Central Idea

• The RBI has issued a directive requiring commercial banks and Non-Banking Financial Companies (NBFCs), collectively referred to as Regulated Entities (REs), to disclose borrower information.
• This disclosure pertains to borrowers whose secured assets have been repossessed under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act).

What is the SARFAESI Act?

• Objective: The SARFAESI Act, introduced in 2002, is formally known as the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act. Its primary objective is to protect financial institutions against loan defaults.
• Empowering Banks: The Act empowers banks to seize, manage, or sell securities pledged as collateral for loans, facilitating the recovery of bad debts without the need for court intervention.
• Broad Application: The SARFAESI Act applies nationwide and covers all types of assets, whether movable or immovable, provided as security to lenders.

Aim of the SARFAESI Act

The SARFAESI Act serves two key purposes:

1. Efficient NPA Recovery: It streamlines and expedites the recovery of non-performing assets (NPAs) for financial institutions and banks.
2. Asset Auction: It enables financial organizations and banks to auction residential and commercial assets in cases of borrower default.

Why was such a Law needed?

• Pre-SARFAESI Era: Before the enactment of the SARFAESI Act in December 2002, financial institutions and banks faced complex procedures for recovering bad debts.
• Legal Complexity: Lenders had to navigate legal complexities, resorting to civil courts or designated tribunals to secure ‘security interests’ for recovering defaulted loans, resulting in slow and cumbersome debt recovery.

Powers Granted to Banks under the Law

• Default Trigger: The SARFAESI Act comes into play when a borrower defaults on payments for more than six months.
• Notice Period: The lender is required to issue a notice to the borrower, providing them with a 60-day window to clear their outstanding dues.
• Asset Possession: If the borrower fails to comply within the stipulated period, the financial institution gains the right to take possession of the secured assets and manage, transfer, or sell them.
• Appellate Avenue: The defaulter has the option to appeal to an appellate authority established under the law within 30 days of receiving a notice from the lender.

SARFAESI Act: Applicability

The SARFAESI Act primarily deals with various legal aspects related to:

• Registration of asset reconstruction companies.
• Acquisition of rights or interest in financial assets.
• Measures for asset reconstruction.
• Resolution of disputes.

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