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Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002, was enacted to enable banks to recover Non-Performing Assets (NPAs) without court intervention. The recovery of NPAs has advanced thanks to the SARFAESI Act of 2002.

Introduction SARFAESI Act 2002

The current legal system governing banking regulations occasionally falls short of meeting the constantly shifting needs of the financial industry. Without a strong legal framework, the SARFAESI Act made up for it. The SARFAESI Act of 2002 has been tremendously helpful in collecting defaulted loans and reducing the quantity of non-performing assets (NPAs) in banks and other financial institutions.

The central government made the Narasimham Committee and the Andhyarujina Committee up to review the overall banking sector reforms and decide whether the current legal framework for banks needed to be adjusted.

These committees recommended creating new legislation for securitisation and giving financial institutions the authority to possess securities and sell them when the time was right with no court action. These recommendations became the SARFAESI Act.

What Does The SARFAESI Act of 2002 Entails And Where Does It Apply?

The SARFAESI Act gives Indian banks and financial institutions the authority to sell or auction the assets and property of credit defaulters with no court intervention.

A Central Registry of Securitisation Asset Reconstruction and Security Interest is also established under the SARFAESI Act (CERSAI). CERSAI is a central registry of security interests that is entirely online. CERSAI was developed to prevent frauds in which the same assets are used as collateral for several loans got from various banks.

The SARFAESI Act Addresses the Following Issues:

  • Reserve Bank of India (RBI) registration and supervision of Asset Reconstruction Companies (ARCs) (RBI).
  • Supporting the securitisation of different financial assets owned by banks and other financial institutions, whether underlying securities are used.
  • The SARFAESI Act entrusted the Asset Reconstruction Companies (ARCs) to raise money by providing security receipts to a group of qualified buyers.
  • Assisting in the overall reconstruction of several financial assets that are gained while using the authority to enforce securities, change management, or exercise any other authority that is planned to be granted to banks and financial institutions.
  • Defining  “security interest” as a category of security that includes a mortgage and a change in ownership of real estate and is given in return for the prompt repayment of financial help from any bank or financial institution.
  • The Reserve Bank of India (RBI) may designate the borrower’s account as a non-performing asset through the SARFAESI Act under the different instructions supplied or under the rules that are routinely published by the RBI.
  • The allowed officers would act on this behalf under the rules established by the Central Government of India to exercise the many rights of a secured creditor.
  • The Central Government of India may establish or cause to be formed a Central Registry to record securitisation, asset reconstruction, and the creation of security interests-related transactions.
  • Agricultural land security interests, loans of less than Rs. 1 lakh, and situations in which the borrower is repaying the loan in full are exempt from the various laws.
  • The SARFAESI Act opens the door for the proposed legislation to apply to financial institutions and banks and gives the Central Government more flexibility to extend the law’s application to other corporations and financial companies in the non-banking sector.

Objectives of Sarfaesi Act 2002

These are the major goals of SARFAESI Act:

  • Recovery of the non-performing assets (NPAs) of banks and financial institutions quickly or effectively.
  • Allows banks and financial institutions to sell off residential and commercial properties at auction when a borrower defaults and doesn’t pay back the loan.

What Are the Main Features of Sarfaesi Act 2002?

  • Effective or speedy recovery of non-performing assets held by banks and FIs (NPAs).
  • Gives banks and other financial organisations the ability to auction off assets (such office or residential buildings) when a borrower cannot pay back their loan.

What The SARFAESI Act Of 2002 Does?

A bank or other financial institution has the authority to confiscate a borrower’s property if they are in arrears thanks to the SARFAESI Act, 2002. According to the SARFAESI Act’s protocol, the banks send warnings to delinquent borrowers requiring them to pay up their debts within 60 days. The SARFAESI Act provides for the following recourse to a bank when a defaulting borrower ignores the bank notice:

  • Take the loan security into your possession.
  • Rent, sell, or transfer the security’s right as a security
  • Manage it yourself or designate someone else to do it for you.  

The Formation Of SARFAESI Act, 2002

The SARFAESI Act of 2002 was made public:

  • To control the repurposing and securitisation of financial assets.
  • The security interest’s enforcement.
  • Matters related to or incidental to that.

It covered the entirety of India. The Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act of 2016 amended the 2002 act. This Act further amends the following four laws:

  • The Securitization, Reconstruction, and Enforcement of Security Interests Act of 2002 (SARFAESI).
  • In 1993, the Recovery of Debts Owed to Banks and Financial Institutions Act (RDDBFI) was passed.
  • Act of 1899 regulating Indian stamps
  • For matters relating to or ancillary to the Depositories Act of 1996.

What are the Changes Proposed To The SARFAESI Act Of 2002

The Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Bill, 2016, which included the following changes amended the SARFAESI Act:

  • The ability to convert any portion of the failing company’s debt into equity should be granted to banks and asset reconstruction companies (ARCs). Such a translation would imply that instead of the company’s creditor, lenders, or ARCs would become equity investors.
  • If banks do not get any requests during the auction, they may request any immovable property put up for bid by themselves. Banks will reduce the debt in this situation using the proceeds from the sale of the property. It enables the bank to secure the asset as partial payment for the amount of the unpaid loan.
  • Banks can also sell this property to a new owner by requiring the buyer to pay off all outstanding debts.

Borrowers’ Rights Under the SARFAESI Act

The following rights belong to the borrowers:

  • Before the sale is complete, borrowers can pay their obligations and keep their securities.
  • The default of an officer will cause compensation for the borrowers.

Borrowers may file complaints with the Debt Recovery Tribunal under SARFAESI Act Section 17 in order to have their complaints against creditors or authorised officers resolved.

Methods of Recovery Under SARFAESI Act, 2002

Under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, there are three primary methods of recovery for non-performing assets (NPAs):

  • Securitisation:

Definition: Securitisation involves the process of converting existing financial assets, such as home loans or auto loans, into marketable securities. These securities can then be sold in the market.

Asset reconstruction companies can raise funds by creating schemes for acquiring financial assets and selling them to QIBs (Qualified Institutional Buyers).

  • Asset Reconstruction:

Definition: Asset reconstruction allows authorized entities, known as asset reconstruction companies, to take over and manage the borrower’s business. This can involve selling or acquiring the business or even rescheduling debt payments as per the provisions of the SARFAESI Act.

Asset reconstruction companies aim to resolve distressed assets by restructuring or selling them, thereby recovering the dues for the lenders.

  • Enforcement of Security without Court Intervention:

Definition: The SARFAESI Act empowers banks and financial institutions to enforce security interests without the need for court intervention.

Lenders can issue notices to individuals who have secured assets from the borrower, compelling them to pay the outstanding dues. They can also claim the amount due from the borrower’s debtor, facilitating a direct recovery process.

What Assets Not Covered Under SARFAESI Act, 2002?

Under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, certain assets are not covered by the Act. These include:

  • Money or Security under Sale of Goods Act and Indian Contract Act

Assets that are governed by the Sale of Goods Act, 1930, or the Indian Contract Act, 1872, are not covered by the SARFAESI Act. This means that assets involving transactions and disputes falling under these acts are not subject to the SARFAESI recovery process.

  • Lease, Hire-Purchase, Conditional Sale, or Contracts without Security Interest

Any lease, hire-purchase agreement, conditional sale, or other contractual arrangements where no security interest has been created are not covered by the SARFAESI Act. The Act primarily deals with assets that have a security interest in favour of the lending institution.

  • Rights of Unpaid Seller under Sale of Goods Act:

The SARFAESI Act does not apply to the rights of an unpaid seller under Section 47 of the Sale of Goods Act, 1930. This section deals with the seller’s rights when the buyer defaults on payment for goods.

  • Properties Not Liable for Sale or Attachment under CPC:

Any properties that are not liable for sale or attachment under Section 60 of the Code of Civil Procedure, 1908, are also excluded from the scope of the SARFAESI Act. This section specifies properties that are exempt from attachment and sale in the execution of decrees.


Overall, the main objective of the SARFAESI Act, 2002 is to make speedy and effective recovery of the non-performing assets possessed by the banks and provides banks the capability to auction the assets if loan cannot be repaid by the borrower.

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How Is SARFAESI Act applicable to NBFCs (Non-Banking Financial Companies)?

The SARFAESI Act is applicable to NBFCs that are specified as financial institutions under the Act.

Which loans are not covered under SARFAESI Act?

The SARFAESI Act is applicable only in the cases of secured loans where banks can enforce underlying securities such as hypothecation, mortgage, pledge, etc.

What is the process for banks to enforce security interests under SARFAESI?

The banks issue notices to the defaulting borrowers to discharge their liabilities within a 60-day period. When the defaulting borrower fails to comply with the bank notice, then the SARFAESI Act gives the bank the power to seize the property of the defaulting borrower.

Can the borrower challenge the bank's actions under SARFAESI?

Yes, the borrower can challenge the bank's actions under SARFAESI by filing an appeal with the Debt Recovery Tribunal (DRT) within 45 days of receiving the notice from the bank.

Are all types of properties eligible for enforcement under SARFAESI?

No, agricultural land is exempted from enforcement under SARFAESI.

What is the role of the District Magistrate in SARFAESI proceedings?

The District Magistrate is responsible for taking possession of the secured assets and handing them over to the secured creditor.

Is there a minimum loan amount required for SARFAESI action?

Yes, the provisions of the SARFAESI Act are applicable only for NPA loans with outstanding dues Rs. 1 lakh.

Can borrowers settle their dues after SARFAESI proceedings have started?

Yes, borrowers can settle their dues after SARFAESI proceedings have started, but they need to do so before the commencement of auction proceedings.

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