What are the key features of SARFAESI Act ?

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Features of the SARFAESI Act

An informative illustration of the SARFAESI Act, 2002. The image depicts a bank repossessing secured assets, such as property and machinery, from a borrower in default. Show a flowchart with steps: borrower default → notice period → asset possession → auction by bank. Include visuals of Asset Reconstruction Companies (ARCs) managing non-performing assets (NPAs) and a representation of financial recovery. Use professional icons and clear labels for features like 'Securitization,' 'Reconstruction,' and 'No Court Intervention.' The design should be clean, modern, and educational. Legal Sandook
An informative illustration of the SARFAESI Act, 2002. – Legal Sandook

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, is a key legislation enacted to empower banks and financial institutions to recover their non-performing assets (NPAs) efficiently without the intervention of courts. Below are its main features:

Key Features of the SARFAESI Act

  1. Empowers Financial Institutions:
    • Banks and financial institutions can directly seize and auction secured assets of defaulting borrowers to recover loans.
  2. Applicability:
    • Applicable for secured loans (backed by tangible assets like property) where the amount exceeds ₹1 lakh.
    • Does not apply to unsecured loans or loans below ₹1 lakh.
  3. Mechanisms Under the Act:
    • Securitization: Allows banks to pool bad loans and sell them to Asset Reconstruction Companies (ARCs).
    • Asset Reconstruction: ARCs manage and recover loans by acquiring rights over bad assets.
    • Enforcement of Security Interest: Banks can take possession of the collateral without court intervention if the borrower defaults.
  4. No Court Intervention:
    • Financial institutions can directly enforce their claims on secured assets without seeking court approval.
  5. Role of Asset Reconstruction Companies (ARCs):
    • ARCs buy NPAs from banks and try to recover them through innovative means, such as debt restructuring or settlement.
  6. Time-Bound Process:
    • Borrowers are given 60 days to clear dues after the notice. If they fail, lenders can take possession of the asset.
  7. Appeal Mechanism:
    • Borrowers can appeal against the lender’s action to the Debt Recovery Tribunal (DRT) within 30 days.
  8. Scope for Financial Institutions:
    • Includes banks, financial institutions, and ARCs notified by the RBI.
  9. Prevents Long Legal Battles:
    • By bypassing regular courts, the act reduces delays in recovery, allowing banks to swiftly address bad loans.
  10. Promotes Financial Discipline:
  • Acts as a deterrent for willful defaulters, encouraging responsible borrowing and timely repayment.

Benefits of the SARFAESI Act

  • Strengthens the financial system by enabling faster recovery of bad debts.
  • Reduces the burden on courts and expedites the resolution of NPAs.
  • Improves the liquidity of banks, allowing them to channel funds into productive sectors.

Limitations

  • Not applicable to agricultural land.
  • Requires banks to carefully handle enforcement to avoid legal complications or public backlash.

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