The finance industry is one of the important players in India's efforts to accelerate its economic development. The legal structure governing business transactions lagged behind changes in the financial industry and in business behaviour. It increased the number of nonperforming assets held by banks and other financial institutions and reduced the recovery rate of defaulted loans.
The Central Government established the Narasimham Committees I and II and the Andhyarujina Committee to examine banking sector reforms and determine whether the legal framework in these areas needs to be altered.
These committees, among others, proposed new legislation for securitisation that would allow banks and financial organisations to seize securities and sell them without court intervention.
What is SARFAESI Act?
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, was enacted to allow banks and other financial institutions to recover uncollectable loans. The act can be used in various ways to address the concern of non-performing assets (NPAs). However, only secured loans are eligible for this. Banks should ask the court to open a civil action for defaulting on unsecured loans.
This law eliminates the need for court participation in secured loan cases. Under this statute, ARCIL, India's first asset reconstruction corporation (ARC), was established.
Procedure under SARFAESI Act
To recover their debts, banks must follow specific procedures before they may repossess a property. The SARFAESI Act procedure is followed in their daily operations. According to the SARFAESI Act, the financial institution has the right to send the borrower a letter requesting that he pay off the debt within 60 days if he cannot repay his loan (including house loans) for six months. The financial institution can sell the distressed property to recover the loan if the borrower fails to fulfil this commitment.
Within 30 days of the day the order is issued, a defaulting borrower who disagrees with the bank's decision may appeal it to the legal appellate body.
The bank can sell or lease the property after taking possession of it. Additionally, it may grant another entity the legal right to the property. The bank's outstanding obligations are paid off first with the sale proceeds. If any money is left over, it is given to the defaulting borrower.
Methods of Recovery under SARFAESI Act, 2002
The act provides three methods for recovering Non- Performing Assets:
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Securitisation- Securitisation entails releasing marketable securities backed by a collection of current assets, such as mortgages or car loans. After becoming a marketable security, an asset may be sold. By creating schemes for acquiring financial assets, a securitisation or asset reconstruction company can raise money from only Qualified Institutional Buyers (QIBs).
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Asset Reconstruction - Asset reconstruction gives asset reconstruction businesses more power. You can manage the borrower's business by selling it or buying it, or you can reschedule debt payments in accordance with the Act's rules.
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Enforcement of security without any intervention of the court - The Act gives financial institutions like banks the authority to demand payment from a borrower's debtor and to provide notices to anyone who have acquired a secured asset from the borrower.
Offences under SARFAESI Act, 2002
The following offences are defined by the SARFAESI Act's Chapter-V under Section 27-30D:
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Failure to provide information about transactions involving the securitization of assets, the reconstruction of assets, and the creation of security interests
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Failure to provide the amendment's details.
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Failing to give sufficient details or clues.
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Failure of SCO and RCO to adhere to RBI directives.
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Any violation of the SARFAESI Act's provisions or any rules made under it, including attempting to violate or encourage a violation.
The SARFAESI Act imposes the following fines under Section 27:
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Each company, officer of the company, lender, and officer of the lender would be subject to a fine of up to Rs. 5000/- for per day the default persists for failing to file the necessary information regarding the aforementioned transactions.
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For each firm and officer of the company that violates RBI instructions, there is a potential fine of up to Rs. 5,00,000 as well as an additional fine of Rs. 10,000 for each day the default continues.
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Any infringement of a SARFAESI Act provision is subject to a maximum one-year prison sentence, a fine, or both.
Union bank of India and Anr. V. State of West Bengal and others 2017
Whether a secured creditor has the right to rely on section 14 of the SARFAESI Act, 2002, following the sale of immovable property under the SARFAESI Act, 2002, based on symbolic possession was the question put forth before the Calcutta High Court. In its ruling on the matter, the court held that the bank, as a secured creditor, is not entitled to pursue an application under Section 14 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act of 2002 to take possession of the property immediately following the issuance of a sale certificate.
Conclusion
In order to comply with the statute's requirements, the SARFAESI Act, 2002, has undergone significant amendments recently. In the past, the courts have contributed to preventing ambiguities regarding how to apply legislative provisions. As a result, the Supreme Court correctly upheld the significant expansion of the SARFAESI Act, 2002's purview. The SARFAESI Act, 2002 is a crucial law for developing the national economy, and expanding its purview is seen as an essential first step in fortifying the nation's financial institutions.