Session 32

SARFESAI Act & IBC

By
Prof. Atul Kochhar
C.A, C.S, Insurance Inst. Of India, MDP- IIM-A
Visiting Faculty, IBS Gurgaon
atulkochhar1@Hotmail.com
+91-9876247722 1
Atul Kochhar C.A, C.S
 SARFESAI Act 2002
The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest
Act, 2002 (also known as the SARFAESI Act) is an Indian law. It allows banks and other financial
institution to auction residential or commercial properties (of Defaulter) to recover loans.

Where any borrower who is under a liability to a secured creditor under a security agreement,
makes any default in repayment of secured debt or any instalment thereof, and his account in
respect of such debt is classified by the secured creditor as non-performing asset, then, the
secured creditor may require the PROPERTY TO BE ATTACHED AND AUCTION THE PROPERTY TO
RECOVER THE LOANS.

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 Debt Recovery Tribunal
The Debts Recovery Tribunal (DRT) enforces provisions of the Recovery of Debts Due to Banks and Financial
Institutions Act, 1993 and also Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interests (SARFAESI)

Debt recovery tribunals were created in 1993 through an act to speed up cases for financial recovery by
Banks. The Banks and financial institutions were experiencing lot of delays and difficulties in recovering the
moneys lent and enforcement of securities pledged to them for the loans availed.

❖ Where the debt due from the borrower is more than Rs.10.00 lakhs, the case could be filed in DRT.
❖ The working of the tribunal is similar to a court
❖ The borrower who is aggrieved by the order to the DRT can approach the Appellate Tribunal.
❖ Such appeal should be made within 45 days of receiving the orders of the DRT.
❖ He has to deposit 75 % of the amount which is due from him to the Bank or financial institution while filing
his appeal.
❖ The Appellate Tribunal has got the powers to reduce or waive this amount.

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Debt Recovery Tribunal Process

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 SARFESAI
Here are the key differences between DRT AND SARFESAI

Under RDB Act, Recovery of debts is made through quasi-judicial bodies called Debt Recovery Tribunals.
Whereas, under SARFAESI, only secured debts i.e., debts secured by way of underlying assets can be
recovered. Minimum debt amount to approach a DRT is 20 lakhs.

Sarfaesi Act. The provisions of this Act are applicable only for NPA loans with outstanding above Rs. 1.00
lac.

NPA loan accounts where the amount is less than 20% of the principal & interest are not eligible to be dealt
with under this Act.

The government has doubled the monetary limit to 20 lakh rupees for filing loan recovery application in
the Debt Recovery Tribunals (DRT) by banks and financial institutions.

A Finance Ministry notification said the move is aimed at helping reduce pendency of cases in DRTs

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Atul Kochhar C.A, C.S
 Insolvency & Bankruptcy code
The Insolvency and Bankruptcy Code is transformational piece of legislation as it seeks to establish an
ecosystem for handling Insolvency & Bankruptcy issues.

Most importantly it offers an exit plan to all categories of persons-Corporates, Stakeholders, Individuals and
Partnership firms, apart from over hauling century old legal Framework

Hence it is a game changer in which the Bankers, Courts, Investors and the initiators of insolvency
proceedings will have to work in harmony for devising either a survival plan or liquidation of sick units and
others facing debt default.

Sarfaesi Act The provisions of this Act are applicable only for NPA loans with outstanding above Rs. 1.00
lac.

NPA loan accounts where the amount is less than 20% of the principal and interest are not eligible to be
dealt with under this Act.

The government has doubled the monetary limit to 20 lakh rupees for filing loan recovery application in
the Debt Recovery Tribunals (DRT) by banks and financial institutions.
A Finance Ministry notification said the move is aimed at helping reduce pendency of cases in DRTs 6
Atul Kochhar C.A, C.S
 Terms defined
A 'non-performing asset' (NPA) was defined as a credit facility in respect of which the interest and/ or
instalment of principal has remained 'past due' for a specified period of time.

INCOME RECOGNITION.
Income from NPA assets is to be recognized only when it is actually received.
However, interest on advances against term deposits, NSC, IVPs, KVPs, and Life policies may be taken into
income account on the due date provided adequate margin is available in the accounts.

Banks are required to classify nonperforming assets into one of three categories according to how long
the asset has been non-performing:
❖ sub-standard assets,
❖ doubtful assets
❖ and loss assets.

A sub-standard asset is an asset classified as an NPA for less than 12 months

A Doubtful asset is one which has been NPA for more than 12 months.

Loss Assets: A Loss asset is one where the loss has been identified by the bank, through the internal or 7
external auditor or by the central bank inspectors. The amount has not been written off, wholly or partly.
Atul Kochhar C.A, C.S