SARFAESI Act

by Bizopedia · Published January 27, 2022 · Updated January 27, 2022

What is SARFAESI act?

Sarfaesi Act is an Act to regulate securitization and reconstruction of financial assets and 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. SARFAESI Act was passed in 2002 and is also known as SARFAESI in common language.

SARFAESI stands for Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest. With the help of enactment of this act, banks in India have provided with the right to possess the security provided by the defaulting borrower against the loan and sell it to recover losses, without any intervention by any court of law.

Objectives of Act

Main objectives of Sarfaesi act includes-

Efficient and rapid recovery of non performing assets of banks
It also allows financial institutions to auction properties of borrower (both residential/commercial) when borrower is declared a non performing asset on the book of bank

SARFAESI Act: Applicability

SARFAESI Act is applicable for any loan that is greater than Rs 1 lakhs and has been declared as NPA by financial institution. Applicability of Sarfaesi act 2002 includes-

Registration of asset reconstruction companies.
Acquisition of rights or interest in financial assets.
Measures for assets reconstruction.
Resolution of disputes.

Rights of borrowers

Under SARFAESI act, 2002 borrower has been given power to remit dues at any point of time before sale of assets. Moreover a borrower can also lodged complaint against a banking official if he or she is using illegal means to take out possession from applicant and borrwoer can also approach DRT for any grievances.

Recovery methods under act

Under SARFAESI Act, 2002 following methods have been provided for recovery of NPA loans-

Securitization
Asset reconstruction
Enforcement of security without the interruption of the court

Let us look at each method for recovery under this act-

Securitization – Securitization stands for the process of issue of marketable securities backed by a pool of existing assets such as auto or home loans. After pool of asset is converted into a marketable security, it is sold to qualified buyers. A securitisation company or reconstruction company can raise funds from only the QIB (Qualified Institutional Buyers) by forming schemes for acquiring financial assets.
Asset reconstruction – Asset Reconstruction empowers the asset reconstruction companies in India. Asset reconstruction can be performed by means of managing the borrower’s business by acquiring it, by selling a partial or whole of the business or by the rescheduling of payments of debt payable by the borrower by the provisions of the Act.
Enforcement of security without the interruption of the court – Under this provision, banks can enforce the security without the intervention of court

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