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Sarfaesi Act

The SARFAESI Act allows banks and financial institutions to enforce security interests over defaulting borrowers' assets without court intervention. It aims to expedite the recovery of secured debt that is classified as non-performing. The Act establishes legal frameworks for securitization of assets and transfer of NPAs to asset reconstruction companies. While giving creditors effective recovery measures, it also protects borrowers' rights, such as the right to remedy defaults before enforcement of security and seek compensation for illegal acts.

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152 views

Sarfaesi Act

The SARFAESI Act allows banks and financial institutions to enforce security interests over defaulting borrowers' assets without court intervention. It aims to expedite the recovery of secured debt that is classified as non-performing. The Act establishes legal frameworks for securitization of assets and transfer of NPAs to asset reconstruction companies. While giving creditors effective recovery measures, it also protects borrowers' rights, such as the right to remedy defaults before enforcement of security and seek compensation for illegal acts.

Uploaded by

Jatin Panchi
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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SARFAESI ACT:

The Securitization and Reconstruction of Financial Assets and Enforcement of Securities Act,
2002 [SARFAESI] Act, 2002 was enacted to regulate securitization and reconstruction of
financial assets and enforcement of security interest and for matters connected therewith or
incidental thereto.
Provisions of SARFAESI Act:
The right of the banks/financial institutions to resort to the provisions of the SARFAESI
arises only in the event where any borrower, who is under liability to a secured creditor under
a security agreement, makes any default in payment of a secured debt or any instalment
thereof and his account in respect of such debt is classified by the secured creditor as nonperforming asset. It basically deals with 3 aspects:
1. To provide legal framework for securitization of asset.
2. Transfer of NPAs to asset reconstruction company, which can then dispose off the
assets and realize the proceeds.
3. Enforcement of security interest by secured creditor(banks/financial institutions)
NEED FOR SARFAESI ACT:
The previous legislation enacted for recovery of the default loans was Recovery of Debts due
to Banks and Financial institutions Act, 1993. This act was passed after the recommendations
of the Narsimham Committee I were submitted to the government. This act had created the
forums such as Debt Recovery Tribunals and Debt Recovery Appellate Tribunals for
expeditious adjudication of disputes with regard to ever increasing non-recovered dues.
However, there were several loopholes in the act and these loopholes were mis-used by the
borrowers as well as the lawyers. This led to the government introspect the act and this
another committee under Mr. Andhyarujina was appointed to examine banking sector reforms
and consideration to changes in the legal system. This committee recommended to enact a

new legislation for the establishment of securitisation and reconstruction companies and to
empower the banks and financial institutions to take possession of the Non-performing assets.
Thus, via the SARFAESI act, for the first time, the secured creditors were empowered to
recover their dues without the intervention of the court.

RIGHTS OF BORROWERS
The SAFAESI act was able to provide the effective measures to the secured creditors to
recover their long standing dues from the Non-performing assets, yet the rights of the
borrowers could not be ignored, and have been duly incorporated in the law.

The borrowers can at any time before the sale is concluded, remit the dues and avoid

losing the security.


In case any unhealthy/illegal act is done by the Authorised Officer, he will be liable

for penal consequences.


The borrowers will be entitled to get compensation for such acts.
For redressing the grievances, the borrowers can approach firstly the DRT and
thereafter the DRAT in appeal. The limitation period is 45 days and 30 days
respectively

PRE-CONDITIONS:
The Act stipulates four conditions for enforcing the rights by a creditor.

The debt is secured


The debt has been classified as an NPA by the banks
The outstanding dues are one lakh and above and more than 20% of the principal loan

amount and interest there on.


The security to be enforced is not an Agricultural land.

SECURITIZATION AND RECONSTRUCTION OF ASSETS:


Securitization is the process of conversion of existing assets or future cash flows into
marketable securities. For the purpose of distinction, the conversion of existing assets into
marketable securities is known assets-backed securitization and the conversion of future
cash flows into marketable securities is known as future-flows securitization.

Securitization is to sell the secured NPA loans to investors through a special purpose

vehicle called securitization company (SC).


SC formulate a separate scheme for each set of assets and invites QIB`S

(Qualified Institutional Buyers) for investment in the scheme.


SC realize the financial asset and pays the proceedings to QIB(
Asset Reconstruction involves securitization and enforcement of security interests.

CURRENT OUTLOOK:
In the Annual Budget presented for FY 15-16, Government of India has decided to treat nonbanking financial companies (NBFCs) as financial institutions under the SARFAESI Act,
which will be a big boost to the sector as this will allow NBFCs to enjoy the benefits that
presently apply only to banks.
However, Industry feels the act need to be revisited and there is a demand to include Bond
Holders under the ambit of this act.

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