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SARFAESI Act, 2002: Giving teeth to Banks and Financial Institutions

A five-judge bench of the Supreme Court held that the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) will be applicable even to cooperative banks, and not just commercial banks and other financial institutions. This decision has been welcomed by cooperative banks in India.

What is the SARFAESI Act about?

Let us understand what the SARFAESI Act is about. Whenever a borrower borrows money from banks or other financial institutions and fails to repay it or defaults, the account of the borrower will be classified as a Non-Performing Assets. With increasing numbers of NPAs, the banking system needed a new regulatory mechanism, something that put them in the driver's seat. The SARFAESI Act was passed in 2002, to empower creditors to recover their dues quickly without delays by taking possession and to deal with them without any court intervention. The most striking feature of the SARFAESI Act is that it empowers banks and other financial institutions to directly auction properties that have been mortgaged with them to recover loans from borrowers who are now defaulters. Before this Act was enacted, financial institutions had to take the long recourse to courts to recover their dues, which is a lengthy, expensive and time-consuming process.

As per the SARFAESI Act, banks and other financial institutions can take possession of the assets and also auction them if debtor the fails to repay the amount due within a time period of 60 days of the notice. Banks can also take over the management of the business of the defaulter. The banks can also additionally appoint a person to manage them. Banks can also package and sell the loans via securitization which can be traded as bonds in the market. This recovery procedure saves banks and financial institutions from the harsh negative effects of litigation. It also provides a detailed framework to Asset Reconstruction Companies that buy distressed assets of companies and are also the other alternative that is available to banks to ensure a more focused and efficient resolution.

The RBI has placed restrictions on several cooperative banks ever since the case of PMC Bank was in discourse. Allowing co-operative banks to take the recourse available to them under the provisions of the SARFAESI Act can expedite the process of liquidation or resolution. For depositors, this judgment would be a major relief as it is easy to recover the money under the SARFAESI Act since the banks and other financial institutions have sweeping powers to take possession and auction the properties of the defaulters if the defaulter does not repay the amount in time even after providing a notice of 60 days.

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