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4/18/2015 WhyistheSARFAESIActofcriticalimportancetolenders?IFMRBlog

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7Nov

WhyistheSARFAESIActofcriticalimportancetolenders?

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ByDarshanaRajendran,IFMRFinanceFoundation

Anassetbecomesnonperformingwhen itceasestogenerate incomefor thebank. In India,aNonPerforming Asset (NPA) is broadly defined as one with interest or principal repayment instalmentunpaidformorethan90days.

ThereexistdefinedmechanismstodealwithNPAsofbanksandfinancialinstitutionstoday.Howeverprior to 1993, banks had to take recourse to the long legal route against defaulting borrowers,beginningwiththefilingofclaimsinthecourts.Alotoftimewasthereforespentinthejudicialprocessbeforebankscouldhaveanychanceofrecoveryontheirloans.Onaverage,acivilsuitdecisiontookanywherebetween5to7years.

Under theRecoveryofDebts toBanksandFinancial InstitutionsAct1993,DebtRecoveryTribunals(DRTs) were set up for recovery of loans of banks and financial institutions. This led to speedyrecoveryof loans inabout1years timeasagainst theaverage timeof5 to7yearsrequired incivilsuits.While initially theDRTsperformedwell, theirprogresssufferedas theygotoverburdenedwiththehugevolumeofcasesreferredtothem.

Tospeedup theprocessof recovery fromNPAs,TheSecuritisationandReconstructionofFinancialAssetsandEnforcementofSecurityInterestAct(SARFAESI)Actwasenactedin2002forregulationofsecuritizationand reconstructionof financial assets andenforcement of security interest by securedcreditors.TheSARFAESIActempowersBanks/FinancialInstitutionstorecovertheirnonperformingassetswithouttheinterventionoftheCourt.TheActprovidesthreealternativemethodsforrecoveryofnonperformingassets,namely:

SecuritisationAssetReconstructionEnforcementofSecuritywithoutinterventionofthecourt

Securedcreditorsaregiventhepowertotakepossessionofthesecuritiesintheeventofdefaultandsell such securities for the purpose of recovery of the loan. The Act provides for enforcement ofSecurity interest by a secured creditor without intervention of the court, in cases of default inrepaymentofinstalmentsandnoncompliancewiththenoticeperiodof60daysafterthedeclarationoftheloanasanonperformingasset.

TheActalsoprovidesforsettingupofSecuritisationCompanies/ReconstructionCompanies(SC/RC),which acquire the NPAs from banks and financial institutions by raising funds from QualifiedInstitutional Buyers (as defined by the Act) by issue of Security Receipts (As defined by the Act)representingundividedinterestinsuchfinancialassets.TheActenablesSC/RCstotakepossessionofsecuredassetsoftheborrowersincludingrighttotransferandrealizethesecuredassets.SC/RCsactasdebtaggregatorsoragentsofthebanksorfinancialinstitutionsfocusedintheresolutionofNPAs.The SC/RCs buy the impaired assets from banks and financial institutions, thereby cleaning thebalancesheetsofthebanksandpermittingthemtofocusontheirnormalbankingbusiness.

Thepromulgationof theSARFAESIActhasbeenabenchmark reform in the Indianbankingsector.

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TheprogressunderthisActhadbeensignificant,asevidencedbythefactthatduring200203whentheAct came into effect, therewas an overall reduction of nonperforming loans to 9.4 per cent of

grossadvancesfrom14.0percentin199920001.

Currently, three legaloptionsareavailable tobanksforresolutionofNPAs theSARFAESIAct,DebtRecovery Tribunals and Lok Adalats. The SARFAESI Act has been the most important means forrecoveryofNPAs.TheamountofNPAsrecoveredunder theSARFAESIAct formedoverhalfof thetotal amount of NPAs recovered in 200910. Banks have referred asmany as 78,366 loan defaultcasesbyendmarch2010under theSARFAESIAct involvinga loanamountofRs. 14, 249crores.

Againstthis,banksmanagedtorecoverRs.4,269croresrepresenting30%oftheloans2.

Recentlythe Reportof theWorkingGroupontheIssuesandConcerns intheNBFCSector laidoutrecommendations to extend the coverage of SARFAESI to NBFCs as well. This move will benefitNBFCs, ensuring quicker recovery of their nonperforming assets. This, in turn, could encourageNBFCstoprovideaccesstoawiderrangeoffinancialproductsandservebetterthecauseoffinancialinclusion.

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2ReserveBankofIndiaonTrendandProgressofBankingIndia20092010

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sumangaindhar 6monthsagoIfeeltheSarfeasiactstillhaslotofloopholes.ThereareadvocatesavailableinthecoridoorsofDRTsandDRATswhowillensurethedefaulterstosleepfor4yearsandnothingwillhappen.Thisactneedsareview.

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Puniya ayearagocanthePropertyboughtfromthebankundersarfaesiactbesoldbythefirstownerofthelandwhohappenstobetheSC/ST.Ipurchasedapropertyfrombankandafter8yearsthesamepropertyisbeingclaimedbyitsfirstownerwhoisSC.

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sv.nagarajan ayearagoBrief........Butgivesaclearunderstandingwithsimplelanguagethanku

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ManSinghTosaria 3yearsagoTheSARFAESIActisaCibillawwhichdealswithhelpingBanks/FIstotakepossessionofFinancialAssetsforthesakeofrecoveringtheirdues(NPA).DoesSec.35ofTheSARFAESIActsupercedecriminallawstoo?

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T.R.Radhakrishnan 3yearsagoDearDarshanaRajendran,AttheoutsetIintroducemyselfasanExbankerpresentlyhandlingDRTandSARFAESIcasesasfacilitator.IhaveclientsfromalloverIndia.IdonotknowwhetheryouhavemadeathoroughstudyofSARFAESIACT.Ihavewrittenmanyarticlesabout

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youhavemadeathoroughstudyofSARFAESIACT.IhavewrittenmanyarticlesaboutSARFAESIACTthroughwhichIhavebroughtouthowthisdraconianacthasinfringedintothehumanrights,fundamentalrightsandprinciplesofnaturaljustice.WhereverIhavehandledthecases,theyarestillinthetrialcourtofDRTandIamsureifarguedproperlyeachcasewillgotosupremecourtlevel.Manyofthehonestborrowers'liveshavebeenaffectedbyinvokingtheSARFAESIACTbytheirresponsiblebankerswhosemanywrongdoingshavecausedlossanddamagestothesehonestborrowers.Thebankersdonotdistinguishbetweenanintentionaldefaulterandaborrowerwhobecameadefaulterbecauseofthecircumstancesbeyondhiscontrolandthebanksalsowereandstillaremutespectatorstotheproblemsandpredicamentfacedbysuchborrowers.MostofthebakersneverfollowRBIdirectivestopreventaccountbecomingNPA.IfyouneedIcansendsomeofthearticlesIwroteonthesubjectmatter.Iamsorrytohaveexpressedmypointssoblatantly.T.R.RadhakrishnanEmail:[email protected]:(0)9229248048

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GManivachagam 12daysago>T.R.RadhakrishnanThanksfortheservicebeingprovidedbyyoutotheborrowerswhoseloanaccountshavebecomeNPA...OnceanoticeunderSARFAESIActisissuedcantheNBFC,forinstancetheStateFinancialInstitutions,continuetodebitsuchNPAaccountwithnormalpluspenalinterestforultimaterecovery?InCivilCourts,Iremember,suchaccrualofinterestoncerecoveryproceedingsareinitiated..EvenwithRBIguidelinestheNBFC/BanksarenotallowedtodebitsuchintereststosuchaccountsoncetheybecomeNPAs.NBFC/Banksiftheykeepaseparateaccountofsuchaccruedinterest,theyshouldprovideequalamountbycreatingprovision,viz.,suchinterestsarenottobetreatedasincome..SomeNBFCsarecontinuedtochargesuchinterestonNPAswithoutaddingthemintotheirincomeandpayingincometaxonsuchincome.Whatisthelegalposition?Canyouclarifybymailtomaniadg@yahoo.co.in?GManivachagam,IRS(C&CE)RtdMobile:09449823664

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MAuppal ayearago>T.R.RadhakrishnanItisindeedadraconianlawwhichhasencouragedcorruptioninBanks.Suchlawsandarbitrary/sadisticinterpretationisnotsparingotherDirectorswhohavenothingtodowiththeborrowingsnortheyareguarantors.

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DarshanaRajendran 3yearsagoOncetheaccountoftheborrowerhasbeenclassifiedasanNPAaspertheguidelinesissuedbyRBI,theBankwillproceedtomakeademandnoticeunderSection13(2)informingtheborrowerabouttheoutstandingamountintheloanaccountandalsotheconsequences.IftheborrowerraisesanywrittenobjectionstotheBanksdemandnoticeundersection13(2),thentheBankshouldreplytotheobjections.IftheBanksrejectstheobjectionsraisedbytheborrowerundersection13(3A),thentheBankproceedstoissueapossessionnoticeundersection13(4)oftheActinformingtheborrowerthattheyhavetakensymbolicpossessionoftheproperty.Thisisnotactualpossessionofthesecuredassetorpropertyoftheborrower.ThepossessionnoticeissuedbytheBankundersection13(4)oftheActprovidesarighttotheborrowertoapproachtheDebtRecoveryTribunalandfileanAppealifhefeelsaggrieved.IftheDRTdismissestheapplication,thentheborrowerisentitledtofileanappealtotheDebtRecoveryAppellateTribunal.IncaseswheretheborrowerdidnotapproachtheTribunalandincaseswheretheborrowerfailstomeetthedemandmadebytheBank,theBankwilltakestepsintakingphysicalpossessionofthepropertyundersection14andcansellthesecuredassetinpublicauction.

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Sonia 3yearsagoWhatisthecurrentexactprocedurebywhichBanksinitiatearecoveryfromadebtoraftertheLoanbecomesanNPA?DobankshaveanobligationtoselltheirNPAstoSC/ARCsimmediatelyafteradefaultof90daysonthedebtorspart?AndhowmuchtimedoestheSC/ARCgivethedebtortomakegoodtheinstallmentsmissed?

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DarshanaRajendran 3yearsagoIagreethatinthecaseyoumentioned,thecourtheldthatifacontractualrighttorepossessionisprovided,thereisnoneedforcourttointerfere.Whilethiscasestatedthatthehypothecateecantakepossessionofgoodswithoutinterventionofthecourtasperthehypothecationagreement,therehavebeenothercaseswherecontraryviewshavebeenexpressedbycertaincourts.Forexample:IncaseofTarunBhargavaVs.StateofHaryana&Anr.,itwasheldthatIftheagreementisheldtobealoanagreementandrightsofthecreditorareheldtobethoseofahypothecatee,rightsofthepartiesundertheagreementwouldbedifferent.Ahypothecatee,cannottakepossessionofthesecuritywithoutinterventionoftheCourt,thoughhehasarighttotakepossessionortosellthehypothecatedpropertythroughCourtortogivenoticetothehypothecatortoenforcethesecurity.Permittingahypothecateetophysicallyrepossessthehypothecatedgoodsagainstthewishesofthehypothecatorwillenablethehypothecateetotakelawinhisownhands,deprivethehypothecatorofhisdefencebydeprivinghimoftheuseofgoodsevenwhenhisclaimmaybethathedoesnotoweanymoney

Hencetherewereconflictingjudgmentsontherightsofthehypothecatee.SARFAESIresolvedthisconflictbyconferringpowersofenforcementonbanksandfinancialinstitutions.

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SoorajSharma97 3yearsagoVeryevidently,youhavenotreadStatebankofIndiaV.S.B.ShahAli,sinceyousayallthis.Onlyservestohighlighthowpoorlyresearchedthisarticleis.

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DarshanaRajendran 3yearsagoTheSARFAESIAct,forthefirsttime,recognisedtheconceptofcomprehensivesecurityinterest.Howeveritistruethatitdoesnothaveuniversalapplication,itonlyappliestobanksandfinancialinstitutions.Also,whilepossessorysecurityiscoveredbytheIndianContractsAct,therewerenoprovisionsinregardtononpossessorysecuritiesuntilSARFAESIwasenacted.

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sooraj 3yearsagoNotallsecuredcreditorsaregiventhebenefitofprotectionunderSARFAESIAct.Infact,theblogpostwronglysuggeststhatthesecuredcreditorsdidnothavesuchprotection.Pledgeealwayshadtherightofsellingthepawnedgoodsandthisrighttheyhadbeenpossessingsince1872(passageofIndianContractAct).TherearemanyspeciesofsecuredcreditorsandsecurityandSARFAESIdoesnotcoverallofthem.So,thisblogpostreallymissesthepoint.

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NishaTatkar 3yearsagowhatisthedifferencebetweenSecuritisation&EnforcementofSecuritywithoutinterventionofthecourt?

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