SECURITIZATION AND

RECONSTRUCTION OF FINANCIAL
ASSETS AND ENFORCEMENT OF
SECURITY INTEREST ACT ,2002
 INTRODUCTION
AIM
 Auctioning commercial or residential properties to recover a loan when a borrower fails
to repay the loan amount.
 It enables the banks to reduce their non-performing assets through recovery methods and
reconstruction.
 Banks can seize the property of a borrower without going to court except for
agricultural land.
 Applicable - secured loans where banks can enforce underlying securities such as
hypothecation, mortgage, pledge etc.
 Order from the court is not required unless the security is invalid or fraudulent.
 In the case of unsecured assets, the bank would have to go to court and file a civil case
against the defaulters.
 

The Narasimham Committees I and II and Andhyarujina Committee

were established by the Central Government in India to investigate banking
sector reforms and propose new laws for Securitisation. The
recommendations from these committees led to the SARFAESI Act, 2002
which comprises of 42 sections housed in VI chapters and one schedule.

Axis Bank v. SBS Organics (P) Ltd., (2016) 12 SCC 18.

“This Act is intended to facilitate easy and fast recovery of loans advanced by
banks and financial institutions.”
 APPLICABILITY OF SARFAESI ACT, 2002
 With regard to ARCs-
Registration and regulation of Asset Reconstruction Companies (ARCs) by the Reserve
Bank of India. S.3
 Facilitating securitization of financial assets of banks
 Presentation of any securitization company or asset reconstruction company registered
with the Reserve Bank of India as a public financial institution.
 Classification of the borrower’s account as a non-performing asset
 The officers authorized will exercise the rights of a secured creditor
 An appeal against the action of any bank or financial institution to the concerned Debts
Recovery Tribunal and a second appeal to the Appellate Debts Recovery Tribunal.
S.17 and 18
 The Central Government may set up or cause to be set up a Central Registry. S.20-
CHAPTER IV
HOW SARFAESI ACT, 2002 WORKS?

As per the SARFAESI Act procedure, the banks issue notices to the defaulting
borrowers to discharge their liabilities within 60 days period. When the defaulting
borrower fails to comply with the bank notice, then the SARFAESI Act gives for the
following recourse to a bank:

 Take possession of the loan security 

 Lease, sell or assign the right to the security
 Manage the same or appoint any person to manage the same.
RBI AND SARFAESI
Section 12, 12-A and 12-B of the Act outlines the powers of the Reserve Bank of India-
 To determine policies and issue directions to asset reconstruction companies (ARCs) in
matters related to income recognition, accounting standards, provision for bad debts,
capital adequacy, and deployment of funds.
 It may also give directions on the type and valuation of financial assets that can be
acquired by ARCs and may call for statements and information relating to their business
affairs.
It has the power to carry out audits and inspections of ARCs and may appoint additional
directors or an observer to ensure proper management. The duty of ARCs and their
officers is to provide assistance and cooperation to the Reserve Bank in carrying out its
audits and inspections
 ENFORCEMENT OF SECURITY INTEREST (S.13)

(i)  Take ownership of the security;

(ii)  Sale or lease or assign the right over the security;
(iii) Employ a Manager to manage the security;
(iv) Ask the borrower’s debtors to pay any sum due to the borrower.
In situations where there is more than one secured creditor, the provisions
of this act will be valid only when 75% of them agree on the decision.
METHODS OF RECOVERY UNDER SARFAESI ACT, 2002
 SECURITISATION
Securitisation is the process of issuing marketable securities backed by a pool of existing assets
such as home or auto loans. An asset can be sold after it is converted into a marketable security.
 ASSET RECONSTRUCTION
Asset reconstruction empowers asset reconstruction companies. It can be done by managing the
borrower’s business by selling or acquiring it or by rescheduling payments of debt payable by the
borrower as per the provisions of the Act.

 ENFORCEMENT OF SECURITY WITHOUT THE INTERRUPTION OF THE COURT

The Act empowers banks and financial institutions to issue notices to individuals who have obtained
a secured asset from the borrower for paying the due amount and claim to a borrower’s debtor to pay
the sum due to the borrower.
APPEAL

 Section 17 of the SARFAESI Act provides the right to appeal of any person
(including borrower) against any of the measures taken by the secured creditor
or his authorized officer before the Debts Recovery Tribunal within 45 days.

 Section 18 of the SARFAESI Act, any person aggrieved, by any order made by
the DRT under section 17, may prefer an appeal within thirty days to an
appellate Tribunal (DRAT)
IMPACT OF SECURITIZATION ON BANKING

• standard reform in the Indian banking sector.

• progressive growth, seen with the decrease in non-performing assets.

 CONCLUSION

Securitization helps an economy by stimulating flow of credit and by transforming

illiquid assets into easy convertible marketable and tradable securities. It is not only
helpful for the banks or Originators which use securitization mainly for the purpose
keeping their balance sheets clean because of the NPAs but also for the investors
who get to diversify risk.