SARFAESI Act, 2002

Context:

RBI has asked Regulated Entities (REs) to display information regarding borrowers whose secured assets have been taken into possession under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002.

Details – SARFAESI Act, 2002

What is the purpose?

• The act was framed in order to address the problem of Non-Performing Assets (NPAs) or bad assets of banks/financial institutions through different mechanisms.

Who can be taken under possession?

• It allows only secured creditors (lenders whose loans are backed by a security such as mortgage) to take possession over a collateral security if the debtor defaults in repayment.

What does the act provide?

• The act provides procedure for registration and regulation of asset reconstruction company (ARC) and allows them to carry out the business of
  • Asset reconstruction: It is the activity of converting a NPAs or bad assets into performing assets. The ARCs can acquire financial assets (NPAs) from banks and try to recover dues through measures like:
    • the proper management of the business of the borrower, by changing or taking over the management
    • the sale or lease of a part or whole of the business
    • rescheduling of payment of debts payable etc.
  • Securitization: It is the process of conversion of existing loans into marketable securities by ARCs through issue of security receipts.

Enforcement of Security interests by lenders without the intervention of the Court:

• After giving a notice period of 60 days to the defaulting borrower, banks/financial institutions can
  • take possession of the pledged assets of the borrower,
  • take over the management of such assets,
  • appoint any person to manage them or
  • ask debtors of the borrower to pay their dues too, with respect to the asset.

Creation of a Central Registry:

• By the Central Government for the purposes of registration of transaction of securitization and reconstruction of financial assets and creation of security interest.

Application against measures to recover secured debts:

• Can be filed by borrowers/lenders with Debt Recovery Tribunal (with appeal to Debts Recovery Appellate Tribunal) established under Recovery of Debts due to Banks and Financial Institutions Act, 1993.

Provisions of this Act not applicable to:

• any security interest created in agricultural land
• any case in which the amount due is less than twenty per cent of the principal amount and interest
• any security interest for securing repayment of any financial asset less than one lakh rupees.

Related information

• Narsimham Committee – I (1991) envisaged setting up of a central Asset Reconstruction Fund to facilitate Banks to improve their balance sheets.
• Narsimham Committee – II (1998) proposed ARCs.
• RBI regulates ARCs as Non-Banking Financial Companies.

ARC is incorporated under the Companies Act and registered with Reserve Bank of India under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002. ARCIL was the first ARC set up by ICICI Bank, State Bank of India and IDBI.

Source: The Hindu

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Previous Year Question

Consider the following statements:
Statement-I:
Interest income from the deposits in Infrastructure Investment Trusts (InvITs) distributed to their investors is exempted from tax, but the dividend is taxable.
Statement-II:
InviTs are recognized as borrowers under the ‘Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002’.
Which one of the following is correct in respect of the above statements?

[UPSC Civil Services Exam – 2023 Prelims]

(a) Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I
(b) Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement-I
(c) Statement-I is correct but Statement-II is incorrect
(d) Statement-I is incorrect Statement-II is correct

Answer: (d)

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