SARFAESI Act, as the name of the act suggests, deals with 3 matters:
- Securitisation [Sec 2 (1) (z)]
- Reconstruction of Financial Asset [Sec 2 (1) (v)]
- Enforcement of Security Interest [Sec 2 (1) (zf)]
Securitisation is a kind of agreement between Securitisation Company (SCo.)/ Reconstruciton Company (RCo.) with the Originator (Banks/ Financial Institutions) where in Originator trasfer the Financial Assests (FA: Loans given/ Debtors) to the SCo./ RCo (aka SPV/SPE) these SCo./ RCo. sell these FA as security to the investors (in India investors are QIB). After the transfer of the FA to the SCo./ RCo. the Originator sends Notice to the Obligor (in the simple words Debtors of the bank who has taken loan etc) and after this the Obligor have to pay the instalments etc to the SCo./ RCo. instead of the Bank/ Fin. Institute.
Enforcement of Security Interest is more with which a common person may be more affecd. Below is the analysis:
1) This Act gives immense power to the secured creditors (Banks/ Fin Inst) u/s 13 chapter-III of the Act, Practically which may be harsh from Borrowers point of view. This Act has been enacted keeping in mind the interest of Banks/ Fin Inst.
2) If banks has classified the account as NPA (i.e is instalments overdue for 90 days or more) Bank will serve Demand Notice to the borrower to pay FULL amount WITHIN 60 Days, If borrower doesn't pay they Secured Creditor can proceed to take Possession of Secured Assest if borrower is running a company/business then Secured Creditor can Acquire the Company also.
3) Of course the Right to make representation/ Objection is given to the Borrower But it is Kind of Formaility (To make borrower happy that they have some Right) Practically This Right is merely an eyewash. If you think practically you are objecting a decision of a Bank at the same time Complaining/ registering your objection with the same bank. As per the act the power to decide whether the objection is tenable or not Rests with the Banks. Do you think Bank will liesten the Objection. Also, the bank's action is taken by the executives (may be Loan/ Credit manager who are under tremendous pressure to meet the target of recovery/ grant of loan) My question is how effetive this right of representation is?
4) Practical difficulties faces by borrower, specifically by Individaul taken Home loans and hypothecated/ mortgaged the Flat/ home with Bank thereby bank becomes Secured Creditor:
a) In order to meet the Loan Target, the Loan manager if miscalculate/ incorrectly assesses the value of property or worthiness or Ability of borrower to Reapy and gives him loan over his requirement keeping in mind the Enforcement of Security Interest in case borrower doesnot pay the THREE (3)Instalment (after which an Account is classified as NPA by Bank).
b) Non-payment may be due to ANY Reason (take an instance, where the borrower has gone Abroad for 6 monhts or more and the bank from where he was paying the instalments freezed the account because there is new guidelined from the RBI or other authority like KYC which the customer has to confirm else the accout's operation will be freezed whereas the account holder is not in India he tried but could not restore the account in 2-3 months due to which he is declared defaulter by the Secured Creditor
c) Then Bank has all right to serve Demand Notice and ask to pay full amount in 60 days (almost 2 months)failuer to pay will lead to possesion of property.
5. The Bank has right to Take the Possession and Recover the amount and not only this But if in the OPINION of BANK there are some cost incurred and allied/ incidental expenses then those can also be Recovered may be by disposal of secured assest or by demanding from Borrower. If Borrower is NOT able to Pay then the GUARANTOR.
The only thing is If Borrower pays the Entire money even at the Last moment of Auction/ Sale of property, which in the "opinion" Bank satisfies its claim, his property must be returned to him.
5. Act Says Borrower can make appeal to the DRT. But BEFORE that he has to DEPOSIT at leat 3/4 of the amount of outstanding. This is discouragin section from Borrowers point of view. Because it may so happen that borrower has so much of amount but he will receive that amount say after 60 day or He arranged the amount of 75% outstanding on the 50th day from the order of enforcement of security by bank then on 50th day he has 75% of amount but can not appeal as the time to appeal is 45 days.
6. No Court has juridiction to trail SARFAESI Act 2002 cases.
7. Most of the cases the Borrower is Retail borrower with small amounts say 1,00,000/- to 30,00,000/- .
8. Now, Keeping in mind the Scenario in India (how the powers are misused, like the bank has power to appoint Recovery Agents but Everyone Knows how they Treat the defaulter Borrower whereas they are suppose to talk politily and approach must be kind of Request and not force) I am not sure how tranparently and honestly this Section 13 will be implemented. One has to keep the Loan manager happy (may be. PLEASE OBSERVE (I believe)hencforth there will be sudden REDUCTION in tge NPA amounts of the Banks and there performance will be inporved in terms of recovery of loans.
9. Securitisation is ONE OF THE KYE REASON for the Recent Financial Turmoil/ Recession. Granting of loan on overpriced security then later on those Loans were transferred to Securitisation Co. (SPV/ SPE) who sold it further by way of Security. Whereas the Borrower/ Obligor was not able to pay the loan and since the secured asses was overpriced the SPV/SPE could not realise money from the Sale of secured Assest causing Huge Loss and this happened in such a large Volume that it landed many bank to Bankruptcy.
Para 8 is just for the information and is not in the Context of SARFAESI Act/ India.
CA. VK Dwivedi