NPA Crisis

Co-operative banks can use SARFAESI Act to recover dues: Supreme Court

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Sarfaesi Act, 2002

Mains level : NPA issue

A five-judge Constitution Bench of the Supreme Court (SC) has ruled that all co-operative banks in the country could make use of the SARFAESI Act to make recovery against defaulting persons.

Possible mains question:

What is the SARFAESI Act, 2002? Discuss its various provisions and efficacy to curb Non-Performing Assets (NPAs)?

What is Sarfaesi Act, 2002?

  • Sarfaesi is an acronym for Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest.
  • It allows banks and other financial institution to auction residential or commercial properties (of Defaulter) to recover loans.
  • The first asset reconstruction company (ARC) of India, ARCIL, was set up under this act.
  • Under this act secured creditors (banks or financial institutions) have rights for enforcement of security interest under section 13 of SARFAESI Act, 2002.

Provisions of the Act

  • If the borrower of financial assistance makes any default in repayment of a loan or any instalment and his account is classified as NPA by secured creditor, then secured creditor may require before the expiry of a period of limitation by written notice.
  • The act does not apply to unsecured loans, loans below ₹100,000 or where remaining debt is below 20% of the original principal.
  • This law allowed the creation of asset reconstruction companies (ARC) and allowed banks to sell their non-performing assets to ARC’s (which are regulated by the RBI).
  • Banks are allowed to take possession of the collateral property and sell it without the permission of a court.

To summarize, the SARFAESI Act empowers financial institutions to ‘seize and desist’. They should give a notice to the defaulting borrower asking to repay the amount within 60 days.

If the debtor doesn’t comply, the bank can resort to one of the three following measures:

1) Take possession of loan security

2) Sell or lease or assign the right over the security

3) Manage the asset or appoint someone to manage the same

Ambit of the Act

  • The recent judgment said that the SARFAESI Act qualifies the test of legislative competence, as well as the definition, cannot be said to be beyond the competence of the Parliament.
  • In 2013, the Gujarat High Court had, while hearing a challenge to the amendment of Banking Regulation Act of 1949, to include cooperative societies as financial institutions, ruled it null and void.
  • The high court had then agreed with the submissions of the petitioners who had argued that Sarfaesi would not be applicable to cooperative banks formed under the state law.
  • The Delhi High Court had, on the other hand, ruled that the cooperative banks and societies were for all purposes banks and financial institutions and thus were allowed to use Sarfaesi to make recoveries against defaulters.
  • In its judgment, the apex court held that all such cooperative banks involved in the activities related to banking are covered within the meaning of ‘banking company’.
Subscribe
Notify of
0 Comments
Inline Feedbacks
View all comments