SARFAESI Act, 2002
The SARFAESI Act full form is – “Securitization and Reconstruction of Financial Assets and Enforcement
of Security Interest Act”. The SARFAESI Act allows banks and other financial institutions for auctioning
commercial or residential properties to recover a loan when a borrower fails to repay the loan amount.
Thus, the SARFAESI Act, 2002 enables banks to reduce their Non-Performing Assets (NPAs) through
recovery methods and reconstruction.
The SARFAESI Act provides that banks can seize the property of a borrower without going to court
except for agricultural land. SARFAESI Act, 2002 is applicable only in the cases of secured loans where
banks can enforce underlying securities such as hypothecation, mortgage, pledge etc. An order from the
court is not required unless the security is invalid or fraudulent. In the case of unsecured assets, the
bank would have to go to court and file a civil case against the defaulters.
Formation of SARFAESI Act, 2002
SARFAESI Act, 2002 was circulated:
To regulate securitization and reconstruction of financial assets.
Enforcement of the security interest for.
Matters connected therewith or incidental thereto.
It extended to the whole of India. Amendment in the (SARFAESI) Act, 2002 vide the enforcement of the
Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016. It is
an Act to further amend four laws:
1. Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002 (SARFAESI).
2. Recovery of Debts due to Banks and Financial Institutions Act, 1993 (RDDBFI).
3. Indian Stamp Act, 1899.
4. Depositories Act, 1996, and for matters connected therewith or incidental thereto.
Objectives of SARFAESI Act, 2002
Efficient or rapid recovery of non-performing assets (NPAs) of the banks and FIs.
Allows banks and financial institutions to auction properties (say, commercial/residential) when
the borrower fails to repay their loans.
Applicability Of SARFAESI Act, 2002
The Act deals with the following:
Registration and regulation of Asset Reconstruction Companies (ARCs) by the Reserve Bank of India.
Facilitating securitization of financial assets of banks and financial institutions with or without the
benefit of underlying securities.
Promotion of seamless transferability of financial assets by the ARC to acquire financial assets of banks
and financial institutions through the issuance of debentures or bonds or any other security as a
debenture.
Entrusting the Asset Reconstruction Companies to raise funds by issue of security receipts to qualified
buyers.
Presentation of any securitization company or asset reconstruction company registered with the
Reserve Bank of India as a public financial institution.
Classification of the borrower’s account as a non-performing asset in accordance with the directions
given or under guidelines issued by the Reserve Bank of India from time to time.
An appeal against the action of any bank or financial institution to the concerned Debts Recovery
Tribunal and a second appeal to the Appellate Debts Recovery Tribunal.
Role of SARFAESI Act, 2002
How SARFAESI Act, 2002 works
SARFAESI Act, 2002 provides power to a bank or financial institution to seize the property of a defaulting
borrower. If the loan borrowers make any default in repayment of a loan or a loan installment, the
financial institution can classify the account as Non-Performing Asset (NPA). The banks or financial
institution can issue notices to the defaulting borrowers to discharge their liabilities within 60 days
period. When the defaulting borrower fails to comply with the bank or financial institution notice, then
the SARFAESI Act gives the following recourse to a bank:
1. Take possession of the loan security
2. Lease, sell or assign the right to the security
3. Manage the same or appoint any person to manage the same.
4. The Act also provides for the establishment of ARCs, regulated by the RBI, to acquire assets from
banks and other financial institutions.
Right of Borrwer Under SARFAESI Act, 2002
The borrowers have the following rights:
1. Borrowers can remit the dues and avoid losing their securities before the sale is concluded.
2. Borrowers will get compensation for the default of an officer.
3. SARFAESI Act Section 17 provides that borrowers can approach the Debt Recovery Tribunal to
rectify their grievances against the creditor or authorised officer.
