Banks invoke Sarfaesi Act

Context

Recently, Banks have invoked the Sarfaesi Act against telecom infrastructure provider GTL to recover their pending dues.

What is the Sarfaesi Act?

• The Sarfaesi Act of 2002 was brought in to guard financial institutions against loan defaulters.
• To recover their bad debts, the banks under this law can take control of securities pledged against the loan, manage or sell them to recover dues without court intervention.
• The law is applicable throughout the country and covers all assets, movable or immovable, promised as security to the lender.
  

Powers given to the banks under the law

• The Act comes into play if a borrower defaults on his or her payments for more than six months.
• The lender then can send a notice to the borrower to clear the dues within 60 days.
• In case that doesn’t happen, the financial institution has the right to take possession of the secured assets and sell, transfer or manage them.
• The defaulter, meanwhile, has a recourse to move an appellate authority set up under the law within 30 days of receiving a notice from the lender.
• According to a 2020 Supreme Court judgment, co-operative banks can also invoke Sarfaesi Act.
• According to the Finance Ministry, the non-banking financial companies (NBFCs) can initiate recovery in Rs 20 lakh loan default cases.

Modes of recovery under the SARFAESI Act

• Securitisation: Securitization is the practice of pooling together various types of debt instruments (assets) such as mortgages and other consumer loans and selling them as bonds to investors.
• Asset reconstruction: Asset reconstruction is the activity of converting a bad or non-performing asset into performing asset with the help of Asset reconstruction companies.
• Enforcement of security without the interruption of the court: If the borrower defaults, the bank may enforce security interests by:
• Take possession of the security
• Sale or lease or assign the right over the security
• Appoint Manager to manage the security
• Ask any debtors of the borrower to pay any sum due to the borrower.

Significance

• Lengthy route: Before the law was enacted in December 2002, banks and other financial institutions were forced to take a lengthy route to recover their bad debts.
• Slow recovery: The lenders would appeal in civil courts or designated tribunals to get hold of security interests to recovery of defaulting loans, which in turn made the recovery slow and added to the growing list of lender’s non-performing assets.
• Co-operative banks: Considering their size, for the smooth functioning of these co-operative banks, speedy recovery of defaulting loans is critical.
• Allowing co-op banks recourse to the SARFAESI Act can expedite the process of liquidation or resolution.
• 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.