The SARFAESI Act gives banks powers to recover loans from defaulting borrowers. It allows banks to issue a 60-day notice for loan repayment. If unpaid, banks can take possession of secured assets and sell them to recover dues. The Act established Asset Reconstruction Companies regulated by RBI to acquire NPAs from banks. ARCs must be registered with RBI and meet net worth requirements. They can issue security receipts to qualified buyers and investors for acquired assets. The DRT provides an avenue for borrower appeals, which must be filed within 45 days with 50% of claimed dues deposited.

1. THE SECURITISATION AND RECONSTRUCTION OF
FINANCIAL ASSESTS AND ENFORCEMENT OF
SECURITY INTEREST ACT, 2002

2. Preamble of the Act
An Act
to regulate
securitisation and reconstruction of financial assets
enforcement of security interest
to provide
for a Central database of security interests created on property
rights,
for matters connected therewith or incidental thereto.

3. The SARFAESI Act was enacted with a distinct purpose to facilitate banks and
financial institutions to recover dues in a speedy manner by enforcement of
security interest without intervention of the court. The object of the debt
recovery laws is to reduce non-performing assets and increase liquidity in the
market.

4. The SARFAESI Act, 2002 gives powers of ‘seize’ to banks. Banks can give a notice in
writing to the defaulting borrower requiring it to discharge its liabilities within 60 days. If the
borrower fails to comply with the notice, the Bank may take recourse to one or more of the
following measures:
•Take possession of the security for the loan;
•Sale or lease or assign the right over the security;
•Manage the same or appoint any person to manage the same.
The SARFAESI Act also provides for the establishment of Asset Reconstruction Companies
regulated by RBI to acquire assets from banks and financial institutions.
The Act provides for sale of financial assets by banks and financial institutions to asset
reconstruction companies. RBI has issued guidelines to banks on the process to be followed for
sales of financial assets to Asset Reconstruction Companies.

5. Stressed
assets
NPAs
interest or principal is not
repaid by the borrower
during a specified time
period (90 days)
Substandard
Asset (≤12
months)
Doubtful
Asset(≥12-
36 months)
Loss Asset
(>36
months)
Source: rbi.org.
Guidelines on Sale of Stressed Assets
by Banks

6. Originator means
• the owner of a financial asset which is acquired by
an asset reconstruction company for the purpose
of securitisation or asset reconstruction;

7. PRE-CONDITIONS(sec 31):
The Act stipulates four conditions for enforcing the rights by a creditor:
The debt is secured;
The debt has been classified as an NPA by the banks
The outstanding dues are one lakh and above and more
than 20% of the principal loan amount and interest there
on;
The security to be enforced is
not an Agricultural land.

8. Sec. 3 Registration of Asset Reconstruction Company
Conditions for carrying on business by Securitisation and Asset Reconstruction Company
Obtain the
Certificate of
registration by
fulfilling following
conditions
Having Net owned funds not less than
1. 2 cr (or higher as notified by RBI)
a) that the ARC has not incurred losses in any of the three preceding financial years;
(b) that such ARC has made adequate arrangements for realisation of the financial assets acquired for the purpose of
securitisation or asset reconstruction and shall be able to pay periodical returns and redeem on respective due dates on
the investments made in the company by the [qualified buyers] or other persons;
(c) that the directors of ARC have adequate professional experience in matters related to finance, securitisation and
reconstruction;
[(d) * * *]
(e) that any of its directors has not been convicted of any offence involving moral turpitude;

9. Q. If certificate of registration of ARC is cancelled by RBI, then to
whom such ARC can make appeal?
(i) Supreme Court
(ii)CG/Ministry of Finance
(iii)High Court
(iv)DRT
Status of ARC to be continued despite rejection of registration application or cancellation of
registration certificate
• in case ARC holds investments of qualified buyers.
• until it repays the entire investments held by it (together with interest, if any) within such period as
the Reserve Bank may direct.

10. Other functions of ARC (Section 10)
 Any ARC may-
 act as an agent for any bank or financial institution for the purpose of recovering their dues
from the borrower on payment of such fees or charges as may be mutually agreed upon
between the parties;
 act as a manager referred to section 13(4)(c) on such fee as may be mutually agreed upon
between the parties;
 act as receiver if appointed by any court or tribunal

11. Obligor means  The person whose obligation is to pay.
It means borrower or his nominee or his surety .

12. Q. To whom ARC may offer security receipts under the Act:
(i) To qualified buyers
(ii) To investors specified by RBI
(iii) to qualified buyers or such other category of investors including non-
institutional investors as may be specified by the RBI

13. , the Chief
Metropolitan
Magistrate, in case
of Metro cities
Chief Metropolitan Magistrate or District
Magistrate to assist secured creditor in taking
possession of secured asset (Section 14)
The secured creditor may, for
the purpose of taking
possession or control of
secured asset, request, in
writing
or the District Magistrate
within whose jurisdiction
any such secured asset or
other documents relating
thereto may be situated or
found, to take possession
thereof

14. Q. How many day’s notice period is required by ARC to be given to
borrower before enforcing security interest?
(i) 30 days
(ii) 60 days
(iii)90 days
(iv)120 days

15. Application against measures to
recover secured debts DRT
45 days
Time period for disposal of application by DRT
Within 60 days to max 4 months
DRAT
Within 30
days
When shall appeal be
entertained?
Only when the borrower has
deposited with the Appellate Tribunal
fifty per cent. of the amount of debt
due from him,
as claimed by the secured
creditors or
determined by the DRT
Which
ever is
less
The % may be reduced to 25% by DRAT for
reasons to be recorded in writing

16. Right of enforcement of securities (Section 26D)
 No secured creditor shall be entitled to exercise
the rights of enforcement of securities under
Chapter III unless the security interest created in
its favour by the borrower has been registered with
the Central Registry.

17. Priority to secured creditors (Section 26E)
 After the registration of security interest, the debts
due to any secured creditor shall be paid in
priority over all other debts and all revenues,
taxes, cesses and other rates payable to the
Central Government or State Government or local
authority.
 However such priority shall be subject to the
provisions of the Insolvency and Bankruptcy Code,
2016, where insolvency or bankruptcy proceedings
are pending in respect of secured assets of the
borrower.