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Target 30+ in General Awareness: SARFAESI Act

Target 30+ is series of static awareness in context of current affairs. This will support your preparation  along with the power capsule provided by our team. In this article we are discussing about SARFAESI Act.

What is SARFAESI Act?

The acronym stands for Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act of 2002, or SARFAESI Act, is a legislation that permits banks and other financial institutions to successfully recover bad debts. An act to regulate securitization and reconstruction of financial assets and enforcement of security interests, and to provide for a central database of security interests created on property rights, and for matters associated with or incidental thereto. Under this act, India’s first Asset Reconstruction Corporation (ARC), ARCIL, was established. The SARFAESI Act of 2002 will now apply to all state and multi-state co-operative banks, according to the Supreme Court of India. Banks can now seize and sell defaulters’ properties to recoup their debts.

SARFAESI Act – It’s Provisions:

  • If a borrower of financial assistance defaults on a loan or an instalment, and his account is categorised as a non-performing asset (NPA) by a secured creditor, the secured creditor may request written notice before the term of limitation expires.
  • Unsecured loans, loans under ₹100,000, and debts that are less than 20% of the initial principle are exempt from the statute.
  • This law permitted the formation of asset reconstruction companies (ARCs) and the sale of non-performing assets by banks to ARCs (which are regulated by the RBI).
  • Without the consent of a court, banks are authorised to take ownership of collateral property and sell it.
  • To conclude, the SARFAESI Act gives financial institutions the authority to “seize and desist.” They should send a notification to the delinquent borrower, requesting payment within 60 days.
  • If the debtor does not cooperate, the bank may take one of the following three actions:-

1) Take control of the loan security.

2) Sell, lease, or assign the security’s right.

3) Take care of the asset or appoint someone to do so.

Functions under the Act:

  • The Reserve Bank of India registers and regulates Asset Reconstruction Companies (ARCs).
  • Facilitating the securitization of banks’ and financial institutions’ financial assets, with or without the use of underlying securities.
  • The ARC promotes the seamless transferability of financial assets by issuing debentures, bonds, or any other instrument as a debenture to buy financial assets from banks and financial organisations.
  • By entrusting the Asset Reconstruction Companies with the task of raising cash through the sale of security receipts to qualified buyers, the Asset Reconstruction Companies will be able to raise funds.

SARFAESI Act – All Amendments Till Now:

  • The Central Government passed a law in 2013 bringing cooperative banks under the SARFAESI Act of 2002.
  • The Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016, altered the statute once again.
  • The Supreme Court also held that co-operative banks that engage in banking activities are subject to Sections 5 (c) and 56 (a) of the Banking Regulation Act of 1949, which are laws related to List I Entry 45. (Union List).

What It Brings:

The SARFAESI Act enables a secured creditor to enforce his security interest without the involvement of courts or tribunals. In addition to these, there are voluntary mechanisms such as Corporate Debt Restructuring and Strategic Debt Restructuring, which allow banks to collectively restructure borrowers’ debt (including changing loan repayment schedules) and take over a company’s management.

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