Objectives and Purpose of SARFAESI Act

Introduction
Any developing country's financial industry is one of its most significant pillars. It is also vital
for India to accelerate its economic growth. The meager rate of recovery on defaulted loans, as
well as banks' and financial institutions' exceptionally high levels of nonperforming assets, were
major concerns that ultimately led to the establishment of a reform. The Central Government's
Narasimham Committees I and II, as well as the Andhyarujina Committee, made modification to
the legal system in response to these concerns. The Committees proposed new legislation for
securitization that would allow banks and financial institutions to take ownership of securities
and sell them without the need for court intervention.

The Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest
Act, 2002, or the SARFAESI Act allows Indian banks and other financial institutions to auction
commercial or residential properties to recover loans. The first asset rebuilding business, ARC,
was founded as a outcome of this statute. The SARFAESI Act of 2002 was enacted to allow
financial institutions to analyze asset quality in a variety of ways. To put it another way, the act
was enacted to identify and address the predicament of non-performing assets (NPAs). It also
enables financial institutions and banks to auction or sell residential and commercial properties
to recover bad loans. This effectively means that the Act was enacted to address the problem of
non-performing assets, or bad assets, through a variety of approaches. The Act specifies the
formation and actions of Asset Securitization Companies and Reconstruction Companies in great
detail along with the capital needs, finance, and operations. The Reserve Bank of India is in
charge of overseeing the SARFAESI Act's institutions.

Legal History
Prior to the implementation of the SARFAESI Act, aggrieved parties, such as banks or financial
institutions, would file a civil recovery lawsuit in civil court, and the process would drag on for
years because the civil suit was fought by both sides. In light of this, the legislature decided to
enact particular rules under which such NPAs can be rapidly resolved, allowing the bank to
reinvest the recovered funds in the business. Banks and financial institutions will save time by
not having to file a lawsuit in civil court, which would normally be a lengthy procedure.1

Features and Objectives

The Act is an attempt to securitize financial assets. Invest in the securitization, Create companies
such as a Securitization Company and a Reconstruction Company, for example. Secured
1
Lawyers Club India, (18 Jul, 2021, 4:00 P.M.) https://www.lawyersclubindia.com/articles/legal-history-before-
passing-sarfaesi-act-4688.asp
creditor's security interest must be enforced (without court intervention), Act as a bank's agent,
Rebuild your financial assets. Create a central registry. Penalties for violations/non-compliance
with rules should be specified. Unlike many other statutes, the SARFAESI Act of 2002 gives the
bank the power to take action under section 13(4) of the Act while the civil litigation is pending.
The Act also establishes a right of appeal against proceedings connected to the collection of
unpaid loans.

It's a legal framework that governs securitization transactions. Security interests can be enforced
without the help of a court. To effectively deal with NPAs, the Act encourages banks and
financial institutions to manage their assets and to establish up asset reconstruction and asset
securitization firms. This Act empowers banks and financial institutions to seize hypothecated or
mortgaged assets in order to recover nonperforming assets (NPAs). The SARFAESI Act
establishes three recovery channels for nonperforming assets:

(i) Securitization: It is the process of taking loans and other financial assets and
transforming them into marketable securities that can be sold to investors. In other
words, it entails repackaging less liquid assets into securities that may be sold. The
securitization company takes over the borrower's mortgaged assets and has the
authority to take the following actions:
 Obtaining financial assets from a bank.
 By issuing security receipts to acquire financial assets, cash are raised from
authorized institutional buyers.
 Obtaining funds in any lawful manner.
 Purchasing financial assets as well as taking over mortgaged assets (such as
building, land etc).
(ii) Asset Reconstruction: The process of converting a bad or non-performing asset into
a working asset is known as asset reconstruction. The asset reconstruction method
entails a number of steps, including the purchase of a poor asset by a dedicated asset
reconstruction company (ARC), funding the conversion of the bad asset into a good
asset using bonds, debentures, securities, and cash, and so on.
(iii) Security Enforcement without Court Intervention: According to the Act, financial
institutions have the authority to issue notices to defaulting loan takers and
guarantors, requiring them to pay the arrears within 60 days of receiving the
notification from the Insolvency and Bankruptcy Board of India. The bank has the
right to pursue the security interest if the defaulter does not act in line with the
notification.2

The efforts of India's financial industry have been a crucial driver in the country's rapid
economic development. Despite the fact that Indian banks and financial institutions followed

2
SARFAESI ACT, 2002- Applicability, Objectives, Process, Documentation, (17 July,2021, 2:00 PM)
https://cleartax.in/s/sarfaesi-act-2002
international procedures and norms, there were still gaps in some areas. The lack of power with
financial institutions to collect defaulting debts was one of the areas of worry. After careful
consideration, the SARFAESI Act of 2002 was enacted, allowing banks and financial institutions
to address issues like as liquidity, long-term assets, rising nonperforming assets, and loan
recovery delays (reconstruction).

Landmark Cases
In the case of Karnataka State Financial Corporation vs. N. Narasimahaiah, the Supreme Court
correctly emphasized the importance of the fundamental right to property. As a result, both
creditors and lenders will be guided as to the necessity of the property mortgaged to the bank.

The constitutionality of the SARFAESI Act has been questioned. The Act's constitutional
validity was confirmed by the Supreme Court in Mardia Chemicals Ltd v Union of India. The
Act's Section 17(2) is declared unlawful. Following the Supreme Court's decision in the Mardia
Chemicals case, the SARFAESI Act was revised on November 11, 2004.3

In the case, Transcore vs. Union of India & anr; 4 the Hon’ble Apex court has settled several
important issues, and the recovery position in NPAs in almost all banks and financial institutions
has improved to a greater level through action under the Act today than in earlier years.

Conclusion
The SARFAESI Act was enacted with a specific goal in mind: to make it easier for banks and
financial institutions to recover debts quickly by enforcing security interests without the need for
court intervention. The goal of debt recovery regulations is to decrease non-performing assets
and boost market liquidity. In recent years, various changes to the SARFAESI Act, 2002 have
been observed in order to meet the legislation's requirements. The judiciary has always aided in
the interpretation of legislative requirements by removing any uncertainties. As a result, the
Supreme Court has correctly upheld the requirement of the new development in the scope of the
SARFAESI Act, 2002. Widening the scope of the SARFAESI Act, 2002, a key Act for the
benefit of the country's economy, is seen as a critical step in strengthening the country's financial
institutions.

By: Mansi Rathi

3
Mardia Chemicals Ltd v Union of India, (2004) 4 SCC 311

4
Transcore  Vs. Union Of India & Anr, AIR 2007 SC712