The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), is a landmark legislation enacted to empower banks and financial institutions with the ability to recover non-performing assets (NPAs) without the need for court intervention. The Act was later amended by the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2004, further strengthening its provisions. The SARFAESI Act is considered one of the most effective statutory tools for NPA recovery in India’s financial sector.
Objectives of the SARFAESI Act
The primary objectives of the SARFAESI Act are:
- To enable secured creditors (mainly banks and financial institutions) to enforce security interests efficiently.
- To facilitate the reconstruction and securitisation of financial assets.
- To reduce the burden of mounting NPAs in the Indian banking system by streamlining the recovery process.
Rights of Secured Creditors under the SARFAESI Act
Secured creditors can invoke the provisions of the SARFAESI Act only when a loan account has been classified as a Non-Performing Asset (NPA) in accordance with Reserve Bank of India (RBI) norms.
As per the Security Interest (Enforcement) Rules, 2002, notified on 20 September 2002, certain protocols must be followed by banks to enforce security interests:
- The “Authorised Officer” (AO) designated to enforce the Act must be an officer not below the rank of Chief Manager (or equivalent) as notified by the Board of Directors.
- Once the account is classified as NPA, a demand notice under Section 13(2) of the Act is issued to the borrower and guarantor(s), detailing the amount due and requiring repayment within 60 days of the notice.
- If the borrower submits objections or representations, the bank must respond with reasons for non-acceptance within 15 days.
If the borrower fails to comply within the stipulated period, the secured creditor may take any of the following measures under Section 13(4):
a) Take possession of the secured asset, including the right to lease, assign, or sell it. [Section 13(4)a]
b) Assume management of the secured asset if it constitutes a substantial part of the borrower’s business. [Section 13(4) b]
c) Appoint a person to manage the secured asset taken into possession. [section 13(4)c]
d) Issue written notice to third parties owing money to the borrower, directing them to pay directly to the secured creditor. (This power can only be exercised after the 60-day period post-Section 13(2) notice has expired.)[ [section 13(4)d]
Procedure for Sale of Secured Asset
When disposing of secured assets through public auction or tender, the following procedures are prescribed:
- Publish a sale notice in two leading newspapers (one in vernacular language) with wide circulation in the area.
- Affix the sale notice at a conspicuous place on the property.
- Upload the notice on the bank’s website and, as per Ministry of Finance guidelines, on the government portal www.tender.gov.in for wider publicity.
Additional Guidelines:
- Service of Notices: The 60-day period for the demand notice begins from the date of service, not from the date printed on the notice.
- Deceased Borrower: In case the borrower is deceased, notices must be served to all known legal heirs.
- Possession Notice: Upon taking possession, the notice must be:
- Delivered to the borrower.
- Affixed on the outer door of the property.
- Published in two local newspapers (one vernacular) within 7 days.
- Sale Notice: To be issued with full details and served similarly as the possession notice.
- Recordkeeping: The AO must retain proof of service (acknowledgements, PODs, registered post receipts, etc.) for all notices served.
If physical possession cannot be taken, the bank must approach the Chief Metropolitan Magistrate or District Magistrate under the Act to obtain possession.
If the enforcement proceeds are insufficient to recover the full debt, the bank may initiate recovery before the Debt Recovery Tribunal (DRT) or a competent court within the limitation period.
A 30-day sale notice must be issued to the borrower/mortgagor after 20 days of taking possession, enabling them to approach DRT within 45 days to seek a stay on the sale.
Procedure for Movable Assets (Action Flow Chart)
- Take possession and record via Panchanama (Rule 4(1) & 4(2)).
- Conduct a detailed inventory.
- Ensure safe custody, either directly or via an agent (Rule 4(3)).
- If assets are perishable or expensive to maintain, sell immediately (Rule 4(3)).
- Arrange for protection, preservation, and insurance (Rule 4(4)).
- Obtain valuation and fix a reserve price.
- Sell via tender, auction, or private treaty to maximise returns (Rule 6).
- Issue a 30-day sale notice to the borrower (Rule 6(2)).
- Advertise in two newspapers (including one vernacular) for public auction.
- On full payment, issue a sale certificate for the movables sold.
Extension of SARFAESI Act to NBFCs
The Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) was established under Section 20 of the SARFAESI Act. The latest amendments extend the Act’s provisions to include Non-Banking Financial Companies (NBFCs) as secured creditors.
As per the amendment:
- Secured creditors cannot enforce their rights unless their interest is registered with CERSAI.
- Upon registration, priority is granted to such creditors in debt recovery.
For a detailed understanding of registration, enforcement rights, and priority of claims, refer to the SARFAESI Act Amendment, 2019.
Case Study: Supreme Court on Simultaneous Proceedings – Transcore v. Union of India & Indian Overseas Bank
The Supreme Court addressed several important issues related to the concurrent application of SARFAESI and DRT Acts:
a) Can banks proceed under SARFAESI even after initiating recovery under the DRT Act, 1993?
b) Does Section 13(4) allow actual possession of immovable property?
c) Is an ad valorem court fee required for an application under Section 17(1) in the absence of specific SARFAESI Rules?
Judgment:
The Supreme Court ruled that withdrawal of the OA (Original Application) under the DRT Act is not a prerequisite to initiate proceedings under the SARFAESI Act. The decision to seek leave to withdraw lies at the discretion of the bank, based on the facts of each case.
Originally posted: 23 July 2014 | Updated: 24 May 2025
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