Securitisation and Reconstruction of Financial Assets & Enforcement of Security Interest Act, 2002 (SARFAESI) is basically is an act which provides different options to Banks and Financial Institutions for resolving their non performing assets and it is also an effective tool in the hands of the lenders to enforce the security interest and recover the dues thereby reduce the amount of nonperforming assets (NPA).
The Act empowers Banks/ Financial institutions to recover its dues through enforcement of security interest without intervention of the Court/ Tribunal
The Act deals with the following aspects:
- Enforcement of security interest by secured creditors without intervention of the court . The action under SARFEASI ACT can be initiated for both moveable assets e.g vehicles, plant & machinery and as well as immovable properties except agricultural land
- Transfer of nonperforming assets to Asset Reconstruction Company , the specialised agencies created under the Act, on sale on cash or Security Receipt basis
- To provide a legal framework for securitisation of assets
- It also gives option for the Bank to take over the management of the unit ( borrower) and o appoint a manager to run the unit for recovering the NPA
- Priority of claims of secured creditor over the dues of other creditors, including the dues of Government
- Non applicability of any other laws to the extent of inconsistency with regard to any action taken by the secured creditors
Enforcement of Security Interest Act :
For enforcing the security interest , the borrowal accounts must comply with the following criteria :
> The contractual dues in the account should be more than Rs.1.00 lac
> The account should have become NPA as per RBI norms
> The security charged to the Bank must be specific , clear and available to the Bank . It must be duly and effectively charged to the Bank and therefore, enforceable if the borrower fails to pay in response to the notice
> Either the Bank must be the sole banker to the borrower i.e 100% lending is done by that bank or in case of consortium lending consent of secured lenders representing not less than 60%of the amount outstanding in value is to be obtained.
> In case of multiple banking , if the security is exclusively charged, the bank may proceed as though it is sole Banker
Process flow for SARFEASI action:
- Bank to issue demand notice under section 13 (2) of SARFESI ACT within 3 days of account becoming NPA
- It is to be ensured that demand notice was served to all the borrowers and guarantors of the loan account and receipt of acknowledgement card/ proof of delivery to be preserved safely by the bank
- In case, Notices could not be delivered to any of the Parties or any Notice returned undelivered, Bank to effect the service of notice through substituted service:
by affixing the notice where borrower / mortgagor ordinarily resides or carries on business AND also by publishing contents of notice in twoü newspapers, one of which should be in vernacular language. Please ensure that all the parties get 60 days’ time to repay bank’s dues.
- During 60 days’ time, in case bank gets any representation from the borrowers / guarantors under Section 13(3A), the same should be replied by the Authorised Officer (officer identified for the purpose of enforcement of security interest to realise & recover bank dues) within 15 days
- During the 60 days’ period: Bank shall verify the title deeds and otherØ documents/ deed of mortgage and ensure that the mortgage is valid. Branch shall verify the validity of insurance & encumbrances over secured assets.
- An officer to visit the mortgaged assets, so as toØ identify the same. A record in this regard must be kept with file by the officer concerned and counter signed by the Branch Head. Bank to engage recovery agent ( if felt necessary)
- Within 3 days of the expiry of the 60 day’s demand notice period , bank to take symbolic possession ( incase of resistance to take physical possession) or peaceful physical possession
- Within next 7 days of the taking possession, Bank must publish possession notice of immovable property in newspaper, file application with Chief Judicial Magistrate (CJM), District Magistrate (DM) for physical possession wherever required and file a caveat before DRT/ if necessary in high court also.
- In respect of all those properties, where bank could take peaceful physical possession it must carry out following measures in next 7 days :
1. Obtain valuation report from Bank’s approved valuer
2. Reserve price of the asset must be fixed
3. Within 3 days of fixing the reserve price,it must publish a 30 days sale notice in two newspaper ( out of which one paper must be vernacular language ). The sale notice must be delivered to all borrowers and guarantors and it must also to be compulsorily placed at ibpai.in (eBkray portal)
4. Bank must endeavour to do maximum publicity for auction by contacting property brokers,recovery agents, property websites like magic bricks etc
- In respect of those assets, where CJM/ CMM/ DM application filed:
1. Bank is expected to get the order for physical possession from CJM/ CMM/ DM.
2. Branch to co-ordinate with the Recovery Agent/ Revenue/ Court Authority and initiate the steps for physical possession of assets within next 7 days of getting the order
3. Within next 25 days of getting the order, Physical Possession to be completed and take steps for auction.
- Actions to be taken regarding auction :
1. 25% of the Bid amount to be received on the auction day or not later than next working day. After receipt of 25 % of the Bid amount sale to be confirmed in favour of successful purchaser
2. Within 15 days of Auction – (extendable upto 3 months), 75 % of the Bid amount to be received from successful bidder within 15 days. (Time limit of 15 days may be extended to three months i.e inclusive of 15 days if agreed by secured creditor) Receipt of balance bid amount and Sale Certificate to be issued by the Bank
3. If any party challenges the SARFAESI actions initiated by Bank, by filing Securitisation Application (SA)/ Writ Petition (WP), Bank to ensure that the matters is immediately entrusted to Bank’s Advocate/ Senior Advocate (wherever required). It is to be ensured that SA/WP are got disposed at the earliest.
DRT Suit:
(i) Banks may file DRT / Civil suit simultaneously with the SARFAESI proceedings. This should be invariably done in all cases where value of security is less than outstanding dues.
(ii) In the DRT Applications (OA) the following Interim Applications to be filed, mandatorily wherever feasible:
(a) Declaring on oath all the assets in the name of defendants.
(b) Appointment of Commissioner for taking inventory of all hypothecated assets.
(c) Appointment of Court Receiver to take possession of the hypothecated assets.
(d) Injunction restraining defendants from selling, alienating uncharged properties.
(e) Garnishee Orders against the Debtors of the borrower to deposit the amount to the DRT.
(f) Attachment before Judgment (ABJ) against personal Properties.
(g) Direction to defendants to surrender their Passport to DRT and to restrain them from leaving the country.
(h) Direction to defendants to submit annual returns submitted to the Income Tax/ Wealth Tax authorities.
(iii) The Nodal Officer for DRT/ Bank Official should attend all the important hearings of the case/s and ensure timely compliance of any directions given by DRT.
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