SARFAESI Act, 2002 (Debt Recovery Tribunal)
Debt Recovery Tribunal
Prior to 90s, banks had very hard time recovering bad loans. Because often, borrowers (loan takers) would file frivolous cases in civil courts, then …taarikh pe taarikh, taarikh pe taarikh….. proceeding would go on for years.
So 1993, Government established Debt Recovery Tribunals to deal with NPA matters.
Now borrower cannot approach civil court, they’ve to go to special Debt Recovery Tribunal (DRT).
In 2002, Government came up with new Act, named “SARFAESI Act”.
How it works?
The SARFAESI Act, 2002 gives powers of “seize and desist” 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 (ARCs) 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 (ARCs). RBI has issued guidelines to banks on the process to be followed for sales of financial assets to ARCs.
Background of the act
The previous legislation enacted for recovery of the default loans was Recovery of Debts due to Banks and Financial institutions Act ,1993. This act was passed after the recommendations of the Narsimham Committee – I were submitted to the government. This act had created the forums such as Debt Recovery Tribunals and Debt Recovery Appellate Tribunals for expeditious adjudication of disputes with regard to ever increasing non-recovered dues. However, there were several loopholes in the act and these loopholes were mis-used by the borrowers as well as the lawyers. This led to the government introspect the act and this another committee under Mr. Andhyarujina was appointed to examine banking sector reforms and consideration to changes in the legal system .
- This committee recommended to enact a new legislation for the establishment of securitisation and reconstruction companies and to empower the banks and financial institutions to take possession of the Non performing assets.
Thus, via the Sarfaesi act, for the first time, the secured creditors were empowered to recover their dues without the intervention of the court.
- However, as soon as the act was passed, its implementation was challenged in the court and this delayed its coming into force for 2 years. In the Mardia Chemicals v. Union of India, the Supreme Court upheld the validity of the SARFAESI act was upheld.
Rights of Borrowers
The above observations make it clear that the SAFAESI act was able to provide the effective measures to the secured creditors to recover their long standing dues from the Non performing assets, yet the rights of the borrowers could not be ignored, and have been duly incorporated in the law.
- The borrowers can at any time before the sale is concluded, remit the dues and avoid loosing the security.
- In case any unhealthy/illegal act is done by the Authorised Officer, he will be liable for penal consequences.
- The borrowers will be entitled to get compensation for such acts.
- For redressing the grievances, the borrowers can approach firstly the DRT and thereafter the DRAT in appeal. The limitation period is 45 days and 30 days respectively
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.
Methods of Recovery
According to this act, the registration and regulation of securitization companies or reconstruction companies is done by RBI. These companies are authorized to raise funds by issuing security receipts to qualified institutional buyers (QIBs), empowering banks and Fls to take possession of securities given for financial assistance and sell or lease the same to take over management in the event of default.
This act makes provisions for two main methods of recovery of the NPAs as follows:
- Securitisation: Securitisation is the process of issuing marketable securities backed by a pool of existing assets such as auto or home loans. After an asset is converted into a marketable security, it is sold. A securitization company or reconstruction company may raise funds from only the QIB (Qualified Institutional Buyers) by forming schemes for acquiring financial assets.
- Asset Reconstruction: Enacting SARFAESI Act has given birth to the Asset Reconstruction Companies in India. It can be done by either proper management of the business of the borrower, or by taking over it or by selling a part or whole of the business or by rescheduling of payment of debts payable by the borrower enforcement of security interest in accordance with the provisions of this Act.
Further, the act provides Exemption from the registration of security receipt. This means that when the securitization company or reconstruction company issues receipts, the holder of the receipts is entitled to undivided interests in the financial assets and there is not need of registration unless and otherwise it is compulsory under the Registration Act 1908.
However, the registration of the security receipt is required in the following cases:
- There is a transfer of receipt
- The security receipt is creating, declaring, assigning, limiting, extinguishing any right title or interest in a immovable property.