Guidelines for Borrowers, NPAs under the SARFAESI Act, 2002
The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act of 2002 is quite a convenient tool for banks and other financial institutions which includes Non-Banking Financial Company (NBFC) to recover the debts from their borrowers as financial creditors. But the borrowers are also entitled to certain rights under this SARFAESI Act of 2002 to claim damages if there is default on the part of these financial institutions.
The term ‘borrower’, according to Section 2 of the SARFAESI Act, 2002 refers to “any person who; has been granted financial assistance by any bank or a financial institution…and includes a person who becomes the borrower of a securitization or a reconstruction company upon acquisition by it….”.
In the recent years the above mentioned financial and lending institutions are facing a persistent problem of rising number of defaults in the repayment of the loans including the steep rise in the number of Non-Performing Assets (NPAs) and the provisioning made by these financial and lending institutions respectively. It is necessary to understand what is a Non-Performing Assets (NPAs), which is more popularly known as a NPA.
The initial process of declaring NPAs:
- The borrower does not make the payment of three instalments regularly after 90 days but upto the period of 12 months, the account gets classified as a Non-Performing Assets (NPA).
- According to Section 13 of the SARFAESI Act, 2002, the bank should serve a notice on the borrower for taking over his/her assets which it is holding in possession as security within the time period of 30 days.
- Within the period of 60 days from the date of notice, the bank should also serve a notice on the borrower stating the penal provisions and legal consequences.
- Before the bank takes any measure like selling off the NPA, they must inform the respective State Level Inter-Institutional Sub-Committee (SLIIC) in their respective state
As per the Section 9 of the SARFAESI Act, 2002, the Reserve Bank of India (RBI) may cancel the registration certificate of the Securitization and Reconstruction Company (SRC) if the company fails to carry on the business off asset reconstruction and securitization. The certificate of registration comes with certain requirements which the asset recon. company must adhere to while doing its duty. If the company fails to adhere to such requirements, the RBI may accordingly proceed with the required measures.
There have been instances where banks have sold off the borrower’s assets to Asset Reconstruction Companies (ARC). The banks, in these cases, bundled a few NPA’s and sold them off at a discount without informing the borrower nor disclosing it to the SLIIC, which is a necessary precondition as stated earlier.
It was observed by the Hon’ble Supreme Court in the case of Pegasus Assets Reconstructions Pvt. Ltd. vs Harayana Concast Ltd. And Ors., AIR 2016 SC 494 that, considering that the secured creditor has the right to enforce its security interest without the intervention and the judicial interference of the Court or any Tribunal, the borrower, in case of any grievance, can seek redressal under Sections 17 and 18 of the SARFAESI Act.
Guidelines for Borrower
- The borrower should show his bona fide i.e. he/she has no intention to default on the credit and/or loan repayment.
- The borrower should show his inability and/or incapacity which led to the default on the credit and/or loan repayment.
- The borrower should elucidate the mitigating steps taken by him/her to avoid the default on the credit and/or loan repayment.
- The borrower should come up with a plan of action to repay back the credit and/or loan.
- The borrower should ask for the credit restructuring.
If the borrower is aggrieved by the action and/or recourse taken by the financial and lending institution under the SARFAESI Act, 2002 then he/she can always make an application for an appeal under Section 17 before the Debt Recovery Tribunal whereby an appeal can be preferred to the Debt Recovery Appellate Tribunal (DRAT), the High Court and the Supreme Court of India.
Authored By: Adv. Anant Sharma & Abhijith Christopher