THE SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSESTS AND ENFORCEMENT OF SECURITY INTEREST ACT, 2002
SARFAESI Act, as the name of the act suggests, deals with 3 matters:
1. Securitization [Sec 2 (1) (z)]
2. Reconstruction of Financial Asset [Sec 2 (1) (v)]
3. Enforcement of Security Interest [Sec 2 (1) (zf)]
Securitization is a kind of agreement between Securitization Company (SCo.)/ Reconstruction Company (RCo.) with the Originator (Banks/ Financial Institutions) where in Originator transfer 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 installments 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 affect. 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 installments 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 Assets 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 Formability (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 listen 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 effective this right of representation is?
4. Practical difficulties faces by borrower, specifically by Individual 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 Repay and gives him loan over his requirement keeping in mind the Enforcement of Security Interest in case borrower does not pay the THREE (3)Installment (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 months or more and the bank from where he was paying the installments freeze the account because there is new guideline from the RBI or other authority like KYC which the customer has to confirm else the account'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)failure to pay will lead to possession 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 assets 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.
6. Act Says Borrower can make appeal to the DRT. But BEFORE that he has to DEPOSIT atleast 3/4 of the amount of outstanding. This is discouraging 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.
7. No Court has jurisdiction to trail SARFAESI Act 2002 cases.
8. Most of the cases the Borrower is Retail borrower with small amounts say 1,00,000/- to 30,00,000/- .
9. 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 politely and approach must be kind of Request and not force) I am not sure how transparently and honestly this Section 13 will be implemented. One has to keep the Loan manager happy (may be. PLEASE OBSERVE (I believe)henceforth there will be sudden REDUCTION in the NPA amounts of the Banks and there performance will be improved in terms of recovery of loans.
10. Securitization is ONE OF THE KEY REASON for the Recent Financial Turmoil/ Recession. Granting of loan on overpriced security then later on those Loans were transferred to Securitization 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 realize money from the Sale of secured Assets 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.
VK Dwivedi, Chartered Accountant, India
CAclubindia
