Banks and other financial institutions are now able to successfully collect bad debts thanks to the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act of 2002, or SARFAESI Act. The first Asset Reconstruction Corporation (ARC) in India, ARCIL, was founded as a result of this statute.
What Is The SARFAESI Act?
• "An act to regulate securitization and reconstruction of financial assets and enforcement of security interests, and to provide for a central database of security interests created on property rights, and for matters associated with or incidental thereto," is what the SARFAESI Act of 2002 is described as.
• Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest is referred to as SARFAESI.
• It enables banks and other financial institutions to recoup loans by selling the home or commercial property of defaulters at auction.
• The first Asset Reconstruction Corporation (ARC) in India, ARCIL, was founded as a result of this statute.
• Under section 13 of the SARFAESI Act of 2002, secured creditors (banks or financial institutions) have rights to the enforcement of security interests.
• The Supreme Court of India has ruled that all state and multi-state cooperative banks must now abide by the SARFAESI Act of 2002. With the Supreme Court's landmark ruling, banks can now take and sell defaulters' properties to repay their obligations.
Provisions of The SARFAESI Act
• A secured creditor may request written notice prior to the time of limitation expiring if a borrower of financial assistance defaults on a loan or an installment and his account is classified as a non-performing asset (NPA) by the secured creditor.
• The Act exempts unsecured loans, loans under $100,000, and obligations that are less than 20% of the initial balance.
• This law authorized the creation of asset reconstruction companies (ARCs) and the sale by banks to ARCs (who are subject to RBI regulation) of non-performing assets.
• Banks are permitted to seize and sell collateral property without a judge's approval.
• Last but not least, the SARFAESI Act grants financial institutions the right to "seize and desist." They should notify the late borrower and demand payment within 60 days in the notification.
• The bank may choose from the following three options if the debtor refuses to cooperate:
o Take charge of the security for the loan.
o The security's right may be sold, leased, or assigned.
o Maintain the asset yourself or designate someone to do so.
SARFAESI Act - Modifications
• Cooperative banks are now covered under the SARFAESI Act of 2002
according to a law that the Central Government passed in 2013.
• The statute was once again changed by the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill in 2016.
• The Supreme Court further ruled that List I Entry 45 (Union List) laws, including Sections 5(c) and 56(a) of the Banking Regulation Act of 1949, apply to cooperative banks that conduct banking activities.
Functions Covered Under The Act
• Asset Reconstruction Companies (ARCs) are registered with and governed by the Reserve Bank of India.
• Assisting in the securitization of the financial assets of banks and other financial institutions, either with or without the use of underlying securities.
• By issuing debentures, bonds, or any other type of instrument as a debenture to purchase financial assets from banks and financial institutions, the ARC encourages the seamless transferability of financial assets.
• The Asset Reconstruction Companies will be able to raise money by being given the responsibility of selling security receipts to approved customers in order to raise cash.
A secured creditor can pursue his security interest without the assistance of courts or tribunals thanks to the SARFAESI Act. In addition to these, there are voluntary processes that enable banks to jointly restructure debtors' debt (including altering loan repayment schedules) and take over a company's management, such as Corporate Debt Restructuring and Strategic Debt Restructuring.