OVERVIEW OF THE SARFAESI ACT: UNDERSTANDING THE SCOPE AND PURPOSE

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) is a powerful legislation in India that allows banks and financial institutions to recover their dues from defaulting borrowers without going through the lengthy court process. This act was introduced to provide a speedy and effective remedy to lenders to recover their non-performing assets (NPAs) and reduce their burden of bad loans. In this article, we will provide an overview of the SARFAESI Act, its scope, and purpose.

Scope of the SARFAESI Act

The SARFAESI Act applies to all secured loans above Rs. 1 lakh, where the original debt amount is not less than 20% of the principal loan amount. The Act empowers banks and financial institutions to take possession of the assets of the borrower, sell them, and recover the outstanding amount without the intervention of the court. The Act also applies to cases where a borrower has created a security interest over his assets in favour of a bank or financial institution as collateral for the loan.

Purpose of the SARFAESI Act

The primary purpose of the SARFAESI Act is to provide a legal framework for banks and financial institutions to recover their dues from defaulting borrowers. The Act provides a non-judicial remedy for the recovery of NPAs, which reduces the burden on courts and helps banks and financial institutions to recover their dues in a time-bound and efficient manner.

Under the SARFAESI Act, banks and financial institutions can take possession of the secured assets of the borrower and sell them without the intervention of the court. This provision helps in quick recovery of the outstanding amount and reduces the burden of bad loans on the banks and financial institutions. The Act also provides for the establishment of asset reconstruction companies (ARCs) that can acquire the NPAs of banks and financial institutions and recover the dues from the borrowers.

Salient Features of the SARFAESI Act

Some of the salient features of the SARFAESI Act are:

1. Definition of Secured Asset: The Act defines secured assets as any property or asset on which a security interest has been created in favour of a bank or financial institution to secure a loan or an advance.
2. Powers of Banks and Financial Institutions: The Act empowers banks and financial institutions to take possession of the secured assets of the borrower, sell them, and recover the outstanding amount without the intervention of the court.
3. Notice Period: Before taking possession of the secured assets, banks and financial institutions have to give a 60-day notice to the borrower.
4. Right to Appeal: The borrower has the right to appeal against the possession of the secured assets to the Debt Recovery Tribunal (DRT).
5. Establishment of Asset Reconstruction Companies (ARCs): The Act provides for the establishment of ARCs that can acquire the NPAs of banks and financial institutions and recover the dues from the borrowers.
6. Liability of Borrower: The borrower remains liable for the outstanding amount even after the possession of the secured assets by the bank or financial institution.

Conclusion

The SARFAESI Act is a powerful legislation that provides a speedy and effective remedy to lenders to recover their non-performing assets. The Act has helped banks and financial institutions to recover their dues in a time-bound and efficient manner, which has reduced the burden of bad loans on them. However, the Act has also been criticised for being harsh on borrowers and not providing adequate safeguards against the arbitrary exercise of powers by banks and financial institutions. Overall, the SARFAESI Act is an important legislation in India’s banking and financial sector that has significantly impacted the recovery of NPAs.