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Understanding the Sarfaesi Act, 2002: Empowering Creditors and Managing Non-Performing Assets

  • Initially we have to understand the full form of the said act Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest.
  • SARFAESI ACT, allows banks and other financial institutions to auction commercial or residential property to recover loans which becomes NPA.
  • Under this act, the secured creditors (banks or financial institutions) have many rights for enforcement of security interest under section 13 of the Sarfaesi Act, 2002.

How The Act Works:
  • The Bank's asset is the loan from which it gets profit. Thus, how the system works. Bank gives loans to customers. If that person is unable to pay back the loan in this case the assets of the bank struck in the market i.e. non-performing assets (NPA).
  • The Asset which is not performing or Asset stuck in the market is NPA. In this case how, the bank & other financial will recover the NPA. Thus, this aspect is dealt in the Sarfaesi act, 2002.
  • Before the enactment of Sarfaesi act, 2002. The situation prevailed can be explained with the example: if the banks has given a loan with security to a customer. After sometime, customer does not pay his debt and the account becomes NPA. Then the bank can only recover the loan amount through that security only but it required an authorization from Civil courts. Before Sarfaesi act if bank want to recover an NPA account it use to take 4 to 5 years. Bank were not provided decision making authority in respect to the security to recover the debt. Which was then felt by the law maker to make changes with this regard.
  • Then the Sarfaesi Act, 2002 came into existence. Wherein the secured creditor was given power to recover the NPA accounts of secured debts by selling or auctioning it.
  • The secured creditors didn't need to go to the court of law for taking possession of security for recovery of secured loan which became NPA.
  • But before proceeding under this Act. When the secured creditor thinks that the customer's account can become NPA. The secured creditor has to give 60 days of Notice to the debtor stating that if the debtor does not pay the debt. The bank will take possession of the property or the property will be seized to recover the debt.

Exception To Power Of Secured Creditor/Bank Given Under Sarfaesi Act Or This Act Is Not Applicable To:
  • Loan below 1 Lakh.
  • Loan on agriculture.
  • Unsecured loans like Personal loans or Educational loan of up to 7.5 lakh with Guarantee.
  • Where 80% of Loan amount is returned then this act is not applicable.
  • Where remaining debt is below 20% of the original principle.
The Role Of Asset Reconstruction Company (ARC):
  • The term ARC is defined under section 2 (ba) of the Sarfaesi Act,2002. It means that a company is registered with the Reserve Bank of India. Under section 3 of the Sarfaesi Act for the purpose of carrying on business of asset reconstruction or securitization or both is called as ARC.
  • When the bank seizes the property for recovery of NPA. Then the Bank has to recover monetary value. So, they can auction the property. There are cases where property is not actionable by the actioner because of some reason like bad design. Then in this type of case, the banks give the assets to ARC. The ARC restructures the assets by constructing mall, and apartments or modifying them to be actionable property. They take their expenses as per the terms agreed between them. The bank recovers its monetary value by leasing or selling such Reconstructed property by ARC.
  • The ARC sells some part of the property for recovery of their expenses. Then they give it to banks/financial institutions. The ARC does so because they invested their money in the property and the remaining property is handed over to Banks. It's the bank's decision either to sell or get the rent out of it.
  • The ARC was introduced in 2002. First Asset Reconstruction Company was ARCIL(Asset Reconstruction Company of India Limited). 100 crores are required to registered as an ARC. Then the RBI gives a License.


The SARFAESI Act aimed to facilitate the bank and financial institutions to recover NPA without procedural constraints and for the speedy recovery of the asset. Here the assets are being the loans given by the banks which becomes NPA. Before this act, if banks want to take possession of security to recover a loan. It requires authorization of court to take possession.

The Act ensures that the Banks are provided with decision making power with respect to recovery secured assets (loans) with respect to taking possession and auctioning of that property. Thus, the Act ensures fast-tracking of process of recovery of secured loan.

Elements Of Banking And Insurance By Jyotsna Sethi Nishwanbhatia.
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