The Securitisation and Reconstruction of Financial Assets and Enforcement Of Security Interest Act, 2002 (SARFAESI ACT)[1] was enacted to empower banks / financial institution(s) to recover their non- performing assets from borrowers without the intervention of courts. This is applicable to the cases where a bank has got some collateral in their hand so that they can sell it off in case of non-payment by the borrower (Example: hypothecation, guarantee, mortgages). The Act conferred on banks, the right to realize their security without involvement of court, thus significantly speeding up recovery and providing a potent instrument for debt collection. But its implementation also significantly altered the banking practices of financial institutions as well impacted borrowers.
Section 13 of the Act deals with the Enforcement of Security Interest and Section 14 deals with the powers of Chief Metropolitan Magistrate or District Magistrate to assist secured creditors in taking possession of secured assets. When the loan becomes an NPA (Non – Performing Asset) due to default in payment of dues, a demand notice is sent to the borrower under Section 13(2), claiming the amount defaulted by him & settling his account within 60 days from date of issue. The Supreme Court explained in the case of United Bank of India Vs. Satyawati Tondon (AIR 2010 SC 1621)[2], what should be constituted as notice under Section13(2) by doing so. The court ruled that notice to the borrower under the Act had to put forth full particulars of all that debt is outstanding and give a reasonable chance for curing default. It went on to highlight the significance of providing a borrower with clear and unambiguous notice before taking steps under SARFAESI Act. This ruling has ensured greater compliance by banks in releasing notices and showing transparency and following procedures.
If the secured creditor is not able to recover the required amount within a period of 30 days, he files an application under Section 14(1) before Chief Metropolitan Magistrate or District magistrate for assistance in recovery of their dues.
This article will give an overview of how differently the banking practices in our country are going to take place after this legislation was enforced. In the past few years, SARFAESI cases have impacted significantly on banking practices resulting in a mixed bag of good and bad results. Few of the most salient changes that have come about and are being practiced in terms of banking practices because of SARFAESI Act has been given below:
- Speedy Recovery and Debt Resolution:
One of the biggest changes in banking practice through SARFAESI cases is quick recovery for pending loan amounts due. Before the implementation of this Act, the process of recovery was a long-way process which involved legal battle for years to get back NPA. SARFAESI empowers banks to take charges of recovery on their own, so it is expected that this would help faster resolution of bad debts. This has presumably improved the balance sheet health of their banks as well, strengthening further in such a way that they can do more credit extension to productive bits and pieces.
In the case of Mardia Chemicals Ltd. v. Union of India[3], the Supreme Court upheld the constitutional validity of this act in a landmark judgment The judgment upheld the power of secured creditors to act on their security without recourse to court proceedings. It cleared the air about SARFAESI proceedings not being bound by principles of natural justice and protected supremacy, when it comes to recovering dues from defaulting borrowers. This move gave a shot in the arm to banks, giving them confidence of using the Act as an expedited tool for recovery and clean up NPAs.
- Challenges for Borrower Rights vs Banks Powers:
On one hand it has proved to be a tool which can rejuvenate the recovery process for banks but on the other hand, SARFAESI also faced criticisms and challenges by borrowers rights organizations on ground that it tends to dis-empower borrower’s in whatever sense possible. A few borrowers contend that the Act provides banks with extra-judicial powers and decreases the borrower representation in a possible recovery process. Regulators and the judiciary, however, remained a challenge to walk on two legs — taking care of borrowers but allowing banks their due rights. Hence to curb such practice, The Supreme Court of India passed a judgment in the year 2016 under the case name Vishal N. Kalsaria v. Bank ofIndia[4];
This was a significant judgment where the Supreme Court elaborated on what is due process under SARFAESI. The DRT (Debt Recovery Tribunal)[5] awarded in favor of the borrowers who may approach it for grievances against action by banks under SARFAESI. This judgment is a statement to the fundamental tenets of justice and right every borrower may avail in event he or she feels that his rights have been violated during recovery. Banks, on their part, have also become extra cautious to avoid violation of due process requirements or non-compliance with the provision under SARFAESI.
- Enhanced Asset Quality Assessment:
The implementation of SARFAESI has made banks improve asset quality and risk management practices. In order to reduce the probability of non-recovery, banks have become increasingly stringent when assessing both the creditworthiness of borrowers as well as in valuing collateral offered against loans. The result is that borrowing has trended towards responsible lending and helped discipline borrowers to make timely repayments of their loans. While the Acthas laid emphasis on both regarding mortgaged property to keep clear of any ambiguities during recovery.
In the case of, Transcore v. Union of India[6], the Honourable Supreme Court observed that if third-party interests had been created on immovable property, then those rights have to be respected and protected whilst taking steps towards realization of security in its favor,pertaining safeguarding Owners interest vested in Non Positive List Properties. It observed that the SARFAESI Act does not wipe out third-party interests in a secured asset and issued directions to protect their rights. This judgment clarified that the banks have to maintain proper diligence as far as title & incumbrances of collateral properties is concerned before taking recovery proceedings. Resultantly, banks have increasingly become vigilant and skeptical in the very first place in respect of verifying genuineness of securities as well as prompt recognition at the right time during recovery.
- Greater Transparency And Efficiency:
This has not only brought transparency but also increased efficiency in the banking ecosystem. The Act creates a relatively clear path to recovery, which is favorable for the banks in taking appropriate recourse against those who default. This has helped to create a more disciplined and structured method of dealing with NPAs, making overall banking practices faster. It has given jurisdiction to both the parties — creditor and borrower to knock at doors of Debt Recovery Tribunal (DRT) for redressal, if any rights have been allegedly violated.
The Supreme Court of India in Central Bank of India v. State of Kerala[7], dealt with the question regarding how much judicial scrutiny is permissible at stages under SARFAESI proceedings. The Supreme Court on Friday said SARFAESI proceedings are not maintainable against the Co-operative Banks and as such processes like mandamus, certiorari or prohibition do no lie.Parameshwara decided by Apex court in Nov 2017 [ Para B] The court also made it clear that the relevant forum to adjudicate on whether a lenders action under SARFAESI is in order or not can only be DRT. The apex court delivering this precedent judgment has reiterated the non-interference principle thereby allowing banks to continue their recovery exercise free from any unnecessary interference by judiciary which will augur well for an efficient recovery mechanism.
The above-mentioned landmark Judgements on the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) are key role changers in defining Banking Practices India. These judgments provide a settled interpretation of the provisions under this Act and have far-reaching implications not only for Debtors but also to Creditors.
These are the landmark judgments which have changed the course of Indian banking. They have reinforced the recovery process, advised banks to follow best practices on lending and underlined the need for borrower rights when implementing SARFAESI Act. Even as the banking sector evolves, these judgements remain critical touchstones that have helped shape both practice on SARFAESI (even guiding legislation) and set the course for all interactions between lenders and borrowers.
However, there is no denying the fact that the SARFAESI Act has altered traditional banking practices in India by enabling banks/financial institutions to recover bad loans or realize secured interests much quicker than what could have been done earlier. It also claims that the Act has expedited recovery by helping banks to get back on their feet and lending again.
Balancing the interest of borrower’s rights while empowering banks to recover dues effectively will, however, remain an important task. The balancing act between ensuring that banks are given enough leeway to grow and protecting the interests of borrowers will remain challenging for regulators and policy makers. Conclusion: Undoubtedly, the SARFAESI has strengthened the banking sector but it needs to be regularly reviewed and updated to counter emerging economic as well as legal challenges. The financial sector continues to evolve, with regulatory authorities monitoring both the impact of implementation and its effects on the wider economy when considering necessary revisions.
[1] https://www.indiacode.nic.in/handle/123456789/2006
[2] (2010) 8 SCC 110
[3] 2004) 4 SCC 311
[4] (2016) 3 SCC 762
[5] https://drt.gov.in/
[6] (2008) 1 SCC 125
[7] (2009) 4 SCC 94
Author: Rishabh Singh, a 5th-year BBA LLB (Hons) student at CHRIST (Deemed to be University), Pune, Lavasa.
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