Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act - 2002(SARFAESI)
SARFAESI enables the banks to seize and sell the properties secured to the bank without the intervention of courts resulting in realization of the amount due in NPA accounts and reduction of NPAs. As per the act, officers with a rank of Chief Manager and above are empowered to act as Authorized Officer to initiate proceedings which includes issue of notices, taking possession of the property and sale of property except the following:
- Where the outstanding liability in the account does not exceed Rs 1.00 lakhs
- Any security interest created in agriculture land
- Pledge of movables / Lien on any goods
- Amount due is less than 20% of the principal amount and interest
- Creation of Security Interest in any Air Craft / Vessel
- Any conditional sale, hire purchase or lease or any other contract in which no security interest is created
- Any right of unpaid seller / Any properties not liable for attachment /sale under section 60 Civil Procedure Code.
The prerequisite should be that notice be issued one month after identification of NPA advising the borrower/mortgagor to pay the entire amount due within 60 days from the date of receipt of the notice. In case, more than one borrower, notice shall be sent to each one of them. If the borrower avoids notice, the same may be served by publishing in two leading Newspapers (English and Vernacular language). On expiry of 60 days notice period and on default of the payment, possession shall be taken of the property mentioned in Sec.13 (2) notice and the notice of the same shall be give to the borrower and general public in two newspapers – English and vernacular Language. The time prescribed for considering the representation / objections by the borrower on receipt of the notice is fixed as 15 days. The Possession of moveable property may be taken by taking inventory in the presence of two witnesses. Authorized Officer shall keep the property either in his own custody or in the custody of any person authorized or appointed by him who shall take as much care of the property in his custody as an owner of the property. Insurance of secured assets and their valuations are to be done before sale of seizure of secured assets. Security agents can be engaged while seizing the secured assets. Authorized Officer may sell the secured assets of which the possession is taken by obtaining quotations from the parties; by inviting tenders from the public; by holding public auction; by private sale. Auction notice is to be kept on the bank’s website. If sale is by inviting tenders from the public or public auction the same has to be published in two news papers viz., English and another in Vernacular language. Sale can be affected only after issuing 30 days notice to the borrower / mortgagor. If the property is subject to speedy decay the Authorized Officer may sell it immediately. The authorized Officer cannot sell the property less than the reserve price. If the entire liability of the bank is not cleared after affecting the measures under the Act, the bank is to file a suit or application before the court or DRT for recovery of the balance amount of loan. In the accounts where the borrower failed to honour his commitment under the compromise/OTS, then compromise/OTS permitted should be withdrawn before initiating action under the Ordinance. In case of resistance from the borrower to hand over the possession of assets, such resistance should be recorded in the presence of two witnesses and application should be made under Sec.14 of the act to Chief Metropolitan Magistrate/Dist. Magistrate seeking their assistance for taking possession of secured assets.
Recent Developments: The Enforcement of Security Interest and Recovery of Debt Laws (Amendment) Bill, 2011 was passed in the Loksabha which allows the banks to acquire immovable properties from the borrower so that they can sell the assets at a later date. Sometimes there are no buyers for a property or there is a cartelization from bidders, who deliberately quote lower price thus undervaluing it. The amendment will ensure that banks do not get into the situation of distress sale and get the right pricing for the assets on sale. The amendment states that banks will be heard in Debt Recovery Tribunals before granting any stay on recovery of loans from borrowers. This will ensure that the law is not misused by the borrowers to delay the settlements and payment of dues. Further, the amendment allows Asset Reconstruction Companies (ARC) to convert a part of the debt into equity. This could be a win-win situation for the borrower as well as the ARC. The borrower stand to gain because his outstanding liability decreases to the extent of equity conversion and the ARC will also become part of the management so as to aid in the turnaround of the stressed company.
Credit Information Bureau India Limited (CIBIL): It is a repository of information, which contains credit history of commercial and consumer borrowers. The members of CIBIL are banks, NBFCs and Housing Finance Companies who provide borrower data to CIBIL. It collects and maintains records of an individual‘s payments pertaining to borrowal accounts including credit cards from the member institutions on a monthly basis. Members are provided access to CIBIL to generate CIR and CIBIL levy charges for the same. The CIBIL score is an objective numeric summary of the credit report generated on an individual. It takes a snapshot of a consumer’s CIR and with the use of advanced analytics moulds the information into a 3-digit number representing the probability that a consumer will default on a credit facility over the next 12 months. The possible score ranges 300 to 900. Obtaining CIR from CIBIL is mandatory before sanctioning credit limits to borrowers. The payment history has a significant impact on the score. High utilization of credit limits also play a vital role in arriving credit score of an individual. A higher concentration of home loans or secured loans is likely to be more favourable for the score than a large number of unsecured loans. More the number of unsecured loans with high utilization, larger are the payments resulting from its high rate of interest and consequently lower would be the score despite satisfactory payment track. “Credit Hungry behavior” – many applications for loans, indicates that the debt burden is likely to, or has increased and one is less capable of honoring any additional debt and is likely to negatively impact the score. CIBIL enables the lending institutions to take informed decisions while according credit sanctions. With CIBIL’s help, banks have caught many frauds like individuals trying to avail multiple loans on the same house, vehicle etc. It is a powerful tool to protect the interest of the Banks.
Central Registry of Securitization Asset Reconstruction and Security Interest of India (CERSAI): It is a government company licensed under section 25 of the Companies Act 1956, has been incorporated to operate and maintain the Central Registry under the provisions of SARFAESI Act 2002. The objective of CERSAI is to prevent frauds in loan cases involving multiple lending from different banks on the same immovable property. The Central Registry is also an important for the development of the home loan market as lenders can now be sure that the property offered as a security has a clear title. Unlike CIBIL, where borrower information is accessible only by lenders, the records maintained by the Central Registry will be available for search by any lender or any other person. The scheme is operational w.e.f. 31.03.2011 where central database will contain details of all properties against which loans have been advanced by Banks/Financial Institutions. The lending institutions are required to make a payment of Rs.250/- & Rs.500/- for creation and modification of security interest to CERSAI for the loans up to Rs.5 lakh & above Rs.5 lakh respectively. Under this, the lenders should file details of the charge over any property with CERSAI within 30 days from the date of creation. However, the delay up to 30 days can be condoned with a penalty of Rs.2500/- and Rs.5000/- for loans upto Rs.5 lakh and above Rs.5 lakh respectively. If the delay is beyond 30 days, the penalty will be Rs.5000/- per day during which the default continues.