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The SARFAESI Act of 2002 grants the right to seize the banks. Under these regulations, banks may notify default borrowers in writing to request payment of their debts within 60 days. If the borrower does not respond to this notice, the bank concerned may:
Get a guaranteed asset, i.e. the collateral (security) on behalf of the loan.
Sale, lease or transfer the title of the security.

SARFAESI does not apply to:

  • Money or security issued under Indian Contracts Act or Sales Act 1930.
  • Any contract of sale, lease purchase, conditional lease or any other agreement without protection if created.
  • All unpaid seller’s rights under section 47 of the Sale of Goods Act, 1930.
  • Property not forfeited or sold under section 60 of the Civil Procedure Code, 1908

The intention of the SARFAESI Act

The main objective of the SARFAESI Law is to establish the enforcement of the security interest, i.e. to take possession of the goods provided as security for the loan. Issue a reminder to a borrower, the defaulting borrower, and the surety asking them to pay their instalments in full within 60 days of the date of the reminder. After that, financial assets can be sold to ARC following the guidelines and instructions of the RBI.

Salient Features of the SARFAESI Act:

Under the SARFAESI Act, 2002, the lenders are granted the privilege of capturing the secured asset and promoting the equal to get better dues, directly bypassing the time-taking criminal system through the criminal courts.

This is a procedural regulation and retrospective effect; this redefined the idea of Asset Reconstruction Company (ARC), letting the banks promote their Non- Performing Assets (NPA) to the ARC. The first Asset Reconstruction Company of India, ARCIL, turned into the regulation of this Act. The Act is a powerful device for restoring NPA and is robust and in opposition to secured loans.

Mentioned under are the salient functions of the Act, which attempts to:

  • Securities the economic assets (securitisation)
  • Fund the securitisation
  • Integrate corporations as SCO (Securitisation Company) and RCO (Reconstruction Company)
  • Implement Security interest through the secured creditor (without court intervention)
  • Act as an agency of banks
  • Reconstruct the economic investments
  • Ascertain Central Registry
  • Stipulate consequences for offences/ non-compliance with laws

Unlike many legislations, the SARFAESI Act, 2002 provides the financial institution with the proper place to move under section 13(4) of the Act for the duration of the pendency of the civil suit. The Act similarly renders treatment of attraction in opposition to the movements referring to the restoration of loans dues.

When the right arises

The secured obligee’s right to enforce the security interests under the SARFAESI Act or Securitisation and Reconstruction of Financial Assets and the Enforcement of Security Interest does not arise unless the borrower’s account has been entered in the account books of the secured obligee (banks or financial institutions) following the guidelines of Reserve Bank of India (RBI). The secured party must give the borrower 60 days’ notice to repay the amount owed and indicate the borrower’s assets for which the secured party intends to enforce collateral.

If the borrower fails to meet his liability to the secured creditors after the 60-day notice period has expired, the secured creditor can obtain the collateral for the secured assets:

(I) by taking possession of the secured assets;

(II) take over the management of the guaranteed assets along with the right to transfer through lease, assignment or sale of the secured assets;

(III) appoint a person to manage the guaranteed assets; and

(IV) requires each person who has acquired the borrower’s guaranteed assets to pay the amounts necessary to settle the debt.

When can you approach DRT?

Suppose the secured creditor cannot collect the total amount owed to enforce the collateral on the secured assets. In that case, the secured creditor can turn to the debt collection court (DRT) or the appropriate court to reclaim the remaining amounts. In addition, a secured creditor can also exercise his resources according to the SARFAESI law and the DRT at the same time.

Application of the SARFAESI Act

For applying the SARFAESI Act, the borrower’s account must be classified as a Defaulted Asset by the secured creditor and have an outstanding balance of INR 100,000 or more. They are not applicable in certain situations as set out in Section 31 of the SARFAESI Act or Securitisation and Reconstruction of Financial Assets and the Enforcement of Security Interest, including an account where the residual debt is less than 20% of the original principal and interest amount.

Frequently Asked Questions

✅ Can an NPA account be legalised?

Yes, as long as the outstanding amount u / s 13 (2) on the day of the announcement is paid on time.

✅ Who is an Authorized Officer?

The secured creditor may appoint any agent, not less than the general manager of a public sector bank or equivalent bank, or any other person or authority appointed by the board of directors/trustee.

✅ Which assets are covered by SARFAESI?

Any movable or immovable property is used as security, either in a mortgage, mortgage or security interest.