HOW SARFAESI ACT 2002 OPERATES IN THE BANKING SECTOR?
Banks & Financial Institutions before the enactment of SARFAESI ACT, 2002 faced significant losses due to the problem of rising NPA’s . Banks could not sell off the security interest without the intervention of courts/ tribunals to recover the defaulting loan. The sluggish nature of the court proceedings and lack of direct laws in place for regularization of financial assets gave rise to SARFAESI ACT, 2002 wherein the Banks & Financial Institutions could now recover their NPA’s by selling off the properties mortgaged with them without the intervention of court of laws.
Securitization And Reconstruction of Financial Assets and Enforcement of the Security Interest act of 2002 abbreviated as SARFAESI ACT, 2002 came into force on 21st June 2002. The name says it all, “an act to regulate securitization & reconstruction of financial asset & enforcement of security interest and to provide for a Central database of security interests created on property rights, and for matters connected therewith or incidental thereto“.
In this article, we will see how SARFAESI Act has been helping banks & financial Institutions in recovering loans and protecting themselves from significant losses.
It all starts with the need for financial assistance. The borrower goes to a bank/ FI seeking a loan. The bank requires the borrower to fulfill certain requisites for a loan which may require the borrower to mortgage/ pledge/ guarantee his one or more immovable/moveable assets depending on the amount of loan required. Further, when all the formalities are done correctly the bank sanctions the loan to the borrower. The bank decides on EMI to be paid by the borrower. The borrower must repay the loan by paying EMI’s regularly. If the borrower defaults on one of the EMI’s the bank might send you the notice to repay the same. However, if the borrower fails to pay the EMI’s consecutively for three months, the banks are required to classify such accounts NPA’s, and banks can now initiate further action to recover the loan.
PROCEDURE UNDER SARFAESI, 2002.
Section 13 of the SARFAESI Act, 2002 contains the provisions for discharging mortgaged property without court intervention. In order, to do so the banks have to follow certain procedures:
- Declaration of the Loan account as NPA.
Section 13(2) of the act says that if the borrower who is liable to repay, defaults on such a payment, then the bank/FI has to first classify such an account as NPA and then issue notice to the borrower to discharge in full all his liabilities towards bank within 60 days from the date of notice failing which bank shall exercise rights under Sec 13 (4).
- Representations under section 13 (3A).
Upon reception of the notice u/s 13(2), the borrower can raise objections and make representations. If the bank/FI is of the view that the representations made by the borrower are not tenable then it shall issue its non-acceptance within a week from the receipt of such representations from the borrower.
- Right to bank/ FI under section 13 (4).
If the borrower fails to make payment within the stipulated period of 60 days u/s 13(2), then the bank/ FI can exercise one or all of the following rights:
- Take the possession of the mortgaged property of the borrower.
- Take over the management if the substantial part of the borrower’s business is held as security.
- Appoint the manager to manage the secured asset, the possession of which is taken by the bank/FI.
- Demand money from the person who has acquired any of the secured assets from the borrower by giving notice in writing to pay sufficient money as is required to clear the debt.
The general practice is that the bank takes symbolic possession of the property first by pasting a copy of the possession notice outside the premises of the secured asset & cautioning the borrower & public in general to not deal in a secured asset which means the borrower cannot sell, lease, or assign the secured asset.
- Physical Possession of the Property.
To take physical possession of the Secured Asset or to sell off the secured asset, an authorized officer is appointed on behalf of the bank/FI to carry out further procedures. An application is required to make requesting the control over the asset to CMM or DM within whose jurisdiction the secured asset or other related documents are situated. On such a request being made, peruse all the documents, and pass such orders for taking possession of the secured asset within 30 days.
Note- Banks/ FI’s on a timely basis have to keep the borrower informed about the upcoming legal action to be taken up them towards acquiring the possession and sale of the secured asset.
- Pre-sale Notice to the borrower.
Once the Bank/FI receives an order from the CMM/DM, the date of physical possession is intimated to the borrower upon which the bank officials in the presence of two witnesses take possession of the Secured Asset, and the Panchama is drawn & signed by the witness. The local Police and Talathi of the jurisdiction in which the Secured Asset is situated are present while taking possession. Thereafter, a pre-sale notice is issued to the borrower giving 30 days to pay the outstanding dues.
- Sale of Secured Asset
On the expiry of 30 days, bank/FI can sell whole or any part of such Secured Asset by one of the following methods-
- Obtain quotations from persons dealing in Secured Assets; or
- By inviting tenders from the public; or
- By holding a public auction; or
- By private treaty.
Before effecting such a sale, a proper valuation of the Secured Asset is required to be obtained from the approved valuer and the reserve price is fixed for the Secured Asset.
If at the time of physical possession, any movable articles are lying on the premises & not mortgaged with the bank. The borrower has the right to claim such movable articles & the bank cannot sell such items without giving an opportunity to the borrower to vacate the premises.
While the property is in possession of an authorized officer, he/she has to ensure the safety of the premises and take necessary steps for preservation and protection so that no damage is caused to the property that will result in its devaluation.
The Secured Asset is sold to the highest bidder or one with the highest tender quotation or one with the highest offer. If the value of the property is more than the outstanding debt with Bank/FI the remaining sale proceeds are returned to the borrower. No sale shall be confirmed at price lesser than the reserve price without the permission of the borrower.
A certificate of sale is issued to the purchaser, stating whether the secured asset is delivered free from any encumbrances known to the Bank/FI or not.
Important points to note:
- The provisions of the Sarfaesi Act, 2002 are not applicable in the following cases:
- A security interest in agricultural land.
- The outstanding amount is less than 20% of the Principal Amount & Interest thereon.
- Security in aircraft.
- Any rights of unpaid seller.
- any security interest in a financial asset not exceeding one lakh rupees;
- The borrower has the right to appeal under section 17 of the act wherein if the borrower is aggrieved by any of the acts of the bank/FI u/s 13(4) in DRT within 45 days.
- The borrower is entitled to compensation in case of an illegal act done by an authorized officer.
- CERSAI is set up under Section 20 of SARFAESI, 2002 which keeps the record of collaterals with various banks/FI which enables them to keep a check on borrowers taking loans from multiple sources with the same collateral.
- No two legal actions can be initiated by banks/FI’s simultaneously to recover the loan such as Arbitration & SARFAESI Procedures together.
- The act does not apply to Unsecured Loans.
The SARFAESI Act, 2002 has acted as a boon to the financial sector. With the power to enforce the secured asset by selling them off with less hassle, banks have been able to recover NPA’s. The Co-operative Banks can also issue a notice under this act and initiate the recovery proceedings. All kinds of movable or immovable asset that has been provided as security are covered by the act. The SARFAESI Act, 2002 has become a protective shield for banks against loan defaulters.
- Non Performing Asset
- Ref. SARFESI ACT, 2002
- Financial Institution
- Equated Monthly Installment
- Chief Metropolitan Magistrate
- District Magistrate
- Debt Recovery Tribunal
- Central Registry of Securitisation Asset Reconstruction and Security Interest of India