Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act of 2002

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act of 2002

Subject – Economy

Context – Extend IBC provisions to InvITs: experts

Concept –

• Banks utilize Sarfaesi Act as an effective tool for bad loans (Non Performing Asset) recovery.
• The Sarfaesi Act is effective only against secured loans where banks can enforce the underlying security.
• Basically, the SARFAESI Act empowers financial institutions to ‘seize and desist’.
• They should give a notice to the defaulting borrower asking to repay the amount within 60 days. If the debtor doesn’t comply, the bank can resort to one of the three following measures:

1. Take the possession of the loan security.
2. Sell or lease or assign the right over the security.
3. Manage the asset or appoint someone to manage the same.

• Major feature of Sarfaesi is that it promotes the setting up of asset reconstruction companies (ARCs) and asset securitization companies (SCs) to deal with NPAs accumulated with the banks and financial institutions.
• The Act provides three alternative methods for recovery of non-performing assets, namely:
  • Securitisation – Securitization is the practice of pooling together various types of debt instruments (assets) such as mortgages and other consumer loans and selling them as bonds to investors.
  • Asset Reconstruction – Asset reconstruction is the activity of converting a bad or non-performing asset into performing asset with the help of Asset reconstruction companies.
  • Enforcement of Security without the intervention of the Court – If the borrower defaults, the bank may enforce security interests by:
    • Take possession of the security;
    • Sale or lease or assign the right over the security;
    • Appoint Manager to manage the security;
    • Ask any debtors of the borrower to pay any sum due to the borrower.