

  • In 2020 Supreme Court held that Co-operative banks established under a State law and multi-State level co-operative societies also come within the ambit of the SARFAESI Act of 2002.

PRACTICE QUESTION

Which of the following statements is not correct regarding SARFAESI Act?

(a) The Act empowers banks to directly auction residential or commercial properties that have been pledged with them to recover loans from borrowers.

(b) Co-operative banks come within the ambit of the SARFAESI Act

(c) The Act is applicable to both secured and unsecured creditors

(d) It provides the procedures for the transfer of NPAs to asset reconstruction companies

Answer