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We have a lot of banks in our country. The main purpose of setting up a bank is to give loans to people and companies. Banks provide loans and charge some interest on them. This interest collected by banks is the main source of revenue for banks. A borrower of a bank agrees to repay the loan in some instalments as decided by the bank but if he fails to do so, the bank has the mechanism of taking that money back by selling some asset of that borrower, this power is given to the bank by an act known as SARFAESI Act.
All About SARFAESI Rules
A loan that is not received by a bank within the required period, is called a bad loan or in financial jargon, one calls it ‘NPA’ or Non-Performing Asset. The Indian government formulated an act called SARFAESI Act that gives the power to banks to recover the money from the borrower.
The expansion of the SARFAESI Act is the ‘Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act’, 2002. It gives the legal authority to banks to take the amount of the loan back by using or capturing the collateral presented by the borrower at the time of taking the loan from the bank. Collateral can be any movable or immovable asset of the borrower that can be sold or auctioned by the bank in case the loan is not paid timely. The SARFAESI rules give power to banks only in the case when the loan is ‘secured’, meaning the collateral was provided by the borrower. In the case of an ‘unsecured loan’, the borrower does not give any collateral and banks usually charge high-interest rates against such loans.
The objective of ‘Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act’, 2002-
The main objective of ‘Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act’ 2002 is to empower the banks to take back the money which bank has lent to the borrower; in case he fails to repay it on time. The SARFAESI Rules do not apply to loans which are not secured. If the amount of the loan is below 1 lakh rupees, banks cannot enforce this action to recover the loan. Also, if the borrower has completed the repayment of 80% of the loan, still this act will not be enforced.
The objective of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 can be met by three methods as mentioned in the act-
The first method is the securitization for security. In the method of securitization, a company clusters some of the assets and offers them in the market as a ‘bond’ or ‘security’ of the company. This way, banks can club the assets that they have against their loans and can get a good amount of money for the assets and recover losses. So, this securitization for security is an efficient method for banks.
The second method is restructuring the loan. For this purpose, Asset Reconstruction Company was formed by the government which helps the banks to restructure their loans and suggests the methods to take back the remaining payment from the borrower.
In the case of immovable property, it cannot be enforced if the land put as the mortgage is agricultural land.
In the case of movable assets, the bank or the secured creditor should send an official to take the control of the collateral while having 2 eyewitnesses on spot.
The Issuance of Notice-
The notice is generated in the name of the borrower and his guarantor to pay the remaining amount within 60 days. This time is counted right from the date on which the notice is issued.
Notice can be sent to the spouse of the borrower if they are not separated as per the judicial procedure. Also, notice is delivered at the office address if the borrower is a body of corporate.
The bank can issue unlimited notices to the borrower, there is no restriction on the number.
Also, this Act was amended in 2016 and IBC reforms which mean Insolvency and Bankruptcy Reforms were commenced to deal with the situation of bad loans which are often defaulted by companies.
Conclusion-
The SARFAESI rules were made to assist banks in performing their services efficiently. These rules help the banking sector in dealing with the loan amount which does not come back to the bank due to some reasons. Sometimes borrowers deliberately avoid paying back their loans which forces banks to take legal action against them. The objective of ‘Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act’ 2002 is to empower the banks to take back the money which the bank had lent to the borrower.
