The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act,2002 (SARFEASI Act) stands as important legislative measures that aims to address the issue of non-performing assets (NPA's) in the banking and financial sector. This Act provides a legal framework for banks and financial institutions to recover dues from defaulting borrowers through the enforcement of security interests. This article contains various aspects of the SARFESI Act, including its objectives, mechanisms, processes, and implications.

Objectives:
Banks and financial institution faced difficulties in recovering their dues, which adversely affected their profitability and operational efficiency. To address these challenges, the SARFAESI Act was introduced by the Indian Parliament with the following objectives:

• The Act provides banks and financial institutions with a streamlined process for recovery of loans and enforcement of security interests.
• The Act aims at facilitating the recovery of outstanding loans and reducing non-performing assets in the bank and financial institutions.
• The Act encourages the creation of securitization and asset reconstruction companies (ARCs) to manage and recover distressed assets.
• It provides a legal framework to recover the loan amount due.
• To reduce the time and cost of recovery of secured assets.

Key provisions of the SARFEASI Act:

Section 13 (2) and 13(4) are the key provisions of the act which laydown the procedures for the Enforcement of Security Interest by banks and financial institutions to take possession of secured assets upon default by the borrower. The process involves issuing demand notice to the borrower, providing with the sale or auction of the assets.

Demand Notice under Section 13(2): The SARFAESI Act empowers banks and financial institutions to issue a notice to the borrower in case of default in repayment of any secured loan. The notice should specify the outstanding dues and demand repayment within 60 days. The borrower has the right to make representation against the notice before the secured creditor.

If the borrower fails to comply with the notice the bank or financial institution can proceed with the enforcement of security interest without any further notice.

Possession Notice under Section 13(4): Notice issued by the secured creditor (usually bank or financial institution) to the borrower who has defaulted on their loan payments. This section pertains to the right of the secured creditor to take possession of the secured asset after the borrower has failed to comply with the demand notice issued under Section 13(2). If there is resistance to take possession of assets, the secured creditor can approach the District Magistrate or the chief metropolitan Magistrate for assistance in taking possession.

Here you need to know about mainly on Section 13(2) and section 13(4) of SARFAESI Act:

• Default on loan payment: Before a possession notice under section 13(4) is issued, the borrower must have defaulted on their loan payments. This means they have not fulfilled their repayment obligations as per the loan agreement.
• Demand notice: Before taking possession of the secured asset, the secured creditor is required to send a demand notice under section 13(2) of the SARFAESI Act to the borrower. This notice requests the borrower to repay the outstanding loan amount within 60 days.
• Response to demand notice: If the borrower fails to comply with the demand notice within the specified time frame and does not clear the outstanding dues, the secured creditor may proceed to issue a possession notice under section 13(4).

A possession notice under section 13(4) includes details about the default, the outstanding loan amount, and the intention of the secured creditor to take possession of the secured asset. It may also specify a date for taking possession.

The borrower has the right to challenge the possession notice in accordance with the provisions of the SARFAESI Act. They can make representations to the secured creditor and, if necessary, seek legal remedies through the Debt Recovery Tribunal (DRT) to prevent or prevent or delay the possession.

The secured asset in question is usually the collateral or property that was used to secure the loan. The possession notice empowers the secured creditor to take physical possession of the asset.

After taking possession, the secured creditor may proceed to sell the asset through a public auction as per the SARFAESI Act's provisions.

Section 5 to 12 of SARFAESI Act enables banks and financial institutions to transfer their NPAs to securitization and asset reconstruction companies (ARCs). These ARCs are responsible for managing and recovering distressed asset.

Application under Section 17 of SARFAESI Act: Borrowers who are aggrieved by the actions taken under the SARFAESI Act can file an application with the Debt Recovery Tribunal (DRT) within 45 days.

The SARFAESI (Amendment)Act, 2016, introduced several changes to improve the recovery process. The key change is central Registry was introduced to consolidate and create a single large database for registering security interest.

Conclusion:
The SARFAESI Act, 2002, represents a crucial step in addressing the challenges associated with non-performing assets in the Indian banking and financial sector. By providing a comprehensive legal framework for the enforcement of security interest and the recovery of dues, the Act has contributed to improved efficiency and effectiveness in asset management. While the Act has achieved significant successes, ongoing reforms and amendments are essential to address emerging issues and ensure that the recovery process remains fair and transparent.

References

• https://www.indiacode.nic.in/bitstream/123456789/2006/1/A2002-54.pdf
• https://indiankanoon.org/doc/52229129/

Written By: Rekha. K, Advocate
No.61,14th cross,1st C main, Soundarya layout, Sidedahalli Nagasandra, Bangalore-560073