NPA

For 90 days
Consecutively
SARFAESI ACT 2002 :
“Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act” 2002-is an Indian
law aimed at empowering banks and financial institutions to recover non-performing assets (NPAs) without the intervention
of courts.

-Applicable for NPA of 1 Lakh and above & loan amount of NPA remaining above 20%.
-Act contains 41 sections.
The key objectives of the SARFAESI Act 2002 are:

1.Facilitate Quick Recovery: Enable banks and financial institutions

to swiftly recover non-performing assets (NPAs) without court
intervention.
2.Empower Financial Institutions: Allow them to take possession
and sell secured assets in case of loan defaults.
3.Securitisation: Convert NPAs into marketable securities to improve
liquidity.
4.Asset Reconstruction: Establish Asset Reconstruction Companies
(ARCs) for managing and recovering bad loans.
5.Central Registry: Prevent fraud and multiple lending against the
same property through a centralized registry (CERSAI).

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The need for the SARFAESI Act 2002 arises from the
following reasons:

1.Efficient NPA Recovery: Traditional judicial

processes for recovering non-performing assets
(NPAs) were slow and cumbersome, leading to
delayed recoveries.
2.Financial Stability: Quick and effective recovery
of bad loans helps maintain the health and stability of
the banking system.
3.Encouraging Lending: By reducing the burden of
NPAs, banks are more willing to extend credit,
supporting economic growth.
4.Preventing Fraud: The establishment of a
centralized registry (CERSAI) helps prevent
fraudulent multiple lending against the same
property.
5.Improving Liquidity: Securitisation allows banks
to convert bad loans into marketable securities,
enhancing liquidity.
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Key features of the SARFAESI Act 2002, including
relevant sections:

1.Empowerment of Banks (Section 13): Allows banks and financial

institutions to take possession of secured assets and sell them
without court intervention in case of loan defaults.
2.Securitisation (Section 5): Enables the conversion of non-
performing assets (NPAs) into marketable securities to improve
liquidity.
3.Asset Reconstruction (Section 9): Facilitates the creation of Asset
Reconstruction Companies (ARCs) to manage and recover bad
loans.
4.Enforcement of Security Interest (Section 13): Provides a
mechanism for banks to issue a 60-day notice to defaulting
borrowers to repay dues, after which they can seize and sell the
assets.
5.Central Registry (Section 20): Establishes a centralized registry
(CERSAI) to record security interests, helping to prevent fraud and
multiple lending against the same asset.
6.Objection and Appeal (Section 17): Borrowers have the right to
file objections with the Debt Recovery Tribunal (DRT) and appeal to
the Appellate Tribunal against actions taken by banks.
Methods Of Recovery in SARFAESI Act
Benefits :
1. Securitisation under the SARFAESI Act (Section 5) :
Securitisation in the context of the SARFAESI Act 2002 refers to the 1. Immediate liquidity infusion for banks.
process by which banks and financial institutions convert their non- 2. Reduction of non-performing assets
performing assets (NPAs) into marketable securities for raising Cash. (NPAs).
This process is outlined in Section 5 of the Act. 3. Efficient recovery mechanism for bad
loans.
Key Points: 4. Enhanced financial health of banks.
5. Increased lending capacity.
1.Pooling of Assets: Banks bundle various loans and financial assets 6. Transfer of credit risk to investors.
that are underperforming or non-performing.
2.Transfer to Securitisation Companies: These pooled assets are
sold to a securitisation company (SC) or an asset reconstruction
company (ARC).
3.Issuance of Securities: The SC or ARC issues securities backed by
these assets. Investors buy these securities, providing funds to the
banks.
4.Improved Liquidity: This process helps banks turn illiquid assets
(NPAs) into liquid funds, improving their financial health and lending
capacity.
2.Reconstruction under the SARFAESI Act (Section 9):
Benefits :
Reconstruction in the context of the SARFAESI Act 2002 refers to the 1. Improved recovery of distressed assets.
process of managing and recovering distressed financial assets by asset 2. Efficient NPA management.
reconstruction companies (ARCs). 3. Risk reduction for banks.
This process is detailed in Section 9 of the Act. 4. Enhanced financial health.
5. Smoothen banking operations.
Key Points: 6. Potentially higher recovery rates.

1.Acquisition of Assets: ARCs acquire non-

performing assets (NPAs) from banks and financial
institutions.
2.Management and Resolution: ARCs manage these
assets with the aim of restructuring them or
recovering the maximum possible value.
3.Resolution Strategies: ARCs employ various
strategies such as restructuring, rescheduling,
settlement, or enforcement of security interests to
recover dues.
4.Sale of Assets: If necessary, ARCs may sell the
assets to realise their value and recover dues.
3. Enforcement of Security Interest under the SARFAESI Act (Section 13) :
Benefits :
Enforcement of Security Interest in the SARFAESI Act 2002 empowers
1. Enables swift recovery of dues.
banks and financial institutions to take possession of secured assets and
2. Efficient resolution of bad loans.
sell them to recover outstanding dues from defaulting borrowers. This
3. Streamlined asset management.
process is governed by Section 13 of the Act.
4. Enhances financial stability of banks.
Key Points:

1.Notice to Borrower: Banks issue a 60-day notice

to defaulting borrowers, demanding repayment of
dues.
2.Possession of Assets: If the borrower fails to
repay within the notice period, banks can take
possession of the secured assets.
3.Sale of Assets: Banks have the authority to sell
or lease these assets to recover the outstanding
dues.
4.Appointment of Manager: Banks may appoint a
manager to oversee and manage the secured
assets during the recovery process.
CERSAI under the SARFAESI Act (Section 20)
CERSAI (Central Registry of Securitisation Asset Reconstruction
and Security Interest) is a centralized online registry Benefits:
established under the SARFAESI Act 2002, specifically 1.Fraud Prevention: Reduces the risk
mentioned in Section 20. of multiple loans on the same asset.
It records details of security interests created on property to 2.Transparency: Ensures clear records
prevent fraud and ensure transparency. of secured interests.
Key Points: 3.Efficiency: Streamlines the
verification process for lenders.
1.Purpose: Prevents multiple lending against the same asset
4.Public Access: Allows public and
and reduces fraud in loan transactions.
financial institutions to check existing
2.Registration of Security Interests: Financial institutions must
charges on properties.
register details of security interests, including mortgages and
securitisation, with CERSAI.
3.Accessible Information: Provides a database accessible to
financial institutions and the public to verify existing security
interests on assets.
4.Function: CERSAI is an online platform that records all
mortgages and loans against properties to prevent multiple
loans on the same asset.
5.Benefit: Enhances transparency and reduces the risk of fraud
in lending.
 PYQs

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Q.1 Successful ltd. defaulted in the repayment of term loan taken from bank against security created as first charge on same of its assets. The Bank
issued notice pursuant of section is of SARFAESI Act, 2002 to company to discharge its liabilities within period of 60 days from date of notice. The
company failed to discharge its liabilities within time limit specified. Identify and explain measures to be taken by the bank to enforce its security
interest under the act.
When a borrower defaults on repayment of a term loan secured by assets, and the lender, in this case, the bank, has
issued a notice under Section 13 of the SARFAESI Act, 2002, and the borrower fails to discharge its liabilities within the
specified time limit, the bank can take various measures to enforce its security interest under the Act. Here are some key
steps the bank can take:
1.Take Possession of Secured Assets: The bank can take possession of the secured assets mentioned in the security
agreement. These assets could include property, machinery, equipment, or any other assets pledged as collateral for the
loan.
2.Sell or Lease the Secured Assets: After taking possession, the bank can proceed to sell or lease the secured assets to
recover the outstanding loan amount. The sale or lease must be conducted through a public auction or private treaty as
per the provisions of the Act.
3.Issue Demand Notice for Repayment: The bank may issue a demand notice to the borrower, requiring repayment of
the outstanding loan amount along with any accrued interest and costs incurred by the bank in enforcing its security
interest.
4.Appoint Authorized Officer: The bank can appoint an authorized officer who has the power to take possession of,
manage, and sell the secured assets on behalf of the bank. This officer must act in accordance with the provisions of the
SARFAESI Act and any guidelines issued by the Reserve Bank of India (RBI).
5.Publish Public Notice: Before selling or leasing the secured assets, the bank must publish a public notice in at least two
newspapers, including one in the vernacular language of the area where the secured assets are located. This notice must
provide details of the intended sale or lease, including the time, date, and place of auction.
6.Transfer of Title: Upon the sale or lease of the secured assets, the bank must transfer the title or leasehold rights to the
purchaser or lessee. The proceeds from the sale or lease should be utilized to repay the outstanding loan amount, and
any surplus should be returned to the borrower.
7.Legal Action: In case the borrower disputes the enforcement of security interest or refuses to cooperate, the bank may
initiate legal proceedings to recover the outstanding dues through the Debt Recovery Tribunal (DRT) or any other
appropriate legal forum.
These are some of the measures that the bank can take to enforce its security interest under the SARFAESI Act. It's
essential for the bank to follow the procedures prescribed under the Act and exercise its rights in a lawful and transparent
manner.
Q.2 Is SARFAESI Act 2002 Applicable To All NBFCs ? Which Assets Will Be Considered For Determining Asset Of 100 Cr ?

The SARFAESI Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security
Interest Act), 2002 applies to certain categories of non-banking financial companies (NBFCs), but not
all NBFCs.
Generally, NBFCs engaged in the business of financing or providing loans, advances, or other
financial services are covered under the Act. However, NBFCs primarily engaged in activities such as
infrastructure finance, stock-broking, merchant banking, leasing, etc., are not typically covered.
Regarding the determination of assets for the purpose of the SARFAESI Act, the threshold is Rs. 100
crores.
Here's how it works:
The Act specifies that it applies to banks and financial institutions (FIs) as well as to any other
company engaged in the business of financial activities as defined under Section 45-I(c) of the RBI
Act, 1934. For these entities, the Act applies when the amount due is at least Rs. 1 lakh or any
higher amount specified by the Central Government.
For the determination of the asset threshold of Rs. 100 crores, it typically refers to the aggregate
amount of the financial assets in the balance sheet of the NBFC. Financial assets can include loans,
advances, investments, and any other assets held by the NBFC in the course of its business. If the
total value of these financial assets exceeds Rs. 100 crores, the NBFC falls under the purview of the
SARFAESI Act, and its provisions become applicable to the recovery of dues.
It's important to note that the specific determination of assets and applicability of the SARFAESI Act
can also be influenced by notifications and guidelines issued by regulatory authorities such as the
Reserve Bank of India (RBI) from time to time. Therefore, NBFCs should closely monitor regulatory
updates to ensure compliance with the Act and related regulations.
Q.3 Analyse the following scenarios with respect to registration under SAR FAESI Act: i) Eligible NBFC with debt amounting to less than Rs. 50 Lacs. ii) Eligible
NBFC with debt amounting to more than Rs. 50 Lacs. iii) NBFC not falling under the definition of Financial Institutions, but the debt amounts to more than Rs.
50 Lacs. iv) The creditor is an operational secured creditor. v) The borrower is not a corporate body

Under the SARFAESI Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act),
2002, registration is mandatory for certain entities involved in financial activities. Let's analyze the given scenarios:
i) Eligible NBFC with debt amounting to less than Rs. 50 Lakhs:
•In this scenario, since the debt amount is less than Rs. 50 lakhs, the NBFC may not be required to register under SARFAESI
Act. However, it's crucial for the NBFC to comply with all other relevant regulations and guidelines applicable to it.
ii) Eligible NBFC with debt amounting to more than Rs. 50 Lakhs:
•If an NBFC has debt exceeding Rs. 50 lakhs, it falls under the purview of the SARFAESI Act, and registration becomes
mandatory. The NBFC needs to register with the appropriate authority as per the requirements laid down in the Act.
iii) NBFC not falling under the definition of Financial Institutions, but the debt amounts to more than Rs. 50 Lakhs:
•Even if the NBFC doesn't fall under the definition of financial institutions, if its debt crosses the threshold of Rs. 50 lakhs,
it would still need to register under SARFAESI Act. The Act primarily focuses on the nature of the debt and the amount
outstanding, rather than the specific classification of the creditor.
iv) The creditor is an operational secured creditor:
•The SARFAESI Act applies not only to financial institutions but also to operational secured creditors. Operational creditors
who have security interests over the assets of the borrower can take recourse under this Act for the enforcement of their
rights.
v) The borrower is not a corporate body:
•SARFAESI Act primarily deals with the enforcement of security interests by financial institutions and other creditors over
assets held as collateral for loans. While the Act doesn't specifically exclude non-corporate borrowers, its application might
differ based on the nature of the borrower and the assets involved. However, the Act generally applies to both corporate
and non-corporate borrowers, as long as the conditions for enforcement of security interests are met.
In summary, registration under the SARFAESI Act depends on factors such as the nature of the creditor, the amount of
debt, and the type of borrower. It's essential for NBFCs and other creditors to understand their obligations under the Act
and comply with its provisions accordingly.

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Practice Multiple Choice Questions
1.SARFAESI stands for
a) Securitization and Restructuring of Financial Assets and Enforcement of Security Interest
b) Secularization and Reconstruction of Financial Assets and Ensure of Security Interest
c) Securitization and Reconstruction of Financial of Financial Assets and Enforcement of Security Interest
d) Secularization and Restructuring of Financial Assets and Ensure of Security Interest

2.What is the primary aim of enacting SARFAESI Act

a) Recovering Loan
b) Increasing Deposits
c) Transparent appointment of Directors
d) Reducing Corruptions and Scams

3.Provisions regarding the establishment of Central Registry are provided

In which of the following chapters of SARFAESI Act, 2002?
a) Chapter 2
b) Chapter 3
c) Chapter 4
d) Chapter 5

4.Under the provisions of SARFAESI Act, 2002, where transaction of securitization is registered?
a) Registrar of Companies
b) Registrar of Firms
c) Registrar of Central Registry
d) Registrar of Assurances

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