The SARFAESI Act

Why in the News?

Banks have invoked the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act against telecom infrastructure provider GTL to recover their pending dues.

Provisions of The SARFESI Act 2002:

• Objective: The Sarfaesi Act of 2002 was brought in to guard financial institutions against loan defaulters.
• Applicability: The law is applicable throughout the country and covers all assets, movable or immovable, promised as security to the lender.
• Auctioning Power: It essentially empowers banks and other financial institutions to directly auction residential or commercial properties that have been pledged with them to recover loans from borrowers.
• Tackling Default Payments: The Act comes into play if a borrower defaults on his or her payments for more than six months.
  • The lender then can send a notice to the borrower to clear the dues within 60 days.
  • In case that doesn’t happen, the financial institution has the right to take possession of the secured assets and sell, transfer or manage them.
• Appellate Authority: The defaulter, meanwhile, has a recourse to move an appellate authority set up under the law within 30 days of receiving a notice from the lender.
• Co-operative Banks & Non-banking Financial Companies (NBFCs)
  • According to a 2020 Supreme Court judgment, co-operative banks can also invoke Sarfaesi Act.
  • According to the Finance Ministry, the non-banking financial companies (NBFCs) can initiate a recovery in Rs 20 lakh loan default cases.

• Methods for Recovery: The Act provides three alternative methods for recovery of non-performing assets:
  • Securitisation, asset reconstruction and enforcement of security — without the intervention of courts.

Why was such a law needed?

• Before the law was enacted in 2002, banks and other financial institutions were forced to take a longer route to recover their bad debts.
• The lenders would appeal in civil courts or designated tribunals to get hold of ‘security interests’ to the recovery of defaulting loans, which in turn made the recovery slow and added to the growing list of lenders’ non-performing assets.

Drawback

• One of the major drawbacks of the Act is that it is not applicable to unsecured creditors.