The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 is a vital legislation enacted by the Indian Parliament to regulate and empower banks and financial institutions in recovering their non-performing assets (NPAs) without court intervention. It is considered a major legal tool for creditors to enforce security interests swiftly and effectively.
Introduction to SARFAESI Act, 2002
- Enacted on December 17, 2002.
- Provides mechanisms for securitisation of financial assets, reconstruction of assets, and enforcement of security interest.
- Applies only to secured creditors such as banks, financial institutions, and asset reconstruction companies.
- Does not apply to unsecured loans, agricultural land, or properties with outstanding less than ₹1 lakh.
Objectives of SARFAESI Act
- To enable banks and financial institutions to recover dues without judicial intervention.
- To provide for the transfer of NPAs to asset reconstruction companies (ARCs).
- To regulate securitisation and reconstruction of financial assets.
- To improve the efficiency of the credit recovery system in India.
Key Features of the SARFAESI Act
- Section 13: Allows secured creditors to enforce security interest without court intervention if the borrower defaults.
- Section 17: Provides the right to appeal to the Debt Recovery Tribunal (DRT) for aggrieved borrowers.
- Asset Reconstruction Companies (ARCs): Can acquire NPAs and manage or sell them.
- Securitisation: Financial assets can be converted into marketable securities and sold to investors.
- Takeover of management: Lenders may take possession of secured assets or manage the borrower’s business.
Legal Provisions under SARFAESI Act
| Section | Provision |
|---|---|
| 2(1)(zd) | Defines secured creditor |
| 2(1)(zf) | Defines securitisation |
| 3–12 | Regulation of securitisation and asset reconstruction |
| 13 | Enforcement of security interest by secured creditors |
| 17 | Appeal to Debt Recovery Tribunal (DRT) by the borrower |
| 18 | Appeal to Appellate Tribunal |
Applicability of the SARFAESI Act
- Applicable to banks and financial institutions.
- Applicable where the loan is secured by a mortgage, pledge, or hypothecation.
- Applicable when the amount due is ₹1,00,000 or more.
- Not applicable to:
- Loans below ₹1 lakh.
- Agricultural land.
- Security interests in aircraft or vessels.
- Unsecured loans.
Powers Granted to Creditors under Section 13(4)
- Take possession of secured assets.
- Take management of the borrower’s business.
- Appoint a manager to manage secured assets.
- Enforce security interest through private sale or public auction.
Important Case Laws
Mardia Chemicals Ltd. v. Union of India (2004)
- Upheld the constitutional validity of the SARFAESI Act.
- Held that the borrower has the right to approach DRT after enforcement action is taken.
Transcore v. Union of India (2006)
- Clarified that banks can proceed under SARFAESI even if they have approached DRT under the RDDBFI Act.
Advantages of SARFAESI Act
- Speeds up the recovery process for banks.
- Reduces burden on courts by avoiding litigation.
- Provides a clear legal framework for asset reconstruction.
- Encourages responsible borrowing and lending.
Limitations of the SARFAESI Act
- Does not apply to unsecured loans.
- Misuse by banks can affect genuine borrowers.
- Legal challenges and delays in DRTs affect the effectiveness of recovery.
- Limited applicability to co-operative banks and small loans.