SARFAESI Act

Introduction

• SARFAESI (Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest) Act, 2002, was framed to address the problem of NPAs (Non-Performing Assets) or bad assets. 
• The statute empowers banks and other financial institutions to recover loans by auctioning residential or commercial properties. 
• Banks can confiscate collateral/securities (excluding agricultural property) without the participation of a court in the event of a loan default.

Important Features 

• Through the SARFAESI Act, secured creditors (banks or financial institutions) have many rights for enforcement of security interest under section 13 of this Act. 
• If the borrower of financial assistance makes any default in repayment of a loan or any installment and his account is classified as Non-performing Asset by secured creditor, then secured creditor may require before expiry of 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.
• The SARFAESI Act empowers financial institutions to ‘seize and desist’. They should give a notice to the defaulting borrower asking to repay the amount within 60 days. If the debtor doesn’t comply, the bank can resort to one of the three following measures:

1. Take possession of the loan security.
2. Sell or lease or assign the right over the security.
3. Manage the asset or appoint someone to manage the same.

• The Act also provides for the establishment of Asset Reconstruction Companies (ARCs) to acquire assets from banks and other financial institutions. ARCs are regulated by the RBI.

Important Points

• The law does not apply to

1. Unsecured loans.
2. Loans below ₹100,000 
3. Where the remaining debt is below 20% of the original principal

• The SARFAESI Act provides for the establishment of Asset Reconstruction Companies (ARCs) which are to be regulated by RBI. 
• Asset Reconstruction Companies can buy securities from banks and financial institutions (ARCs). 
• Government has amended the SARFAESI Act in 2016 to empower the Asset Reconstruction Companies (ARC). 
• ARC is a specialized and dedicated financial organization that purchases non performing assets (NPAs) from financial institutions and banks in order to help them clean up their balance sheets. 
• The RBI registers ARCs, and the SARFAESI Act of 2002 regulates them.