SARFAESI Act & NPA

Management
An empirical presentation on NPA, SARFAESI Act & Role of DRTs

Shirsendu Bikash Das

PGDM(B&FS)
Class of 2018
16PGDMBFS48
 • Nationalisation of banks started in 1969
• Banks were used as an extended arm of the
Government & a political tool for the ruling
Backdrop parties to meet their election manifesto
• A pool of populist measures were taken
• Somehow, the quality of assets used to advance
loans never came under the scanner
 • After liberalization, NPAs loomed large at most
banks caused by aggressive lending
• Narasimhan Committee classified assets,
defined NPAs and recommended for more
Backdrop transparency in the banking system
• Based on such recommendations the “Recovery
of Debts due to Banks and Financial Institutions
Act, 1993” was enacted, Debt Recovery
Tribunals and Appellate Tribunals established.
Gross NPA status from 1992-93 to 2000-01
• DRT Act brought the Gross NPA level,
thus strengthening banks’ balance
sheets
• Applicable to debts above `10 lakhs
• Applicable throughout India except
J&K
• Ensured speedy recovery of bad loans
by avoiding jurisdiction of civil courts
• The Supreme Court upheld the
constitutional validity of the Act after
it was rejected by the Delhi High
Court on grounds of violating Section
14 of the Indian Constitution
 • Various impediments of the DRT Act like the
SICA Act made it impossible to press charges
against industrial houses classified as Sick
Then why Industries under SICA Act

SARFAESI • Huge number of cases in DRT remained

Act? pending.

• Estimates show, 25372 cases lie pending across

DRTs in India for the year 2016-2017 alone
 Chapters Contents Section

I Preliminary 1-2

II Regulation of securitisation and reconstruction of financial assets of banks & 3-12A

SARFAESI financial institutions

Act, 2002
III Enforcement of Security Interest 13-19

IV Central Registry 20-26

V Offences & Penalty 27-30

VI Miscellaneous 31-42
 • Secured loans above `1 lakh
Applicability
• Applicable throughout India, including J&K
of SARFAESI
Act, 2002
 • Mr. Das wants to open a factory. He estimates
his cost to be `100 crores.
Basic • He takes a loan from SBI for `40 crores
• Initially his business does good
Mechanism of • After some years, the company starts making
SARFAESI losses and he fails to pay his EMIs for a period
exceeding 90 days
Act, 2002 • SBI classifies his loan as NPA
• SBI gives him notice per Section 13(2) to pay his
dues within 60 days
 SBI, now has the following powers:
1. take possession of Mr. Das’s assets without requiring court
Basic 2.
order (Commercial or residential, fixed or moving assets.)
Auction / Sale them

Mechanism of 3. Change the administration/ Management of those assets. (in

case, it was a private limited firm the expelled directors not
entitled to any compensation, Winding up petition cannot be

SARFAESI 4.
filed without SBI permission)
If Mr. Das had sold away the mortgaged asset to third party Mr.
X, bank can order Mr. X to surrender that Asset
Act, 2002 (2) 5. If Mr. X owes money to Mr. Das, then he can be ordered to pay
money
6. If more than one Banks are the creditors, then action decided
by 60% of value of creditors shall be taken
 • Get a stay order from Debt Recovery tribunal
What can Mr. (DRT) against the auction/sale of his properties.
(He cannot file case in Civil courts.)
Das do? • Fight the case in DRT.
(Appeal • If unhappy with DRT verdict, he can appeal to
Debt Recovery Appellate Tribunal (DRAT).
Structure)
 • SBI contacts the experts, gets valuation
of Mr. Das’s assets.
• Experts estimated value of the asset is
`50 crore
• SBI advertises in a local newspaper and a
Bank: Power national newspaper in both vernacular
language and English inviting for auction
to Auction • Sometimes, bidders do not take interest
in buying such properties, factories etc.
• To fix this problem, SARFAESI has a
provision: if no one else comes to bid in
the auction, Bank itself can buy that
property
 • Asset reconstruction company (ARC).
What is ARC? • They buy NPA (Bad loans) from Banks and try to
extract maximum money out of it.
• They’ve to register with Reserve Bank of India.
 • ARC will buy the NPA file from SBI at a lower
rate say 35 crores.
• Banks have hundreds of bad loan cases, they do
not have time or manpower to pursue
Continuing individual case, sometimes no bidders are
interested in auction. In such cases, it’s better
our example for bank to transfer NPA to ARC.
• But that doesn’t mean ARC will give 35 crores to
the SBI from its own pocket!
• Asset reconstruction company (ARC) arrange for
the money via Security Receipts.
 • ARC needs Rs.35 crores to buy a Non performing asset
from SBI.
• So ARC will issue “security receipts (SR)” worth Rs.35
crores.
• Only Qualified Institutional buyers (QIB) can buy these
What are security receipts (SR).
• SR are not “bonds”, they donot carry fixed interest rate.
Security • ARC will promise to pay money on SR, when it gets
money the bad loan.
Receipts • Although, ARC usually promise 9% profit on SR. If ARC
fails then decision taken by at least 75% of QIBs is
(SR)? binding on ARC. Disputes arising in between in the
parties involved to be solved as per Arbitration and
Conciliation Act, 1996
• Qualified institutional buyers (QIB) buy those security
receipts (SR). So Rs.35 cr. cash goes from QIB -> ARC ->
SBI.
 ARC’s aim is to extract maximum possible out of its
investment. How does ARC go about doing it?
• Auction the assets fully or partially
• Sell the property in combination with other NPA
properties of other defaulters (similar to “buy one
large pizza and get 20% discount on any medium
Continuing
sized pizzas”).
• Restructure the EMIs of Mr. Das. For example,
instead of 1 lakh per month, give us 75,000 per
our example month.
• Change the Management of that asset, i.e., appoint
its own directors/officers. [In case it had been Das
(P) Limited, then the expelled directors not entitled
to any compensation, Winding up petition cannot be
filed without ARC permission]
• Order Mr. PJ to outsource or lease his business to
another company
 • Previously, borrowers used to forged property
documents and get loans from multiple banks by
giving them duplicate property documents as
security. So when borrower refuses to pay up
loan, many banks would make claim for the same
property!
Central • To fix this problem, Reserve Bank of India (RBI)
Registry setup Central Registry in 2011, under SARFAESI.
• This central registry has details of all properties
against which loans have been taken.
• Any person or bank can inspect records of this
registry to make sure the mortgaged property is
genuine.
 Non
applicability • Agricultural Land
of the • Amount Due < 20% [Principal (+) Interest
SARFAESI thereon]

Act
 NPA in Scheduled Banks (2002-2015)

800 18

700 16

Gross NPA as a % of Total Advances

14
600

NPA situation

Gross NPA (in crore Rs.)

12
500
10
400

after
8
300
6

SARFAESI
200
4

100 2

0 0
1996- 1997- 1998- 1999- 2000- 2001- 2002- 2003- 2004- 2005- 2006- 2007- 2008-
97    98    99    00    01    02    03    04    05    06    07    08    09   

Year
Assets seized
under
SARFAESI
 • Government should look towards tightening
SARFAESI policies to suit the SME sector
• The SME sector has huge dues, but most of
Conclusion them being in small pieces it ends up being
written off by banks to save time & effort
• Enact new mechanism and laws to fasten the
process of settlements in DRTs