SARFAESI

ACT, 2002
PROJECT PRESENTSTION
BY
SMIT GANDHI

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INDEX
1. Introduction
2. Why it is needed
3. Objective
4. Role of SARFAESI
5. Process
6. What is ARC?
7. Structure of ARC
8. Applicability
9. Conclusion

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Introduction
• The financial sector has been one of the key handlers in India’s efforts to achieve success in rapidly
developing its economy.
• This ensures the slow pace of recovery of defaulting loans and escalating levels of nonperforming assets of
banks and financial institutions.
• Listed Indian banks were burdened by ₹ 4.37 trillion of bad loans in the quarter ended December, up
from ₹ 2.92 trillion a year ago.
• The government is hoping that these amendments, along with the bankruptcy code, will provide a time-
bound framework to deal with stressed assets and loan recovery.

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 Introduction
• The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act,
2002 (SARFAESI Act) is an Indian law.
• It allows banks and other financial institution to auction residential or commercial properties (Defaulter) to
recover loan. 
• The first asset reconstruction company of India, ARCIL was set up under this act.
• Under this act secured creditor (banks or financial institutions) have many right for enforcement of security
interest under section 13 of SARFAESI Act, 2002.
• If borrower of financial assistance makes any default in repayment of loan or any installment and his
account is classified as Non performing Asset by secured creditor , then secured creditor may require
before expiry of period of limitation by written notice.

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 Why it needed?
• To regulate securitization and reconstruction of financial assets
• Enforcement of the security interest for
• Matters connected therewith or incidental thereto
• To fill the loophole for borrowers and lawyers

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 Objective
• Efficient or rapid recovery of non-performing assets (NPAs) of the banks and FIs.
• Allows banks and financial institutions to auction properties ( commercial / residential ) when borrower fail
to repay their loans.

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Role of SARFAESI Act
Securitization of Reconstruction of Enforcement of Other
Financial Assets and Financial Assets Security interest function
Issue of security
Receipt

Acquire Financial Take measure for Enforce Security Act as an agent of

Assets by issuing Proper Interest by the Banks or FIs for
Debentures or Bonds Management , sales Secured creditor Recovery ; act as
Or by Agreement. , debt restructuring, Without the Manager of the
Realize the same Settlement , or take Intervention of the secures assets
And redeem the Possession subject court Appointed by the
Security Receipts To RBI Guidelines Lender, or act as
Issued to the Qbs. From time to time. Receiver appointed
By the court

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What is the Process
Security
Originator
Borrower (Banks , Financial
Financial Assistance Institution)

Secure
Cash Assets
Transfer
Security Receipt

Assets Reconstruction
Qualified Company
Buyer Cash

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Action Timeline
Action Period
Notice for possession 60 days
Reply by bank to borrower’s representation or objection form date of receipt of such 15 days
representation
Borrower can approach DRT against Possession Notice from date of acknowledgement 45 days
Appeal to DRAT against decision of DRT 30 days
Notice before sale of the immovable secured assets 30 days
Period of balance payment of 75% amount by the buyer of the secured assets 15 days

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 What is ARC?
• An asset reconstruction company is a special type of financial institution that buys the debtors of the bank
at a mutually agreed value and attempts to recover the debts or associated securities by itself.
• The asset reconstruction companies or ARCs are registered under the RBI and regulated under the
Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002
(SARFAESI Act, 2002).There are 28 ARC registered under RBI in India.
• The ARCs take over a portion of the debts of the bank that qualify to be recognized as Non-Performing
Assets.

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Structure of ARC
ARC

Acquisition Resolution Recovery

Acquire NPA’s from Structure the NPA and Recovers the NPA and
Banks or Promoters at Identify suitable shares profits/losses
discounted Rates profitable avenues with banks/Promoters

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 Applicability
• Registration and regulation
• Securitization of financial assets 
• Entrusting ARC to raise funds by issue of security receipts to qualified buyers
• Defining ‘security interest’ to be any type(except agriculture land) of security including mortgage and
change on immovable properties given for due repayment of any financial assistance given by any  bank or
financial institution
• An appeal against the action of any bank to the concerned Debts Recovery Tribunal and a second appeal to
the Appellate Debts Recovery Tribunal

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 Insolvency and Bankruptcy Code
• Introduction of INSOLVENCY AND BANKRUPTCY CODE, 2016 has done away with overlapping provisions
contained in The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, (SARFAESI ACT) 2002.
• Code has differentiated liquidation and Insolvency process between Corporate Debtors (which shall be
dealt by the NCLT) and Individuals and firms liquidation process (which shall be of the jurisdiction of DRT),
the Corporate Debtors default should be at least INR 1,00,000 which limit may be increased up to INR
1,00,00,000 by the Government. The Code devises two separate processes for corporate insolvency matters
and individual/ un-incorporated bankruptcy matter. Part II of the Code deals with corporate insolvency
mechanism pertaining to companies incorporated under the Companies Act, 1956 and 2013 and limited
liability partnership incorporated under the Limited Liability Partnership Act, 2008; matters in this regard
will be dealt by the National Company Law Tribunal. Part III deals with the bankruptcy process for
individuals and partnership firms (unincorporated entities) and is maintainable before the Debt Recovery
Tribunal.

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 SARFAESI Act V/s  IBC, 2016
• SARFAESI Act, 2002 provides a safety net to secured financial creditors (banks and financial institutions) by
empowering them to enforce their security interests without the intervention of any court. On the other
hand, under IBC, the rights and interests of all types of creditors have been taken into consideration
including that of secured creditors
• Section 14(1)(c) of the Insolvency and Bankruptcy Code, 2016 clearly provides that during the insolvency
resolution process as defined in the Code, the Code takes precedence over the DRT Act and SARFAESI Act.

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 Conclusion
• The high level of NPAs has led to lower interest income and loan loss provisioning requirements which
reduced the profitability of the banks.
• The act intended to strengthen banks and FIs to recover NPAs faster.
• The act empowers banks and FIs to seize charged assets without Court’s Intervention and sell them off.

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