SARFAESI ACT 2002 The full form of SARFAESI Act as we know is Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Banks utilize this act as an effective tool for bad loans (NPA) recovery. It is possible where non-performing assets are backed by securities charged to the Bank by way of hypothecation or mortgage or assignment. • Upon loan default, banks can seize the securities (except agricultural land) without intervention of the court. • SARFAESI is effective only for secured loans where bank can enforce the underlying security eg hypothecation, pledge and mortgages. In such cases, court intervention is not necessary, unless the security is invalid or fraudulent. However, if the asset in question is an unsecured asset, the bank would have to move the court to file civil case against the defaulters. How it works? The SARFAESI Act, 2002 gives powers of seize and desist to banks. Banks can give a notice in writing to the defaulting borrower requiring it to discharge its liabilities within 60 days. If the borrower fails to comply with the notice, the Bank may take recourse to one or more of the following measures: • Take possession of the security for the loan • Sale or lease or assign the right over the security • Manage the same or appoint any person to manage the same The SARFAESI Act also provides for the establishment of Asset Reconstruction Companies (ARCs) regulated by RBI to acquire assets from banks and financial institutions. The Act provides for sale of financial assets by banks and financial institutions to asset reconstruction companies (ARCs). RBI has issued guidelines to banks on the process to be followed for sales of financial assets to ARCs. Background of the 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. • However, as soon as the act was passed, its implementation was challenged in the court and this delayed its coming into force for 2 years. In the Mardia Chemicals v. Union of India, the Supreme Court upheld the validity of the SARFAESI act was upheld. Rights of Borrowers: The above observations make it clear that 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 loosing 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.
Posted on: Sat, 20 Sep 2014 17:12:31 +0000
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