SARFAESI ACT, 2002- Applicability, Objectives

SARFAESI ACT

What is SARFAESI ACT?

Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, is also known as SARFAESI, Act. It is a law which allows banks and financial institutions to auction residential or commercial properties to recover their unpaid loan. 

Narasimham Committee I and II and Andhyarujina committee were formed to examine banking sector reforms which have considered the need for changes in the legal system in respect of these areas. Committees suggested new legislation for Securitization and empowering banks and financial institutions to gain possession of the securities and to sell them without any intervention of the court. 

Applicability Of SARFAESI Act, 2002

The amendment to this Act is “an act to regulate securitization and reconstruction of financial assets and enforcement of security interest and to provide for a central database of security interests created on property rights, and for matters connected therewith or incidental thereto.” The Act deals with the following:

  • Registration and regulation of Asset Reconstruction Companies (ARCs) by the Reserve Bank of India.
  • Facilitating securitization of financial assets of banks and financial institutions with or without the benefit of underlying securities.
  • Promotion of seamless transferability of financial assets by the ARC to acquire financial assets of banks and financial institutions through the issuance of debentures or bonds or any other security as a debenture.
  • Entrusting the Asset Reconstruction Companies to raise funds by issue of security receipts to qualified buyers.
  • Facilitating the reconstruction of financial assets which are acquired while exercising powers of enforcement of securities or change of management or other powers which are proposed to be conferred on the banks and financial institutions.
  • Presentation of any securitization company or asset reconstruction company registered with the Reserve Bank of India as a public financial institution.
  • Defining ‘security interest’ to be any type of security including mortgage and change on immovable properties given for due repayment of any financial assistance given by any bank or financial institution.
  • Classification of the borrower’s account as a non-performing asset in accordance with the directions given or under guidelines issued by the Reserve Bank of India from time to time.
  • The officers authorized will exercise the rights of a secured creditor in this behalf in accordance with the rules made by the Central Government.
  • An appeal against the action of any bank or financial institution to the concerned Debts Recovery Tribunal and a second appeal to the Appellate Debts Recovery Tribunal.
  • The Central Government may set up or cause to be set up a Central Registry for the purpose of registration of transactions relating to securitization, asset reconstruction and creation of the security interest.
  • Application of the proposed legislation initially to banks and financial institutions and empowerment of the Central Government to extend the application of the proposed legislation to non-banking financial companies and other entities.
  • Non-application of the proposed legislation to security interests in agricultural lands, loans less than rupees one lakh and cases where eighty per cent, of the loans, is repaid by the borrower

Objectives behind SARFAESI Act:

1.To enable banks and other financial institutions to recover their non-performing assets (NPAs) efficiently and in a timely manner.

2.Banks and financial institutions could recover their unpaid loan amount or losses from borrowers by auctioning their assets, if borrowers failed to pay their loans.

Role of SARFAESI Act:

  1. To acquire financial assets by issuing debentures or bonds or by agreement. Realize the same and redeem the security receipts issued to the QBs.
  2. Reconstruction of financial assets by measures management, sale, debt restructuring, and settlement in a proper way or takes possession of the assets which is subject to RBI’s guidelines.
  3. Enforcing security Interest by the secured creditors without the intervention of the court. 
  4. It also acts as an agent of banks or financial institutions for recovery of unpaid loans, acts as manager of the secured assets

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