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SARFAESI ACT, 2002 - Applicability, Objectives, Process, Documentation
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The SARFAESI Act covers all residential and commercial properties pledged as security against a loan. However, the Act does not cover agricultural properties.
The Act applies to any loan above Rs. 1 Lakh classified as an NPA. It does not include a loan repaid over 80%.
The Act covers all types of banks, including private and public sector banks, cooperative banks, and foreign banks.
The SARFAESI Act does not cover agricultural property. Moreover, it does not include loans under ₹ 1 Lakh or loans that are already repaid more than 80%.
The SARFAESI Act does not cover security or money issued under the Indian Contract Act of 1872 or the Sale of Goods Act of 1930. Conditional sales, hire-purchases, leases, etc., are also not covered as they do not include security interests.
Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.
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NPAs and bad loans are a regular part of the financial industry. The SARFAESI Act 2002 is an important step that empowers banks to collect NPAs without involving a court. The Central Government constituted the Narasimham Committee and the Andhyarujina Committee to propose new legislation, allowing finance companies to foreclose and sell securities without court involvement legally. Here is a detailed guide to the SARFAESI Act.
What is the SARFAESI Act of 2002?
SARFAESI full form is “Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act”. It allows financial institutions to auction residential and commercial properties of defaulting borrowers to recover their loan outstanding balance. The primary aim of the Act is to reduce NPAs through various recovery and reconstruction methods.
Under the SARFAESI Act, a finance company can seize a borrower’s property without approaching the court, except for agricultural land. However, this is applicable only for secured loans where the borrower mortgages, pledges, or hypothecates an underlying security against the loan.
How SARFAESI Act, 2002 Works?
After learning what is SARFAESI Act, remember that it empowers a financial institution to seize the defaulting borrower's property in case of a Non-Performing Asset (NPA). When borrowers miss a loan installment, they start the process by issuing notices and giving them a short period to discharge their liabilities. If the borrower does not comply, the finance company follows these steps under the SARFAESI Act:
The Act also supports the establishment of ARCs – Asset Reconstruction Companies that deal with acquiring and resolving NPAs from financial institutions.
What are the Objectives of the SARFAESI Act, 2002?
Some major objectives of the SARFAESI Act 2002 are as follows:
Documents Required in the SARFAESI Act, 2002?
The SARFAESI Act required specific documentation for various amendments and applications. These include the following:
For digitally signed e-Form, the following documents are required:
Role of SARFAESI Act, 2002
As the SARFAESI Act full form indicates, the Act plays a crucial role in improving debt recovery and strengthening the financial sector of India by managing the following:
Formation of SARFAESI Act, 2002
The primary purpose of forming the SARFAESI Act 2002 was to regulate the reconstruction or securitisation of financial assets and enforce security interests throughout the country. An amendment was published in the Official Gazette’s Amendment Act in 2016. The Act amends four laws:
Depositories Act, 1996 and the connected matters
Why is the SARFAESI Act 2002 Important?
Every country’s economy largely depends on its financial industry. The SARFAESI Act 2002 provides a guideline for securitisation, allowing financial institutions to seize and sell collateral properties for recovery without the court’s intervention. After identifying a Non-Performing Asset, the finance company addresses the problem through various approaches under the guidelines. Moreover, the Reserve Bank of India oversees the SARFAESI working and institutions, ensuring security and fairness for all parties.
The SARFAESI Act is important in many ways, including the following:
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