SARFAESI ACT 2002

 

                    

         SARFAESI ACT is an Indian law that regulates the banking policy in terms of recovery and auctions of residential or commercial properties of loan defaulters. Its full form is Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act. It was enacted in the year 2002 to empower the banks and financial institution to take possession of the securities and to sell them without intervention of the Court.

HISTORICAL FACTS:

Till early 1990s, the civil suits were being filed for recovery of the dues of the banks and financial institutions under the Act of 1882 and Code of Civil Procedure, 1908. Due to various difficulties the banks and financial institutions had to face in recovering loans and enforcement of securities, the Parliament enacted the Recovery of Debts due to Banks and Financial Institutions Act, 1993 (RDBFI Act).

            On account of lack of infrastructure and manpower, the regular civil courts were not in a position to cope up with the speed in the adjudication of recovery cases. In the light of recommendations of the Tiwari Committee the special tribunals came to be set up under the provisions of the RDBFI Act referred to above for the recovery of huge accumulated NPA of the Bank loans.

            The Narshimha Committee I and II and Andyarujina Committee were constituted by Government because of the continuing rise in number of Non-Performing Assets (NPA) at banks and other financial institutions in India; a poor rate of loan recovery and the failure of the existing legislation in redressing the difficulties of the recovery by banks. The main aim of the Committees are for examining and suggesting banking reforms in India.

            These committees observed in their report that one out of every five burrower was a defaulter and that due to the long and tedious process of existing frame work of law  and the overburdening of existing forums including the specialized tribunals under the 1993 Act, any attempt of recovery with the assistance Court/Tribunal often rendered the secured asset nearly worthless due to long delays.

            The committees thus, proposed new laws for securitisation in order to permit banks and financial institutions to hold securities and sell them in a timely manner without the involvement of courts. SARFAESI Act was then enacted on the recommendation of the committees to empower the banks and financial institutions to take possession of the securities and to sell them without intervention of the Court.

            The law does not apply to unsecured loans, loans below Rs. 1,00,000/- or where remaining debt is below 20% of the principal amount. this law allowed the creation of asset reconstruction companies  and allowed banks to sell theirs non-performing assets to asset reconstruction companies. Banks are allowed to take possession of the collateral property and sell it without the permission of court.
 

OBJECTIVE OF SARFAESI

• Efficient or rapid recovery of non-performing assets (NPAs) of the banks and financial institutions.

• Allows banks and financial institutions to auction properties, commercial residential when the burrower fails to repay their loans.

In leading case, Mardia Chemicals Ltd. & Ors vs. Union of India & Ors (2004), the constitutional validity of the SARFAESI Act was challenged, but the Supreme Court of India upheld and declared the Act to be constitutionally valid. The Court said that a borrower may appeal against the lender in the debt recovery tribunal, without having to deposit 75% of the amount of debt. It the tribunal does not stay the order, the lender may sell the assets. 

            In this case, the Hon'ble Supreme Court empowered the bank, the right to                        sell the secured assets of the defaulters while retaining the right of the borrower                to file appeal against the lender.