SARFAESI
ACT - ECONOMY
News: RBI asks banks to display
information on borrowers linked to SARFAESI Act
What's
in the news?
●
The RBI has issued a directive requiring
commercial banks and Non-Banking Financial Companies (NBFCs), collectively
referred to as Regulated Entities (REs), to disclose borrower information.
●
This disclosure pertains to borrowers
whose secured assets have been repossessed under the Securitisation and
Reconstruction of Financial Assets and Enforcement of Securities Interest Act,
2002 (SARFAESI Act).
SARFAESI
Act:
Need:
●
Pre-SARFAESI
Era:
Before the enactment of the SARFAESI Act in December 2002, financial
institutions and banks faced complex procedures for recovering bad debts.
●
Legal
Complexity: Lenders had to navigate legal
complexities, resorting to civil courts or designated tribunals to secure
‘security interests’ for recovering defaulted loans, resulting in slow and
cumbersome debt recovery.
Objective:
●
The SARFAESI Act, introduced in 2002, is
formally known as the Securitisation and Reconstruction of Financial Assets and
Enforcement of Securities Interest Act.
●
Its primary objective is to protect
financial institutions against loan defaults.
Empowering
Banks:
●
The Act empowers banks to seize, manage,
or sell securities pledged as collateral for loans, facilitating the recovery
of bad debts without the need for court intervention.
Broad
Application:
●
The SARFAESI Act applies nationwide and
covers all types of assets, whether movable or immovable, provided as security
to lenders.
Aim
of the SARFAESI Act:
The SARFAESI Act serves
two key purposes:
●
Efficient
NPA Recovery: It streamlines and expedites the
recovery of non-performing assets (NPAs) for financial institutions and banks.
●
Asset
Auction: It enables financial organizations and banks to
auction residential and commercial assets in cases of borrower default.
Powers
Granted to Banks:
1.
Default Trigger:
●
The SARFAESI Act comes into play when a
borrower defaults on payments for more than six months.
2.
Notice Period:
●
The lender is required to issue a notice
to the borrower, providing them with a 60-day window to clear their outstanding
dues.
3.
Asset Possession:
●
If the borrower fails to comply within the
stipulated period, the financial institution gains the right to take possession
of the secured assets and manage, transfer, or sell them.
4.
Appellate Avenue:
●
The defaulter has the option to appeal to
an appellate authority established under the law within 30 days of receiving a
notice from the lender.
Applications:
The SARFAESI Act
primarily deals with various legal aspects related to:
●
Registration of asset reconstruction
companies.
●
Acquisition of rights or interest in financial
assets.
●
Measures for asset reconstruction.
●
Resolution of disputes.