SARFAESI Act PDF:
SARFAESI Act PDF is available here. Dear Aspirants, we all know the importance of the Banking Awareness section in bank exams. SARFAESI Act is an important topic for bank exams. We have provided the study notes of the SARFAESI Act PDF for your preparation.
SARFAESI ACT, 2002
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI Act), 2002 is an Indian law. It allows banks and other financial institution to auction residential or commercial properties to recover loans. The first asset reconstruction company (ARC) of India, ARCIL, was set up under this act. In the SARFAESI act pdf, you can check all these details.
Under this act secured creditors (banks or financial institutions) have many right for enforcement of security interest under section 13 of SARFAESI Act, 2002. If borrower of financial assistance makes any default in repayment of loan or any installment and his account is classified as Non-performing Asset by secured creditor, then secured creditor may require before the expiry of the period of limitation by written notice to the borrower for repayment of due in full within 60 days by clearly stating amount due and intention for enforcement. Where he does not discharge dues in full within 60 days, THEN WITHOUT INTERVENTION OF ANY COURT OR TRIBUNAL Secured creditor may take possession (including sale, lease, assignment) of the secured asset, or take over management of the business of borrower or appoint manager for the secured asset or without taking any of these action may also proceed against the guarantor or sell the pledged asset, if any.
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 Act is effective only for secured loans where bank 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. 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. In the SARFAESI act pdf, you can check all these details.
SARFAESI Act PDF – 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. In the SARFAESI act pdf, you can check all these details.
SARFAESI Act PDF – Background
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 Narsimhan 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 securitization 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. In the SARFAESI act pdf, you can check all these details.
SARFAESI Act PDF – 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 Authorized 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
In the SARFAESI act pdf, you can check all these details.
SARFAESI Act PDF- 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.
In the SARFAESI act pdf, you can check all these details.
SARFAESI Act PDF – Methods of Recovery
According to this act, the registration and regulation of securitization companies or reconstruction companies is done by RBI. These companies are authorized to raise funds by issuing security receipts to qualified institutional buyers (QIBs), empowering banks and Fls to take possession of securities given for financial assistance and sell or lease the same to take over management in the event of default. In the SARFAESI act pdf, you can check all these details.
This act makes provisions for two main methods of recovery of the NPAs as follows:
Securitisation: Securitisation is the process of issuing marketable securities backed by a pool of existing assets such as auto or home loans. After an asset is converted into a marketable security, it is sold. A securitization company or reconstruction company may raise funds from only the QIB (Qualified Institutional Buyers) by forming schemes for acquiring financial assets. In the SARFAESI act pdf, you can check all these details.
Asset Reconstruction: Enacting SARFAESI Act has given birth to the Asset Reconstruction Companies in India. It can be done by either proper management of the business of the borrower, or by taking over it or by selling a part or whole of the business or by rescheduling of payment of debts payable by the borrower enforcement of security interest in accordance with the provisions of this Act. In the SARFAESI act pdf, you can check all these details.
Further, the act provides Exemption from the registration of security receipt. This means that when the securitization company or reconstruction company issues receipts, the holder of the receipts is entitled to undivided interests in the financial assets and there is not need of registration unless and otherwise it is compulsory under the Registration Act 1908.
However, the registration of the security receipt is required in the following cases:
- There is a transfer of receipt
- The security receipt is creating, declaring, assigning, limiting, extinguishing any right title or interest in an immovable property.
In the SARFAESI act pdf, you can check all these details.
SARFAESI Act PDF – Is Mortgaged House exempted?
The Sarfaesi act covers any asset, movable or immovable, given as security whether by way of mortgage, hypothecation or creation of a security interest. There are some exceptions in the act such as personal belongings. However, only that property given as security can be proceeded under the provisions of SARFAESI Act. If the property of the borrower is his own mortgaged residential house, it is also NOT exempted from the Sarfaesi act. In the SARFAESI act pdf, you can check all these details.
SARFAESI Act PDF – Powers of Debt Recovery Tribunal
The debt Recovery Tribunals have been empowered to entertain appeals against the misuse of powers given to banks. Any person aggrieved, by any order made by the Debts Recovery Tribunal may go to the Appellate Tribunal within thirty days from the date of receipt of the order of Debts Recovery Tribunal. In the SARFAESI act pdf, you can check all these details.
SARFAESI Act PDF – Role of Chief Metropolitan Magistrate or District Magistrate
The Chief Metropolitan Magistrate or District Magistrate has been mandated to assist secured creditor in taking possession of secured asset. These officers will make sure that once the creditor has given him in writing that all other formalities of the act have been done, the CMM or DM will take possession of such asset and documents relating thereto; and forward such assets and documents to the secured creditor. Now, here, you have to note that such an act of the CMM or DM cannot be called in question in any court or before any authority. In the SARFAESI act pdf, you can check all these details.
SARFAESI Act PDF – Role of High Court:
The act allows taking the matter to high courts only in some matters related to the implementation of the act in Jammu & Kashmir. However, High Courts have been entertaining writ petitions under article 226 (Power to issue writs) of the constitution of India. In the SARFAESI act pdf, you can check all these details.
SARFAESI Act PDF – Proposed amendments to the Sarfaesi Act
The government had approved bill to amend the act. The Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Bill, 2011, amends two Acts — Sarfaesi Act 2002, and Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (DRT Act). Via these amendments:
Banks and asset reconstruction companies (ARCs) will be allowed to convert any part of the debt of the defaulting company into equity. Such a conversion would imply that lenders or ARCs would tend to become an equity holder rather than being a creditor of the company.
The amendments also allows banks to bid for any immovable property they have put out for auction themselves, if they do not receive any bids during the auction. In such a scenario, banks will be able to adjust the debt with the amount paid for this property. This enables the bank to secure the asset in part fulfillment of the defaulted loan.
Banks can then sell this property to a new bidder at a later date to clear off the debt completely. However lenders will be able to carry this property on their books only for seven years, as per the Banking Regulation Act, 1949. In the SARFAESI act pdf, you can check all these details.
SARFAESI Act PDF – Amendments to SARFAESI Act (in 2016)
It allows District Magistrate (DM) to take possession over collateral within 30 days for securing the creditors. It empowers District Magistrate (DM) to assist banks to take over the management of a company, in case the company is to integrate records of property registered under various registration systems with a central registry meant for maintaining records of transactions related to secured assets. In the SARFAESI act pdf, you can check all these details.