How Sarfaesi Act 2002 Works?

 Here is a guide on how the Sarfaesi act works, what responsibility it gives to the financial institution, and how it occurs. 


The Sarfaesi Act allows banks and financial institutions to auction residential and commercial properties for loan recovery. As the borrower fails to repay the amount when expected, the bank gets the allowance to take power and take action against the borrower. 


In simple words, Sarfaesi Act gives banks the supreme power to reduce their non-performing assets byways of recovery and reconstruction. 


Asset or Debt securitisation has proven to be the best process in stimulating aids into securities and securities into liquidity. It is done on a long term basis, as a continuous process, to increase business turnover, profits and provide flexibility. The flexibility is in pricing, size, pattern, risk and marketability. 

What is Sarfaesi Act?


The complete form of the Sarfaesi Act is Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI). It allows banks to auction the borrower's property who fails to repay the loan in the desired timespan. 


However, it doesn't take the agricultural land of the borrower into the picture. It provides authority to the banks to seize the borrower's property since they cannot repay the loan as promised. 


However, this act is applicable only for secured loans, where banks hold a leading position to enforce underlying securities, including mortgage, hypothecation, pledge, etc. In the case of unsecured loans, the banks need to move the topic to the civil court and declare the borrower as a defaulter. 


Visit GetlegalIndia.com to know how the Sarfaesi act 2002 works.



Applicability of the Act


The provision for the loans has to be more than 1lakh and classified as non-performing assets. While the NPA loan account must amount to less than 20% of the principal, the interest is not covered under this Act.


The act is not applicable for:


  • Any money or security issued under the Indian Contract Act and the Sale of Goods Act, 1930.

  • Any conditional sale, hire-purchase, lease or any other contract that has no security created. 

  • Any of the rights mentioned for the unpaid seller under Section 47 of the Sale of Goods Act, 1930.

  • Any properties are not liable for the attachment or sale under Section 60 of the Code of Civil Procedure, 1908.

How does SARFAESI ACT 2002 Works?


It gives the power to the bank for seizing the borrower's property. Defaulting borrowers are informed and notified about the sizing process and notice to discharge their liabilities. 


There are two main methods provided in the SARFAESI Act to recover non-performing assets: Securitization and Asset Reconstruction.


They must discharge their liabilities within 60 days. If the borrower fails to comply within 60 days notice, Sarfaesi provides the following responsibility to the bank. Banks can act in a position and take into consideration the following matter. 


  1. Take into possession the securities of the loan.

  2. Sale, lease and assign the rights of the lease to someone else. 

  3. Manage the securities or assign someone else to manage them. 


There are many asset reconstruction companies in India. And such establishment of Asset Reconstruction Companies is guided in the SARFAESI Act, 2002. 

The RBI regulates such companies, acquiring assets from financial institutions and banks. The SARFAESI Act permits banks to sell the seized asset to such asset reconstruction companies. Also, RBI mentions the guidelines to go about the process and make the financial asset flow smooth from bank to company. 

Conclusion


Now that you know so much about Sarfaesi Act and how to go about the process as banks and financial institutions. You need to follow the SEBI’s guide and procedure and properly seize the property. 


If you wish to learn more about Sarfaesi Act 2002, visit GetLegalIndia.com and learn more in detail. It is an information directory that can help you have insight into legal matters.


Navigate the site and know more in detail about securitisation, asset reconstruction and more. Visit GetlegalIndia.com now for better information! 

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