SARFESI (Securitisation & Reconstruction and Enforcement of Security Interest)

SARFESI( Securitisation &
Reconstruction and Enforcement

of Security interest)
Origin of SARFESI
• Narasimham Committee I and II and Andhyarujina Committee was
constituted by the Central Government for the purpose of examining
banking sector reforms have considered the need for changes in the legal
system in respect of these areas.These Committees have made
suggestions to form new legislation for securitization and empowering
banks and financial institutions to gain possession of the securities and to
sell them without any intervention of the court here.
• It came into force on the 21st day of June 2002
• It extends to the whole of India
• It allows banks and other financial institution to auction residential or
commercial properties (of Defaulter) to recover loans
• Constitutional Validity
• Procedural act
Non Applicability of SARFESI Act
Loan below Rs. One lakh
Amount of Loan amount(Principal+interest) of NPA is less
than 20%
Not applicable on agricultural land
Non-performing assets should be backed by securities
charged to the Bank by way of hypothecation or mortgage
or assignment.
Security Interest by way of Lien, pledge, hire purchase and
lease not liable for attachment are not covered under this
Act
Not covered Cooperative Banks
Objective of Sarfaesi Act
• Economic reforms
• For Fastest recovery
• For reducing NPA
• For better economic stability
Procedure
• To issue demand notice to the defaulting borrower and guarantor, calling upon
them to discharge their dues in full within 60 days from the date of the notice.
• To give notice to any person who has acquired any of the secured assets from the
borrower to surrender the same to the Bank.
• To ask any debtor of the borrower to pay any sum due or becoming due to the
borrower.
• A borrower / guarantor aggrieved by the action of the Bank can file an appeal with
DRT and then with DRAT, but not with any civil court
• The borrower / guarantor has to deposit 50% of the dues before an appeal with
DRAT.
• If the borrower fails to comply with the notice, the Bank may take recourse to one
or more of the following measures:
 Take possession of the security
 Sale or lease or assign the right over the security
 Manage the same or appoint any person to manage the same
The Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 (SARFAESI) empowers
Banks / Financial Institutions to recover their non-performing
assets without the intervention of the Court. The Act provides
three alternative methods for recovery of non-performing assets,
namely: -
• Securitisation
• Asset Reconstruction
• Enforcement of Security without the intervention of the Court

Securitization & Reconstruction of Financial
Assets of Banks & Financial Institutions
Have to obtain certificate of Registration from RBI

Having net owned funds not less than 2 crore rupees
Has not incurred loss in any of the three preceding
financial years
The directors have professional experience
Cancellation of certificate of Registration
Ceases to carry on the business of

securitisation or asset reconstruction
Aggrieved by the order can appeal to central
government with 30 days
Acquisition of rights or interest in financial
assets
• By issuing a debenture or bond or any other security in the nature of
debenture, for consideration agreed upon between such company and
the bank or financial institution
• No stamp duty for assets reconstruction for the purpose of acquiring asset
• On acquisition of financial assets asset reconstruction company with the
consent of the originator, file an application before the Debts Recovery
Tribunal or the
• Appellate Tribunal or any court or other Authority for th
• e purpose of substitution of its name in any
• pending suit, appeal or other proceedings and on receipt of such
application, such Debts Recovery
• Tribunal or the Appellate Tribunal or court or Authority shall pass orders
for the substitution
Asset Reconstruction Company
• RC should have a minimum net owned fund of Rs 2 crore
• ARCs have to maintain a capital adequacy ratio of 15% of
its risk weighted assets
• Banks and FIs may receive bonds/ debentures in
exchange for NPAs transferred to the ARCs
• A part of the value can be paid in the form of Security
Receipts (SRs). Latest regulations instruct that ARCs
should give 15% of the value of assets in cash
• Bond or debentures can have a maximum maturity of six
years and should have a rate of interest at least 1.5%
above the RBI’s ‘bank rate
Resolution Strategies that can be followed by ARCs
while restructuring the assets
• a) taking over or changing the management of

the business of the borrower,
• b) the sale or lease of the business of the
borrower
• c) entering into settlements and
• d) restructuring or rescheduling of debt.
• e) enforcement of security interest
Enforcement of security interest
• ‘enforcement of security interest’ means ARCs can

take possession/sell/lease the supported asset like
land, building etc
• ARCs and the secured creditors cannot enforce the
security interest under SRFAESI unless at least 75%
by value of the secured creditors agree to the
exercise of this right
Reference
• https://www.unitedbankofindia.com/english/S
arfaesiAct.aspx

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SARFESI( Securitisation &

Reconstruction and Enforcement

• Enforcement of Security without the intervention of the Court

Have to obtain certificate of Registration from RBI

Ceases to carry on the business of

• a) taking over or changing the management of

• ‘enforcement of security interest’ means ARCs can

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