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VALUATION OF PROPERTY UNDER SARFAESI ACT

Former National Vice - President B. Kanaga Sabapathy

Institution of Valuers Tiruchirappalli (TN)
bkvaluer@gmail.com

For the purpose of detailed study, the subject is discussed in four parts.

Part I - Theory aspects

Part II - Valuation aspects
Part III - Case study & Model report
Part IV - Suggestions to Sarfaesi valuers & bankers

Part I - Theory aspects

1. What is the full form of SARFAESI?

It is “Securitization And Reconstruction of Financial Assets and Enforcement of

Security Interest” Act, 2002.

2. What is the background of this Act?

During 1970s to 1990s, the banking sector witnessed a trend of rising levels of
NPAs and slow recovery of loan dues. This had resulted a tremendous setback
in the growth of the banks. In order to tackle the NPAs and deal with the loan
recovery process, the Government enacted ‘Recovery of Debts due to Banks
and Financial Institution Act 1993’. Debt Recovery Tribunals (DRT) were formed
subsequently in order to speed the recovery process. The DRT is supposed to
dispose the cases within 6 months. But this could not be achieved due to
mounting levels of NPAs. More over, the banks did not have powers to take
possession of the securities and liquidate them in order to recover their dues.

Therefore, in order to effect the speedy recovery of loans, the Government

appointed Narasimhan committee which suggested to enact a new legislation for
securitisation and enforcement of security interest. Based on these suggestions,
a new Act was enacted by the Government of India and this is known as “ The
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Securilization and Reconstruction of Financial Assets and Enforcement of

Security Interest Act, 2002.

2.1. What is NPA?

NPA stands for Non - Performing Assets. Non - performing Asset is an asset in
the hands of bank which represents an amount receivables and realisable by the
bank against such asset.

Some people interpret NPA as Non - Productive account or Non - Productive

assets which are not correct.

3. What is the object of this Act?

The main object of the SARFAESI Act is to improve the recovery process by
vesting the powers with the banks to take posession of the securities and sell
them in case the borrowers fail in repaying the loan in time.

4. What are the contents of the SARFAESI Act?

The Act consists of 6 chapters :

Chapter I - Preliminary (Secs. 1 and 2).

Chapter II - Regulations of Securitisation & Reconstruction of Financial

Assets of Banks and Financial Institutions (Secs. 3 to 12).

Chapter III - Enforcement of Security Interest (Secs. 13 to 19).

Chapter IV - Central Registry (Secs. 20 to 26).

Chapter V - Offences and Penalties (Secs. 27 to 30).

Chapter VI - Miscellaneous (Secs. 31 to 42).

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5. Which rule number of “The security interest enforcement rules, 2002” deals
with valuation?

i) Vide Rule 2d - Approved valuer :

“Approved valuer” means a valuer as approved by the Board of

Directors or Board of Trustees of the secured creditor, as the case
may be;”

ii) Vide Rule 5 - Valuation of movable secured assets :

“After taking possession under sub - rule (1) of rule 4 and in any case
before sale, the authorised officer shall obtain the estimated value of the
movable secured assets and thereafter, if considered necessary, fix in
consultation with the secured creditor, the reserve price of the assets to be
sold in realisation of the dues of the secured creditor”.

iii) Vide Rue 8(5) - Sale of immovable secured assets

“Before effecting sale of the immovable property referred to in sub - rule

(1) of rule 9, the authorised officer shall obtain valuation of the property
from an approved valuer and in consultation with the secured creditor, fix
the reserve price of the property and may sell the whole or any part of
such immovable secured asset by any of the following methods :

a) by obtaining quotations from the persons dealing with similar

secured assets of otherwise interested in buying the such assets;
or
b) by inviting tenders from the public;
c) by holding public auction; or
d) by private treaty.
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6. What is the flow chart with regard to SARFAESI?

Borrower applying to the bank for sanction of loan

Bank directs the panel valuer to do valuation of

the security. Purpose is to certify the present
market value.

Loan sanctioned

Borrower’s account becomes NPA

Bank gives the borrower a chance for one

time settlement (OTS).

Borrower is not in a position for any settlement

Bank decides to auction the property to recover

the loan.

Bank is taking symbolic posession of the security.

Bank directs sarfaesi valuer.

Purpose is to certify the auction value.

The bank fixes the Reserve price.

The bank advertises in the Newspaper.

Bank auctions the property. Bidders attend

the auction. Successful bidder pays the auction
value to the bank and start enjoying the property.

Bank recovers the due from the value realised.

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