Legal Issues in Securitization

Presented by- Anissa Bi Khan

Roll no.: M-1012
M.COM Part I
 CONTENT
Introduction to SARFAESI Act 2002
Why SARFAESI Act came into existence
Banks effective tools for bad loan (NPA) recovery
 Meaning of NPA
 Basis on which loan is declared NPA
 Assets classification of NPA
 Assets Recovery Tools
Rights of the borrower
Loans not eligible under SURFAESI Act 2002
Conclusions
References
 Introduction to SARFAESI Act 2002
 SARFAESI stands for “Securitisation and Reconstruction of Financial Assets and Enforcement of Security
Interest” act 2002.

 It is an Indian Law.

 The Act was framed to address NPAs or bad assets.

 It allows banks and other financial institution to recover their bad loans.

 It gives detailed provision for the formation and activities of ARCs and ASCs. The regulator of these
institution is RBI.

 The first ARC of India set up under this Act is “ARCIL”.

 Under this Act secured creditors have the right for enforcement.

 If there is default in payment of loan or any instalment than his account is classified as NPA by secured
creditor.
 Why SARFAESI Act came into existence
 Before the introduction of SARFAESI Act 2002, there existed civil court to solve the problem of bad loans or NPAs.

 Due to the failure of the civil court in solving the cases, in 1993 the special court came into existence.
o Such special court was only working for the recovery purposes.

Special court

DRT DRAT
Debt recovery Tribunal Debt recovery appellate tribunal

33 DRT 5 DRAT
BANK EFFECTIVE TOOL FOR BAD
LOANS (NPA) RECOVERY
 What is NPA
 NPA stands for “Non Performing Asset”.
 NPA refers to the non payment of loan or any instalment for a period of 90 days.

For eg:
Approaches for loan of rupees
120000

Bank accepts the request

Roshni

January June
February July non performing assets
March performing asset August
April
May
Basis on which loan is declared NPA
1.Term loan

2.Cash credit

3.Overdraft

4.Unrecovered loans from farmer

 ASSETS CLASSIFICATION OF NPA
Standard Assets Regular Instalments

Special Mention account SMA 0= 01-30 days

SMA 1= 31-60 days

SMA 2= 61-90days

Sub standard asset 12 months

doubtful asset 12 months

loss asset audit

ASSETS RECOVERY TOOLS TO
RECOVER BAD LOANS
1. Securitization

Homogenous illiquid Into

Pooling and repackaging Liquid marketable
financial asset securities

Securitization is the process of pooling and repackaging of

homogenous illiquid assets into liquid marketable
securities that can be sold to the investors.
 Securitization process AAA
AA
BONDS A
Categories

CRA

Loan

Bank Cash flow

SPV
Borrower

Mortgage pool
 2. ASSET RECONSTRUCTION

 It is the activity of converting the “non performing assets” into “performing assets”.

 The process of reconstruction involves several steps including purchasing of bad assets.

 Reconstruction is to be done with the RBI regulation.

 SARFAESI Act gives the following components for reconstruction of assets:

 Getting the possession of the asset.
 Sale or lease of a part or whole of the asset of the borrower.
 Rescheduling of payment of debts.
 enforcement of security interest.
 Settlement of dues payable by the borrower.
3.ENFORCEMENT OF SECURITY
 here the legal notice is sent to the borrower to repay the debt within 60 days by the lender.

 He if the borrower fails to comply with the notice the lender may enforce the security interest.

 By following the provision of the act:

 Take the possession of the security.

 Sale or lease the right over the security.

 Appoint manager to manage the security.

Rights of the borrowers
 The borrowers can at any time before the sale can remit the dues and avoid loosing the security.

 In case of unhealthy/illegal act done by the authorised officer, he will be liable for penal consequences.

 the borrower will be entitled to get compensation for such acts.

 If there are any grievances, the borrower can approach firstly to the DRT and thereafter DRAT.
LOANS NOT ELIGIBLE UNDER SARFAESI ACT
 Loans with outstanding up to Rs.1,00,000.

 Agricultural land cannot be sold

 The amount due is less than 20% of the principle & interest.
 CONCLUSION

 SARFAESI Act was introduced in 2002 by Indian government.

 It allows banks and other financial institution to recover their bad loans

 Though the SARFAESI Act 2002 was created to recover the NPA, but it also consider the rights of the
borrowers.

 SARFAESI Act also provide effective tools to the banks, from which the banks can recover their bad
loans.

 The introduction of this Act has provided a lot of benefits to the banks.
 REFERENCES

https://www.ibpsguide.com/sarfaesi-act
https://www.indianeconomy.net
Video by CA Nikhil Jobanpura
Video by Mahendra Guru