SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act, 2002 is an act which came in 2002 to allow banks and other financial institutions to recover their non-performing assets (NPAs) or bad loans without the intervention of the Court.
The Act provides three alternative methods for recovery of non-performing assets, namely:
- Securitisation
- Asset Reconstruction
- Enforcement of Security without the intervention of the Court
When does the act come into force?
When the customers defaults on loans i.e. not able to give back the loan amount to bank and other financial institutions covered under the act, the loan amount given becomes NPA. Now banks have right to auction residential or commercial properties to recover these loans under this act without going to courts.
What rights does the act give to the bank?
- To issue a notice to the customer defaulted on loan to repay the dues within 60 days from the date of notice.
- To issue notice to the person who has been sell any of the secured properties by the customer defaulted on loan.
- To ask the debtor who has to pay any amount to the customer defaulted on loan. (It might be possible that the defaulted customer has given loan to somebody else)
- Secured Agricultural land does not come under the act.
Procedure to recover loan:
- When a customer takes a loan against mortgaging any property, he himself owns the possession of the property.
- When a loan becomes an NPA, a notice is issued to the customer. If after this also customer does not give back the amount, the bank takes possession of the assets being mortgaged.
- After this the bank gives advertisement in one English Newspaper and one regional newspaper giving details about the property and other related information about auction and invite bids from the people.
The act does not imply to loans below Rs 1 Lac or to those loans whose 20% or less of the total amount + interest value is left to be repaid to lender (banks or other financial institutions).
- Narasimham Committee I and II and Andhyarujina Committee was constituted by the Central Government for the purpose of examining banking sector reforms have considered the need for changes in the legal system in respect of these areas. Amongst the other committees, these Committees have made suggestions to form new legislation for securitization and empowering banks and financial institutions to gain possession of the securities and to sell them without any intervention of the court here.
Andhyarujina Committee:
- The committee under the chairmanship of T R Andhyarujina, senior Supreme Court advocates and former Solicitor General of India, has submitted four reports.
- One is on the debt recovery tribunals. The second is on the recent amendment to Section 28 of the Indian Contract Act 1997. The third is on powers for taking possession and sale of securities without intervention of court to banks and financial institutions. The fourth is a law for securitisation. This was the base for SARFAESI act.Â