Abstract
We all consider investing our money as an asset for a rainy day but what if you realize that all of your hard earned money vanishes in the drain. And if such a scenario does occur or happen to take place, would you be prudent enough to risk all that you have to regain what you have lost. Of course you would deploy all your resources at least those which you can to get back the money you invested. Now let us consider this same situation from a different perspective. What would a financial Institution do to regain its losses? I mean Financial Institutions that disburse huge loans to borrowers considering the same as an asset for the institution. The money they lend against a collateral are termed as secured asset according to the SARFAESI Act,2002. Now, if the borrower for reasons both controllable and deliberate stops paying or refuse to pay their instalments for a period of 90 days, the asset as per the guidelines of the Reserve Bank Of India turns into a Non-Performing Asset. In situations like this, the efforts that the Financial Institutions would take to regain their loans are through SARFAESI. SARFAESI till date is majorly used to recover the money lent by the financial institutions for immovable properties and enforcing the law in case of movables will altogether be a different approach that the financiers in the Automobile industry may or may not want to get into given the statutory requirements laid down by the law and the depreciation factor of the movables. The article intends to showcase the traditional and the conventional approach (Through SARFAESI) that the Financial Institutions take in case of vehicle seizure or vehicle impounding. The author also discusses the stand of the Indian Judiciary in matters involving questions whether the Industry should go the traditional way in impounding of vehicles or the conventional way that is through SARFAESI.
SARFAESI
The Securitisation and Reconstruction of Financial Assets And Enforcement Of Security Interest Act, 2002 which came through the recommendation of Narsimha Committee I and II and Andhyarujina Committee allows the financial Institutions to recover the amount lent to the borrower in the event he fails to repay the same through taking possession of the security interest and even auctioning the property taken into possession.
The Financial Institutions lending money and the institutions that fall under the ambit of SARFAESI are termed as secured creditor and the collateral on which the interest is created for the purpose of lending loan is termed as security interest.
As the Article specifically focuses on the applicability of SARFAESI on movable property it becomes pertinent to refer to the definition of security interest under section 2(z)(zf)
Clause (i) of the definition includes hypothecation as a security interest which means the financial institutions that finance the vehicles through hypothecation deed are termed as secured creditors and the hypothecation deed is a security interest created on the vehicle financed.
So, If any borrower applies for financial assistance for purchasing any vehicle and the secured creditor creates a hypothecation on the concerned movable property, the secured creditor makes it a security interest as per the definition of the Act, and thereby makes the secured creditor eligible to recover the defaulted amount as soon as the account is made a non performing asset as per the rules and regulations provided by Reserve Bank of India, through the procedures provided for enforcing of security interest under the SARFAESI Act.
Non-Performing Asset
The Act defines a Non performing asset as an asset which is classified by the bank or any financial institution as Doubtful, Sub Standard or lost.
Any loan disbursed to a borrower is an asset for the financial institution and when the borrower defaults the interest or the principal for a period of 90 days or three months, the financial institution classifies the asset as a Non Performing Asset as per the Regulations of the Reserve Bank Of India.[1]
Classification of an asset as a non performing asset is the ignition to start the process of enforcing the security Interest under the SARFAESI Act. The activity of classifying any account as a non performing asset allows the financial institution to proceed with the enforcement of security interest through the procedures established by the SARFAESI Act, which involves the serving of Demand Notice to the defaulting borrower and further initiating the repossession of the property.
SARFAESI for Vehicle Financiers
As mentioned above, SARFAESI requires the secured creditor to have a security interest which includes hypothecation as mentioned in the definition. So, the automobile financiers that finance the vehicles i.e. movables CAN go the SARFAESI way.
The real issue that needs to be addressed is whether it will be feasible for the banks or NBFCs to take the assistance of the provisions for enforcing the security interest as per the SARFAESI?
In reality the financial institutions do not resort to repossessions, that is taking away the custody of the vehicle, the moment a borrower defaults. Repossessions involve outsourcing of the default account to Agencies that assist the Secured Creditor in recovery and collections thereby increasing the cost per case and given the depreciation of asset value in the automobile industry, the resale price suffer a sharp haircut relatively to the fair value of the asset. Hence, most lenders try to work with the borrower to see that he pays. However, it is a fact that several borrowers are truant, and at times, it is not a case of difficulty in paying but the ability to avoid repossession while defaulting. That is where the use of forced repossession comes in. The trick is to take the borrower by surprise, by having informers who inform the recovery agent of the location of the vehicle while it is on the road or parked on the way.
If the secured creditor decides to take the SARFAESI route it will first have to resort to section 13(2) that permits the secured creditor to issue Demand Notice to the borrower thereby providing him a period of 60 days to pay in full the defaulted debt. In case the debt is not recovered the secured creditor then resorts to section 13(4) to take the physical possession of the property. Most of the secured creditor avoid taking the physical possessions in section 13(4) and file an application under section 14 of the Act seeking a judicial order to take possession of the property. All of this procedure takes nearly three months. The intention of the secured creditor to take the possession of the vehicle is to sell it and recover the amount. This procedure to auction the vehicle, the secured creditor will again have to give a One Month notice before the property can be auctioned.
It is an established fact that the automobile industry suffers with depreciation of the asset value and considering the time period involved in the recovery procedure through SARFAESI as mentioned above, on any given day, it would be the last choice of the secured creditor to recover the money through SARFAESI.
Hire-Purchase Agreement
Hire purchase agreement is basically an arrangement made between the lessor and the lessee whereby the lessor agrees to accept the amount for the movable property in instalments from the lessee and the lessee undertakes to keep the ownership of the vehicle with the lessor till the amount is paid off.
In India, the hire purchase agreements that are governed by the Hire Purchase Act, 1972 is an agreement that almost all the financiers get into where they keep the ownership of the vehicle with the institution till the amount gets cleared by the borrower mainly through instalments. So, when the concerned borrower defaults, it gives the Secured Creditor the right to take the possession of the vehicle as per the agreement entered into by borrower with the concerned Secured Creditor.
The financial Institutions thus avail this traditional route and recover the amount through recovery agents just after they have served the Demand Notice for recall of loan thereby saving time and the asset value of the vehicle.
Is SARFAESI Act Exhaustive?
The Patna High Court through Shashi Kant Kumar vs The State Of Bihar on 19th May, 2023 has mandated the use of SARFAESI for the repossessions of the vehicle considering various aspects of the activity which makes the financial institutions in the state of Bihar to follow the process provided under the SARFAESI Act of 2002 to for all the activities of repossessions.
Now, the basic question that arises is whether the SARFAESI Act, 2002 is a code in itself? Section 37 of the Act opens with the title Application of other Laws not barred and expressly mentions that the provisions of this Act or rules made thereunder shall be in addition to and not in derogation to any other law for the time being in force
The above paragraph which mentions the law provided by the Act, makes the SARFAESI Act, 2002 as an enabling Act which shall facilitate the procedure of recovery for the financial institutions and does not take away the rights or procedures provided by the other laws prevailing and having force in India.
Conclusion
The Article takes the reader through both the aspects involved in repossession of the vehicle financed by the secured creditor and also discusses the judgement passed by the Patna High Court making the SARFAESI the only way to repossess the vehicle financed through hypothecation. It is pertinent to note that the judgement that mandates to undertake proceedings provided under SARFAESI happens to be a strict view of the court. As the Act under discussion expressly mentions that the provisions of this Act or rules made thereunder shall be in addition to and not in derogation to any other law for the time being in force. Thus, the malpractices that may be involved in repossession of vehicles through agency could be regulated with stringent laws rather than putting a blanket ban on the activities performed under the authority given by the Agreement entered into between the borrower and the financial institution.
[1] https://www.rbi.org.in/commonperson/English/Scripts/Notification.aspx?Id=889
Author Bio
Have right to the financer for sale vehicle without F R C ( form 36 )