Banking crises occur when many depositors withdraw their money from banks simultaneously due to lack of trust in the bank's ability to repay deposits. Banking crises are caused by bank runs, stock market bubbles and crashes, regulatory failure, and economic contagion between interconnected economies. The SARFAESI Act of 2002 allows banks to recover non-performing assets like secured property from defaulting borrowers through securitization, asset reconstruction, or enforcing security without court intervention.

1. Banking Crisis/BankingPanics

2. Banking crises are when there are widespread bank runs: an abnormal
number depositors try to withdraw their deposits because they don’t trust
that the bank will have the deposits for withdrawal in the future.
• Banking crises are not a new economic phenomenon, and similarly are not
the only source of financial crises.
• Over the course of the past two centuries there have been a surprisingly
large number of financial crises, as demonstrated in the attached figure.
• In understanding banking crises over time, it is useful to identify the
causes in context with historic examples of banking collapses.
•

3. Banks can fail for several different reasons:
• Bank Run: A bank occurs when many people try to withdraw their deposits at the same
time. As much of the capital in a bank is tied up in investments, the bank’s liquidity will
sometimes fail to meet the consumer demand. This can quickly induce panic in the
public, driving up withdrawals as everyone tries to get their money back from a system
that they are increasingly skeptical of. This leads to a bank panic which can result in a
systemic banking crisis, which simply means that all of the free capital in the banking
system is withdrawn.
• Stock Market Positive Feedback Loops: One particularly interesting cause of banking
disasters is a similar positive feedback loop effect in the stock markets, which was a
much more dynamic factor in more recent banking crises (i.e. 2007-2009 sub-prime
mortgage disaster). John Maynard Keynes once compared financial markets to a beauty
contest, where investors are merely trying to pick what is attractive to other investors.
There is a profound truth to this, creating an interdependent and potentially self-fulfilling
investment thought process. This can create dramatic rises and falls (bubbles and
crashes), which in turn can throw banks with poorly designed leverage into huge losses.

4. • Regulatory Failure: One of the simplest ways in which bank crises can
occur is a lack of governmental oversight. As noted above, banks
often leverage themselves to capture gains despite extremely high
risks (such as over-dependence on derivatives).
• Contagion: Due to globalization and international interdependence,
the failure of one economy can create something of a domino effect.
In 2008, when the U.S. economy collapses, the reduced buying power
and economic output from that economy dramatically damaged all
economies dependent upon it (which includes most of the world).
This is called contagion.

6.  The SARFAESI Act, 2002 empowers Banks / Financial Institutions to recover their nonperforming assets
without the intervention of the Court
Objective of SARFAESI act 2002
 Expeditious recovery of non-performing assets (NPAs) of the banks and FIs.
 To allow banks and financial institutions to auction properties (residential and commercial) when
borrowers fail to repay their loans.

7. When do properties fall under this Act?
 When a loan is defaulted and certain conditions are not met, banks declare the loan as
NPA and AUCTION it.
 The provisions of this Act are applicable only for NPA loans with outstanding above Rs
1.00 lac. NPA loan accounts where the amount is less than 20% of the principal and
interest are not eligible to be dealt with under this Act.

8. What the act says:
uThe Act empowers the Bank
 To issue demand notice to the defaulting borrower and guarantor, calling upon them to discharge
their dues in full within 60 days from the date of the notice
 To give notice to any person who has acquired any of the secured assets from the borrower to
surrender the same to the Bank
 To ask any debtor of the borrower to pay any sum due or becoming due to the borrower.

9. Alternative mechanisms to recover Non –
Performing Assets [NPA]
The Act provides three alternative methods for
recovery of non-performing assets, namely: -
 1. Securitization
 2. Asset Reconstruction
 3. Enforcement of Security without the intervention
of the Court

10. Securitization
u Acquisition of financial asset by securitization
company
u Process where non-liquidated financial assets are
converted into marketable securities and are sold
to investors
u Process of converting the receivables and other
assets into securities (placed in market for trading)
Meaning:

12. • Securitization of financial assets: Acquire financial assets by issuing
bonds or Agreements.
• Reconstruction of financial assets: Take necessary measures for debt
restructure, settlement, sale etc. as per guidelines issued by RBI from
time to time.
• Enforcement of security interest: Enforcing security interest by the
creditor with the intervention of the court.