4/18/2015

WhyistheSARFAESIActofcriticalimportancetolenders?IFMRBlog

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WhyistheSARFAESIActofcritical
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ByDarshanaRajendran,IFMRFinanceFoundation
Anassetbecomesnonperformingwhenitceasestogenerateincomeforthebank.InIndia,aNon
Performing Asset (NPA) is broadly defined as one with interest or principal repayment instalment
unpaidformorethan90days.
ThereexistdefinedmechanismstodealwithNPAsofbanksandfinancialinstitutionstoday.However
prior to 1993, banks had to take recourse to the long legal route against defaulting borrowers,
beginningwiththefilingofclaimsinthecourts.Alotoftimewasthereforespentinthejudicialprocess
beforebankscouldhaveanychanceofrecoveryontheirloans.Onaverage,acivilsuitdecisiontook
anywherebetween5to7years.
Under the Recovery of Debts to Banks and Financial Institutions Act 1993, Debt Recovery Tribunals
(DRTs) were set up for recovery of loans of banks and financial institutions. This led to speedy
recovery of loans in about 1 years time as against the average time of 5 to 7 years required in civil
suits. While initially the DRTs performed well, their progress suffered as they got overburdened with
thehugevolumeofcasesreferredtothem.
To speed up the process of recovery from NPAs, The Securitisation and Reconstruction of Financial
AssetsandEnforcementofSecurityInterestAct(SARFAESI)Actwasenactedin2002forregulationof
securitization and reconstruction of financial assets and enforcement of security interest by secured
creditors.TheSARFAESIActempowersBanks/FinancialInstitutionstorecovertheirnonperforming
assetswithouttheinterventionoftheCourt.TheActprovidesthreealternativemethodsforrecoveryof
nonperformingassets,namely:
Securitisation
AssetReconstruction
EnforcementofSecuritywithoutinterventionofthecourt
Securedcreditorsaregiventhepowertotakepossessionofthesecuritiesintheeventofdefaultand
sell such securities for the purpose of recovery of the loan. The Act provides for enforcement of
Security interest by a secured creditor without intervention of the court, in cases of default in
repaymentofinstalmentsandnoncompliancewiththenoticeperiodof60daysafterthedeclarationof
theloanasanonperformingasset.
TheActalsoprovidesforsettingupofSecuritisationCompanies/ReconstructionCompanies(SC/RC),
which acquire the NPAs from banks and financial institutions by raising funds from Qualified
Institutional Buyers (as defined by the Act) by issue of Security Receipts (As defined by the Act)
representingundividedinterestinsuchfinancialassets.TheActenablesSC/RCstotakepossessionof
securedassetsoftheborrowersincludingrighttotransferandrealizethesecuredassets.SC/RCsact
asdebtaggregatorsoragentsofthebanksorfinancialinstitutionsfocusedintheresolutionofNPAs.
The SC/RCs buy the impaired assets from banks and financial institutions, thereby cleaning the
balancesheetsofthebanksandpermittingthemtofocusontheirnormalbankingbusiness.
The promulgation of the SARFAESI Act has been a benchmark reform in the Indian banking sector.
http://www.ifmr.co.in/blog/2011/11/07/whyisthesarfaesiactofcriticalimportancetolenders/

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TheprogressunderthisActhadbeensignificant,asevidencedbythefactthatduring200203when
the Act came into effect, there was an overall reduction of nonperforming loans to 9.4 per cent of

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(2005)

grossadvancesfrom14.0percentin199920001.

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Currently,threelegaloptionsareavailabletobanksforresolutionofNPAstheSARFAESIAct,Debt
Recovery Tribunals and Lok Adalats. The SARFAESI Act has been the most important means for
recovery of NPAs. The amount of NPAs recovered under the SARFAESI Act formed over half of the
total amount of NPAs recovered in 200910. Banks have referred as many as 78,366 loan default
cases by end march 2010 under the SARFAESI Act involving a loan amount of Rs. 14, 249 crores.
Againstthis,banksmanagedtorecoverRs.4,269croresrepresenting30%oftheloans2.
RecentlytheReportoftheWorkingGroupontheIssuesandConcernsintheNBFCSectorlaidout
recommendations to extend the coverage of SARFAESI to NBFCs as well. This move will benefit
NBFCs, ensuring quicker recovery of their nonperforming assets. This, in turn, could encourage
NBFCstoprovideaccesstoawiderrangeoffinancialproductsandservebetterthecauseoffinancial
inclusion.
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Jointhediscussion
sumangaindhar 6monthsago

IfeeltheSarfeasiactstillhaslotofloopholes.Thereareadvocatesavailableinthe
coridoorsofDRTsandDRATswhowillensurethedefaulterstosleepfor4yearsand
nothingwillhappen.Thisactneedsareview.
1

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Puniya ayearago

canthePropertyboughtfromthebankundersarfaesiactbesoldbythefirstownerof
thelandwhohappenstobetheSC/ST.Ipurchasedapropertyfrombankandafter8
yearsthesamepropertyisbeingclaimedbyitsfirstownerwhoisSC.
12

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sv.nagarajan ayearago

AjayShah'sblog
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Brief........Butgivesaclearunderstandingwithsimplelanguagethanku

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FinancialMarketsBlog

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Vox
ManSinghTosaria 3yearsago

TheSARFAESIActisaCibillawwhichdealswithhelpingBanks/FIstotakepossession
ofFinancialAssetsforthesakeofrecoveringtheirdues(NPA).DoesSec.35ofThe
SARFAESIActsupercedecriminallawstoo?
6

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T.R.Radhakrishnan 3yearsago

DearDarshanaRajendran,
AttheoutsetIintroducemyselfasanExbankerpresentlyhandlingDRTand
SARFAESIcasesasfacilitator.IhaveclientsfromalloverIndia.Idonotknowwhether
youhavemadeathoroughstudyofSARFAESIACT.Ihavewrittenmanyarticlesabout
http://www.ifmr.co.in/blog/2011/11/07/whyisthesarfaesiactofcriticalimportancetolenders/

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youhavemadeathoroughstudyofSARFAESIACT.Ihavewrittenmanyarticlesabout
SARFAESIACTthroughwhichIhavebroughtouthowthisdraconianacthasinfringed
intothehumanrights,fundamentalrightsandprinciplesofnaturaljustice.WhereverI
havehandledthecases,theyarestillinthetrialcourtofDRTandIamsureifargued
properlyeachcasewillgotosupremecourtlevel.Manyofthehonestborrowers'lives
havebeenaffectedbyinvokingtheSARFAESIACTbytheirresponsiblebankerswhose
manywrongdoingshavecausedlossanddamagestothesehonestborrowers.The
bankersdonotdistinguishbetweenanintentionaldefaulterandaborrowerwhobecame
adefaulterbecauseofthecircumstancesbeyondhiscontrolandthebanksalsowere
andstillaremutespectatorstotheproblemsandpredicamentfacedbysuchborrowers.
MostofthebakersneverfollowRBIdirectivestopreventaccountbecomingNPA.Ifyou
needIcansendsomeofthearticlesIwroteonthesubjectmatter.Iamsorrytohave
expressedmypointssoblatantly.T.R.RadhakrishnanEmail:
trrk1941@JNxEKnedO.com.Mobile:(0)9229248048
6

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GManivachagam>T.R.Radhakrishnan 12daysago

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Thanksfortheservicebeingprovidedbyyoutotheborrowerswhoseloan
accountshavebecomeNPA...OnceanoticeunderSARFAESIActisissuedcan
theNBFC,forinstancetheStateFinancialInstitutions,continuetodebitsuch
NPAaccountwithnormalpluspenalinterestforultimaterecovery?InCivil
Courts,Iremember,suchaccrualofinterestoncerecoveryproceedingsare
initiated..EvenwithRBIguidelinestheNBFC/Banksarenotallowedtodebit
suchintereststosuchaccountsoncetheybecomeNPAs.NBFC/Banksifthey
keepaseparateaccountofsuchaccruedinterest,theyshouldprovideequal
amountbycreatingprovision,viz.,suchinterestsarenottobetreatedasincome..
SomeNBFCsarecontinuedtochargesuchinterestonNPAswithoutadding
themintotheirincomeandpayingincometaxonsuchincome.Whatisthelegal
position?Canyouclarifybymailtomaniadg@yahoo.co.in?GManivachagam,
IRS(C&CE)RtdMobile:09449823664

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MAuppal>T.R.Radhakrishnan ayearago

ItisindeedadraconianlawwhichhasencouragedcorruptioninBanks.Such
laws
andarbitrary/sadisticinterpretationisnotsparingotherDirectorswhohave
nothingtodowiththeborrowingsnortheyareguarantors.

Reply Share

DarshanaRajendran 3yearsago

Oncethe
accountoftheborrowerhasbeenclassifiedasanNPAaspertheguidelinesissued
byRBI,theBankwillproceedtomakeademandnoticeunderSection13(2)
informingtheborrowerabouttheoutstandingamountintheloanaccountand
alsotheconsequences.Iftheborrowerraisesanywrittenobjectionstothe
Banksdemandnoticeundersection13(2),thentheBankshouldreplytothe
objections.IftheBanksrejectstheobjectionsraisedbytheborrowerunder
section13(3A),thentheBankproceedstoissueapossessionnoticeundersection
13(4)oftheActinformingtheborrowerthattheyhavetakensymbolic
possessionoftheproperty.Thisisnotactualpossessionofthesecured
assetorpropertyoftheborrower.Thepossessionnoticeissuedbythe
Bankundersection13(4)oftheActprovidesarighttotheborrowerto
approachtheDebtRecoveryTribunalandfileanAppealifhefeelsaggrieved.If
theDRTdismissestheapplication,thentheborrowerisentitled
tofileanappealtotheDebtRecoveryAppellateTribunal.Incases
wheretheborrowerdidnotapproachtheTribunalandincaseswherethe
borrowerfailstomeetthedemandmadebytheBank,theBankwilltakestepsintaking
physicalpossessionofthepropertyundersection14andcan
sellthesecuredassetinpublicauction.
6

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Sonia 3yearsago

WhatisthecurrentexactprocedurebywhichBanksinitiatearecoveryfromadebtor
aftertheLoanbecomesanNPA?DobankshaveanobligationtoselltheirNPAsto
SC/ARCsimmediatelyafteradefaultof90daysonthedebtorspart?Andhowmuch
timedoestheSC/ARCgivethedebtortomakegoodtheinstallmentsmissed?
9

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DarshanaRajendran 3yearsago

Iagreethatinthecaseyoumentioned,thecourtheldthat
ifacontractualrighttorepossessionisprovided,thereisnoneedforcourtto
interfere.Whilethiscasestatedthatthehypothecateecantakepossessionof
goodswithoutinterventionofthecourtasperthehypothecationagreement,
therehavebeenothercaseswherecontraryviewshavebeenexpressedbycertain
courts.Forexample:IncaseofTarunBhargavaVs.StateofHaryana&Anr.,
itwasheldthatIftheagreementisheldtobealoanagreementandrightsof
thecreditorareheldtobethoseofahypothecatee,rightsoftheparties
undertheagreementwouldbedifferent.Ahypothecatee,cannottakepossession
ofthesecuritywithoutinterventionoftheCourt,thoughhehasarightto
takepossessionortosellthehypothecatedpropertythroughCourtortogive
noticetothehypothecatortoenforcethesecurity.Permittingahypothecatee
tophysicallyrepossessthehypothecatedgoodsagainstthewishesofthe
hypothecatorwillenablethehypothecateeto
takelawinhisownhands,deprivethehypothecatorofhisdefenceby
deprivinghimoftheuseofgoodsevenwhenhisclaimmaybethathedoesnot
oweanymoney
Hencetherewereconflictingjudgmentsontherightsofthe
hypothecatee.SARFAESIresolvedthisconflictbyconferringpowersof
enforcementonbanksandfinancialinstitutions.
4

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SoorajSharma97 3yearsago

Veryevidently,youhavenotreadStatebankofIndiaV.S.B.ShahAli,sinceyousayall
this.Onlyservestohighlighthowpoorlyresearchedthisarticleis.

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DarshanaRajendran 3yearsago

The
SARFAESIAct,forthefirsttime,recognisedtheconceptofcomprehensive
securityinterest.Howeveritistruethatitdoesnothaveuniversal
application,itonlyappliestobanksandfinancialinstitutions.Also,while
possessorysecurityiscoveredbytheIndianContractsAct,therewereno
provisionsinregardtononpossessorysecuritiesuntilSARFAESIwasenacted.

Reply Share

sooraj 3yearsago

NotallsecuredcreditorsaregiventhebenefitofprotectionunderSARFAESIAct.In
fact,theblogpostwronglysuggeststhatthesecuredcreditorsdidnothavesuch
protection.Pledgeealwayshadtherightofsellingthepawnedgoodsandthisrightthey
hadbeenpossessingsince1872(passageofIndianContractAct).Therearemanyspecies
ofsecuredcreditorsandsecurityandSARFAESIdoesnotcoverallofthem.So,this
blogpostreallymissesthepoint.

Reply Share

NishaTatkar 3yearsago

whatisthedifferencebetweenSecuritisation&EnforcementofSecuritywithout
interventionofthecourt?

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