The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (also known as the SARFAESI Act) is an Indian statute that governs the commercial legal aspects of securitisation, reconstruction and enforcement of financial assets. This Act is particularly relevant to commercial and corporate banking law matters, and matters relating to this are handled by significant lawyers and corporate law firms all over Ahmedabad and India daily; issues under this are presented to all civil courts, including the NCLTs and NCLATs. Broadly the Act enables financial institutions like banks to recoup loans by selling residential or commercial properties during auctions. Except for agricultural land, the SARFAESI Act allows banks to confiscate a borrower's property without resorting to courts. Only secured loans where banks can enforce underlying securities, such as hypothecation, mortgage, pledge, etc., are subject to the SARFAESI Act of 2002. A court order is deemed unnecessary unless the security is void or fraudulent. The bank would have to appear in court and bring a civil case against the alleged defaulters if there were unsecured assets. The primary intent behind this Act was essential to enable banks and other financial corporations (FIs) to auction borrowers' properties when a loan defaulted act permits banks and other financial institutions to sell financial assets to asset reconstruction firms (ARCs). ARCs may purchase financial assets in compliance with the RBI's regulations and instructions. Today, banks could use it either to take recovery or to rebuild initiatives to lower their non-performing assets (NPAs). If a loan default occurs, banks could confiscate the borrower's securities (apart from agricultural land) without seeking a judge's permission.
Additionally, the SARFAESI Act only works for secured loans when the bank can enforce the underlying security, such as a pledge, mortgage, or hypothecation. Unless the security is void or fraudulent, any court involvement is not necessitated in such circumstances. On the other hand, the bank must ask the court to file a civil case against the defaulters if the asset in question is unsecured.
It is pertinent to note that prior to classifying the borrower's account as an NPA in the secured creditor's (banks or financial institutions) books of accounts, in proper accordance with the Reserve Bank of India’s standards, the secured creditor has no right to pursue the security interest under the SARFAESI Act (RBI). Further, to execute its security claim over the borrower's assets, the secured creditor must issue a 60-day notice to the borrower demanding payment of the outstanding balance. Suppose the borrower/defaulter fails to fulfil their liability within this time frame. In that case, the secured creditor may then take steps to ensure security interests over secured assets through either (i) taking possession of the secured assets, (ii) taking over the management of the secured assets along with the right to transfer by way of lease, assignment, or sale of the secured assets; (iii) appointing any person to manage the secured assets; and (iv) requiring any person who has access to the secured assets to do so. Further, suppose the secured creditor cannot recover the total amount owed by enforcing security interest over secured assets. In that case, they may turn to the Debts Recovery Tribunal (DRT) or the appropriate court to reclaim the remaining balances. A secured creditor may simultaneously exercise their rights under the DRT and the SARFAESI Act.
It is helpful to remember that the secured creditor must mandatorily class the borrower's account as a non-performing asset while simultaneously having an unpaid balance of at least INR 100,000 to be able to invoke sections in the SARFAESI Act. Additionally, for some circumstances listed in Section 31 of the SARFAESI Act, such as an account where the outstanding debt is less than 20% of the initial principal amount and interest, the usage of the act's provisions stands precluded.