Economy Simplified: SARFAESI Act 2002 ( The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 Economy Simplified: SARFAESI Act 2002)

1. The Sarfaesi Act of 2002 was brought in to guard financial institutions against loan defaulters.

2. The act allows banks and financial institutions to auction properties (residential and commercial) when borrowers fail to repay their loans.

3. It enables banks to reduce their non-performing assets by adopting measures for recovery or reconstruction.

4. To recover their bad debts, the banks under this law can take control of securities pledged against the loan, manage or sell them to recover dues without court intervention.

5. Upon loan default, banks can seize the securities (except agricultural land) without intervention of the court.

6. SARFAESI is effective only for secured loans where banks can enforce the underlying security e.g. hypothecation, pledge and mortgages. In such cases, court intervention is not necessary, unless the security is invalid or fraudulent.

7. However, if the asset in question is an unsecured asset, the bank would have to move the court to file a civil case against the defaulters.

How does it work?

1. The SARFAESI Act, 2002 gives powers of ‘seize’ to banks. 

2. 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.

3. The SARFAESI Act also provides for the establishment of Asset Reconstruction Companies regulated by RBI to acquire assets from banks and financial institutions.

4. The SARFAESI Act  provides for sale of financial assets by banks and financial institutions toasset reconstruction companies.

Rights of Borrowers

1. The borrowers can at any time before the sale is concluded, remit the dues and avoid losing the security; 

2. In case any unhealthy/illegal act is done by the Authorized Officer, he will be liable for penal consequences;  The borrowers will be entitled to get compensation for such acts; 

3. For redressing the grievances, the borrowers can approach firstly the Debts Recovery Tribunals (DRT) and thereafter the Debts Recovery Appellate Tribunals (DRAT) in appeal. The limitation period is 45 days and 30 days respectively.

SARFAESI Act, 2002 IN News:

1. According to a 2020 Supreme Court judgment, co-operative banks can also invoke Sarfaesi Act. 

2. According to the Finance Ministry, the non-banking financial companies (NBFCs) can initiate recovery in Rs 20 lakh loan default cases.