The Indian financial sector faces a massive problem with non-performing assets (NPA). Fraudulent activities in the banking system make it especially vulnerable. We often come across fraudulent activities in the news. Banks are facing significant losses, and as a result, they have to stop their operations or merge with another bank.
Such activities not only hurt the system but also point out loopholes. SARFAESI Act, 2002 was implemented to solve this problem.
Did you know?
According to section 31(i) of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ("SARFAESI Act"), the provisions of the SARFAESI Act will not apply to any secured interest in agricultural land.
What Is SARFAESI Act, 2002?
SARFAESI is short for Securitization And Reconstruction of Financial Assets And Enforcement of the Security Interest act of 2002. Under this Act, banks or financial institutions can recover their NPAs and sell the properties that the borrowers do not repay.
The act was needed in the financial sector as the Indian Legal system takes time to process. As a result, banks face more and more losses. Narasimhan (I and II) and the Andhyarujina committees brought the action into the system to empower banks without any legal intervention.
With the formation of the Act, CERSAI was also constituted. CERSAI, or Central Registry of Securitization Asset Reconstruction and Security Interest, keeps track of fraudulent online
activities. The board's main task is to check who borrows loans from multiple sources with the same collateral.
Applicability of SARFAESI Act, 2002
- ARCs can begin the business of securitisation. Here, ARC means Asset Reconstruction Companies, and the companies need to have registration grants from RBI.
- ARCs can facilitate both the assets and properties of the banks or financial institutes without the benefits of underlying securities.
- ARCs promote seamless transactions. Through the issuance of debentures or bonds, ARCs achieve the financial assets of banks or financial institutions.
- SAEFAESI Act promotes the allocation of ARCs to raise funds from qualified buyers, and the issuance receipt raises funds.
- The ‘security interest’ defines any kind of security such as mortgages or immovable properties that are given due to any repayment by the bank or financial institutions.
- The classification of the borrowers is decided under the RBI guidelines.
- According to the central government rules, the authorised officer practices the rights of secured creditors.
- The Central Government sets up CERSAI to keep an eye on all the borrowers, and it gathers all the information.
- Initially, the banks and other financial institutions or central government empowerment can utilise the proposed legislation.
- In the case of the non-utilization of the proposed legislation, it compensates the agricultural lands and loans of less than ₹1 lakh to the borrowers.
Features of SARFAESI Act, 2002
SARFAESI Act was implemented to strengthen the banking systems. Some of the features of the Act are as follows –
- This Act can impose security interests on the creditors without the intervention of courts or law. The bank or the financial institution can issue a demand notice to the defaulter through the act. Within sixty days, the defaulters need to clear all the obligations.
- SARFAESI Act, 2002 gives the bankers or financial institutions the power to take legal measures against the borrowers. Banks can sell or take any possession or debt restrictions under RBI regulations.
- Under this Act, the bank or the financial institution can take the asset from the borrower if they can not repay the loan. They can take the asset made from the loans given by the banks or NBFCs.
- SARFAESI can act as the manager of the financial institutions. It ensures that the defaulter repays the loans in time.
Role of SARFAESI Act, 2002
The Act is created to remove all the loopholes from the systems. Its roles are –
- To secure the financial assets and issue the receipt of the secured assets.
- Reconstruction of the financial assets.
- Enforce the secured interest.
The prime role is to acquire financial assets on behalf of the banks or financial institutions through debentures, bonds, or any agreement. It also redeems the receipt of the issued to the QBs.
It has the power to reconstruct the loans. Through the act, the financial institutions can issue the demand notice to the borrowers, and they can sell or manage their debts. Those procedures are under the RBI guidelines.
SARFAESI Act operates directly with borrowers and financial institutions. There is no need for any other lawyers or courts.
Objectives of SARFAESI Act
- It can make a rapid recovery for NPAs, which is the main objective of this Act.
- It also allows the banks or financial institutions to make an auction of the borrowers' assets if they do not repay the loans.
The procedure of the SARFAESI Act, 2002
The whole process starts with the loans. The borrower comes to the bank or any financial institution and applies for the loans. With proper formalities, banks sanction the loan. In some cases, banks deposit some collateral.
When the repayment time comes, the borrower should start their repayment process. For every institution, different approaches are made. If the borrower does not clear their loans, the bank starts taking action.
Under the SARFAESI Act, the bank notifies the borrower in the form of a written notice. Still, the borrower does not respond; the bank goes for the next steps. Under this Act, the bank can seize the borrower's assets made by the loans. Some of the banks also start auctions. Asset Reconstruction Companies (ARCs) regulated by RBI buy the assets and give a reasonable value to the financial institution. Then, the ARCs look for a qualified buyer who can purchase those assets.
Documentation Needed For SARFAESI Act
To apply, the ARC needs the e-form CHG -1 and e-form CHG -9. It is for the registration and modification of the charges. Under the SARFAESI Act, 2002, the following documents are needed –
- All the particulars regarding the charges
- Registration Certificate
- A created instrument for the charge
- Copy of the instrument to modify the charge
- Hypothecation of deed
- Sanction Letter
What Is the Importance of the SARFAESI Act, 2002?
SARFAESI act was passed in December 2002. Cooperative banks were not considered under the SARFAESI act but later came under the Act. In 2013, the government amended the act and added cooperative banks. Before the SARFAESI Act, such banks faced issues with the slow process of the legal systems, and this Act helped mitigate these problems.
Apart from that, NBFCs can secure their assets with the Act. With the defaulters, the losses can be recovered seamlessly. The best part of the act is that it does not require any legal professionals to solve the process, so it takes less time to recover.
The financial sector is considered the backbone of the country. The loopholes present in the previous Acts caused it to go through several losses. SARFAESI Act, 2002 changed the scenario of the whole sector. The Act gives the power to recover NPAs and allow financial institutions to sell assets when loans against them are not repaid.
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