SARFAESI Act, 2002 Explained: Working, Provisions, Objectives, and Applicability
Loans and Money recovery

SARFAESI Act, 2002 Explained: Working, Provisions, Objectives, and Applicability

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 is a landmark law in India that empowers banks and financial institutions to recover bad loans effectively. The Act allows lenders to seize and sell the assets of defaulting borrowers without the need for lengthy court proceedings, making it a crucial tool in addressing India’s growing non-performing assets (NPA) crisis.

In this blog, we will explain the SARFAESI Act, 2002, covering its history, objectives, key provisions, working mechanism, applicability, recovery methods, borrower’s rights, and the latest amendments. By the end, you will have a thorough understanding of how the Act works and its significance in India’s financial ecosystem.

History of the SARFAESI Act, 2002

The SARFAESI Act was enacted in response to the increasing burden of non-performing assets (NPAs) on banks and financial institutions. In the 1990s, India’s economy witnessed rapid liberalization, but the financial sector struggled with the growing number of bad loans. Banks lacked the legal means to recover unpaid loans effectively, often leading to prolonged legal battles in civil courts.

To address this issue, the Narasimham Committee recommended the establishment of a legal framework that would allow banks to recover their dues without the intervention of courts. In line with these recommendations, the SARFAESI Act was passed in 2002, marking a significant shift in how banks deal with NPAs.

Objectives of the SARFAESI Act, 2002

The primary objective of the SARFAESI Act is to facilitate the recovery of bad loans by empowering financial institutions. Here are the main objectives:

  1. Reducing NPAs: To help banks and financial institutions reduce their non-performing assets by enabling faster recovery of unpaid loans.

  2. Empowering Lenders: To grant banks and financial institutions the authority to enforce their security interests without court intervention.

  3. Establishing Asset Reconstruction Companies (ARCs): To promote the creation of ARCs, which can take over bad loans from banks and work towards their recovery.

  4. Strengthening the Financial System: To create a more stable and robust financial system by encouraging faster recovery of bad loans and better asset management.

  5. Promoting Securitisation: To enable the conversion of loans into marketable securities, which can be sold to investors, thereby helping banks manage risk better.

Important Provisions of the SARFAESI Act, 2002

The SARFAESI Act contains several provisions designed to streamline the process of loan recovery. Here are some of the key provisions:

1. Enforcement of Security Interest (Section 13)

Under this provision, if a borrower defaults, the lender can issue a demand notice giving the borrower 60 days to repay. Failing to comply, the lender can take possession of the secured asset (usually property) and sell it to recover the dues.

2. Asset Reconstruction Companies (Section 3)

The Act allows for the creation of ARCs, which buy bad loans from banks and attempt to recover them through asset reconstruction or sale.

3. Securitisation (Section 5)

Lenders can pool bad loans and convert them into securities, which can then be sold to investors. This allows banks to offload bad loans from their balance sheets.

4. Right to Appeal (Section 17)

If a borrower feels aggrieved by the lender’s actions, they have the right to appeal to the Debt Recovery Tribunal (DRT) within 45 days of the notice.

5. Penalties for Obstruction (Section 32)

Any individual who prevents or obstructs the lender from enforcing their security interest can be penalized with imprisonment or fines.

Working Mechanism of the SARFAESI Act, 2002

Here’s a step-by-step breakdown of how the SARFAESI Act works:

  1. Loan Default: A borrower fails to repay the loan, and the loan is classified as a Non-Performing Asset (NPA).

  2. Issuance of Notice: The lender issues a demand notice under Section 13(2) to the borrower, asking them to repay the dues within 60 days.

  3. Borrower’s Response: The borrower can repay, object, or seek clarification. If they fail to respond or clear the dues, the lender can proceed to enforce their security interest.

  4. Taking Possession: The lender can take physical possession of the secured asset, usually with the help of local authorities.

  5. Auction and Recovery: The lender can auction the property and use the proceeds to recover the outstanding loan amount.

  6. Appeals Process: If the borrower believes the lender has wrongfully taken possession, they can appeal to the Debt Recovery Tribunal (DRT).

Borrower's Rights Under SARFAESI Act, 2002

While the SARFAESI Act grants substantial powers to lenders, it also ensures certain rights for borrowers:

  1. Right to Notice: Borrowers must receive a demand notice from the lender, giving them 60 days to repay the dues.

  2. Right to Appeal: Borrowers can appeal to the Debt Recovery Tribunal (DRT) if they believe the lender has acted unfairly. They can also appeal to the Appellate Tribunal if unsatisfied with the DRT’s decision.

  3. Right to Redemption: Borrowers can reclaim their property by clearing their dues even after the lender takes possession but before the auction.

  4. Right to Fair Valuation: Borrowers have the right to demand that their property is valued fairly before it is auctioned.

Applicability of the SARFAESI Act, 2002

The SARFAESI Act is applicable to a wide range of financial institutions and borrowers:

1. Lenders Covered

  • Banks (public, private, foreign)

  • Financial institutions like NBFCs

  • Housing finance companies

  • Asset Reconstruction Companies (ARCs)

2. Borrowers Covered

  • Corporate and individual borrowers who have taken loans secured by property or other assets.

3. Secured Loans

  • The Act applies only to secured loans, where the borrower has pledged assets as collateral.

4. Exemptions

  • Agricultural land is exempted from the SARFAESI Act, meaning banks cannot take possession of land used for farming purposes under this Act.

Recovery Methods Under SARFAESI Act, 2002

The SARFAESI Act provides multiple methods for lenders to recover bad loans:

  1. Securitisation: Financial institutions can convert loans into marketable securities and sell them to investors.

  2. Asset Reconstruction: Lenders can transfer bad loans to ARCs, which attempt to recover the loans by restructuring or selling the borrower’s assets.

  3. Sale of Assets: Lenders can take possession of the borrower’s secured assets and sell them through an auction to recover the dues.

  4. Management Takeover: In certain cases, lenders can take over the management of the borrower’s business.

SARFAESI Act, 2002 with Latest Amendments

The SARFAESI Act has undergone several amendments to improve its effectiveness. The most significant amendment came in 2016 under the Insolvency and Bankruptcy Code (IBC), which made it easier for ARCs to acquire and manage distressed assets. The amendments allowed for quicker resolution of NPAs and gave priority to ARCs in recovering dues.

Other amendments include:

  • Reduction in Timeline: The amendment reduced the timeline for the resolution of NPAs from 90 days to 30 days, expediting the recovery process.

  • Non-Banking Financial Companies (NBFCs): NBFCs with assets above ₹500 crore were given the same rights as banks under the SARFAESI Act, allowing them to recover their dues effectively.

Limitations of the SARFAESI Act, 2002

While the SARFAESI Act has been a powerful tool for lenders, it is not without its limitations:

  1. Limited to Secured Loans: The Act only applies to secured loans, meaning unsecured loans cannot be recovered using its provisions.

  2. Borrower Harassment: Some critics argue that the Act gives lenders too much power, leading to instances of borrower harassment.

  3. Slow Appeal Process: While borrowers have the right to appeal, the appeals process can be time-consuming and expensive.

  4. Exemption of Agricultural Land: Agricultural land is exempt from the Act, which limits the scope of recovery in rural areas where land is often the only collateral.

Facts About SARFAESI Act, 2002

  1. The SARFAESI Act was passed by the Indian Parliament in 2002 to address the growing issue of NPAs.

  2. It allows lenders to recover bad loans without court intervention.

  3. The Act provides for the creation of Asset Reconstruction Companies (ARCs) to buy distressed loans from banks.

  4. It applies only to secured loans and does not cover loans below ₹1 lakh or where 20% of the loan has been repaid.

  5. Agricultural land is exempt from the Act’s provisions.

Conclusion

The SARFAESI Act, 2002 has transformed the way banks and financial institutions recover bad loans in India. By providing a legal framework that bypasses lengthy court procedures, the Act has empowered lenders to tackle the growing problem of NPAs efficiently. While it has its limitations and challenges, the SARFAESI Act has played a vital role in stabilizing India’s financial sector.

As both lenders and borrowers navigate the complexities of loan recovery, it is essential to understand the rights and responsibilities laid out under the SARFAESI Act. With continuous amendments and evolving case law, the Act remains a cornerstone of India’s efforts to maintain a healthy, functioning financial system.

Understanding RERA and How to File a Complaint under RERA
Property

Understanding RERA and How to File a Complaint under RERA

For a long time, the real estate sector had no regulation. If the consumers faced delays, there was no recourse. Most buyers were at the mercy of the builders as court cases would drag on for long. With the coming of RERA, a proper complaint mechanism has come into existence. Let us see how one can file complaints under RERA.

RERA Complaint Against Builder

RERA imposes certain obligations on the builder or the developer. As a homebuyer, you have certain rights under RERA. If the builder fails to discharge his obligations or violates your rights, then you can file a complaint against the builder. Under RERA, a homebuyer can, in addition to the builder, file a complaint against the following: 

  • Promoter

  • Real estate agent

  • Contractor

  • Intermediary

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If any of the above are found guilty of contravening the RERA, they would have to pay heavy penalties. Key penalties in the RERA are: 

  • Non-registration with RERA attracts a heavy penalty of up to 10% of the project's estimated cost or imprisonment up to 3 years. Sometimes, RERA may impose both imprisonment and a fine. 

  • Furnishing false information also attracts 5% of the estimated cost of construction as a penalty. 

Hence, heavy penalties may be imposed on the builder, promoter, real estate agent, etc., if they are in non-compliance with the RERA.

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RERA Complaint Registration

A homebuyer should have the following details if they wish to register a complaint against the builder: 

  • Details such as name, address etc. 

  • Registration number of the project and the address where it is situated. 

  • The response of the builder. 

  • The relief the homebuyer is requesting.

A buyer may file a complaint with the RERA Authority for any violation or contravention of the provisions of the RERA Act by a builder, developer, promoter or real estate agent. Conditions under which a buyer can file a RERA complaint include:

  • Delay in Possession: If a builder delays delivery of possession of the property, the buyer can file a complaint against the builder to get immediate delivery of possession or get a full refund along with interest.

  • False Advertisement: A complaint can be filed against the developer, promoter, and even the endorsers if false advertisements misled a buyer based on which he/she decided to deposit a sum with the promoter.

  • Advance Payment: A builder can ask for only up to 10% of the cost of the building, apartment, or plot as advance payment. If a builder asks for more than 10%, the buyer can file a complaint against the builder.

  • Improper Registration of a Project: All projects must be registered under RERA. If a builder has sold or is trying to sell an unregistered project, the buyer can file a complaint against the builder.

  • No details about the Project: All details regarding the project including project plan, layout, and government approvals need to be updated on the RERA website. One can file a complaint if a builder or developer doesn't adhere to this provision.

  • Structural Defects: In case of any structural defects in the workmanship and quality of the services, the promoter will have to compensate the amount paid by the allottee. If not compensated, the buyer can file a complaint.

  • Ownership Transfer: A promoter cannot transfer majority rights to any third party. In case he/she is found transferring majority rights to a third party without the consent of the two-third majority of allottees, one can file a complaint.

Typically, a homebuyer has to file a RERA complaint form along with the requisite fee to register his/her complaint. You can follow the given steps to file a complaint under RERA:

  • You can file a RERA complaint form along with the requisite documents and the fee before a RERA or an adjudicating officer. 

  • Once the authorities receive the complaint, they constitute an inquiry bench to hear both the parties involved. 

  • The matter is typically settled within 60 days of the filing of the complaint.

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RERA Online Complaint filing

Many states like Gujarat, Maharashtra, and Karnataka now provide online complaint filing under RERA. The method of filing an online complaint almost remains the same in most states. However, the procedure, applicable fees are different.

To register a RERA complaint online in Gujarat, a complainant must comply with the following steps:

  • Go to the Gujarat RERA portal. On the home page, there will be a link for complaint registration.

  • Once you click on the link, you will be redirected to another page to provide relevant details of the complaint. These details are the same that one would provide in a physical complaint.

  • After filling in the personal details like name, address, contact details, etc., there will be an option for the complainant to attach supporting documents.

  • The complainant must pay a registration fee of Rs. 1000 to be able to submit the complaint. One can avail of any net banking or mobile banking facility for payment. After payment, one has to click the Submit button to successfully register the complaint.

In order to register a RERA complaint online in Maharashtra, a complainant must comply with the following steps:

  • Go to the Maharashtra RERA portal. On the home page, click on the Online Application Menu.

  • One must first log in to be able to access the online complaint form. Therefore, the complainant must create a new registration with an appropriate username and password.

  • Once registration is completed, the complainant must file his/her personal information to proceed with the complaint.

  • After providing relevant personal details, the complainant should find and select Add New Complaints. Here, the complainant would be able to fill in relevant details of the complaint.

  • The complainant must pay a registration fee of Rs. Five thousand to be able to successfully submit the complaint.

For all online portal complaints, once a complaint is successfully registered, both the parties would be called to express their facts and figures surrounding the dispute. The RERA will listen to both parties and will give a verdict on the merits of the case.

The aggrieved party would be given the option to challenge RERA's decision if they are not satisfied with such an order. The aggrieved party must challenge RERA's decision before the High Court.