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The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act is defined as “an act to govern securitisation and reconstruction of financial assets, as well as the enforcement of security interests, and to provide for a centralised database of security interests formed on property rights, and for issues associated with or incidental thereto.”

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 enables banks and other financial institutions in India to recover non-performing assets (NPAs) without resorting to judicial intervention. NPAs are defined under Section 2(1)(o) of the Act. The Act provides for two strategies for recovering NPAs: taking ownership of the borrower's secured assets, or taking control of the borrower's management or company. The Act also permits the sale of financial assets to Asset Reconstruction Companies (ARCs) in accordance with the Reserve Bank of India's guidelines.

The SARFAESI Act also provides for the establishment of Central Registry of Securitisation Asset Reconstruction and Security Interest (CERSAI). CERSAI is an online registry that records security interests to prevent fraud, such as the use of the same assets as collateral for multiple loans from different banks.

According to the SARFAESI Act, a secured creditor cannot proceed with the enforcement of a security interest until the borrower's account has been designated as a non-performing asset (NPA) in the creditor's books of accounts in accordance with Reserve Bank of India regulations. A 60-day notice requesting repayment of the unpaid balance as well as a list of the assets on which the creditor intends to exercise its security interest must be served to the borrower.

After the 60-day notice period has passed, the secured creditor may assert its security claim over the secured assets of the borrower if the borrower fails to fulfil its commitments to it by:

Ø  Taking control of the secured assets;

Ø  Taking over the management of the secured assets and the right to transfer the assets via lease, assignment, or sale;

Ø  Designating someone to administer the secured assets;

Ø  Compelling anyone who has acquired the borrower's secured assets to pay the sums required to settle the obligation.

The remaining balance may be sought through the Debts Recovery Tribunal or the appropriate court if a secured creditor is unable to obtain the full amount due through the execution of a security interest. A secured creditor may simultaneously pursue remedies under the SARFAESI Act and the DRT. Accounts with an outstanding balance of INR 100,000 or more that are classified as NPAs by the secured creditor are subject to the SARFAESI Act. However, the provisions of the Act are not enforceable in certain circumstances, as outlined in Section 31 of the SARFAESI Act, such as accounts where the residual debt is less than 20% of the initial principal amount and interest.

Right of Borrowers Under SARFAESI Act, 2002:

Section 13 of the SARFAESI Act grants broad powers to creditors, which may be misused against borrowers. To protect borrowers against such abuse, the Act and court rulings provide various safeguards. These safeguards help ensure that borrowers' rights are upheld and their interests are protected. The borrowers have the following rights:

Right to Know: After receiving a 60-days notice, the borrower has the right to submit a representation or objection to the creditor. The creditor must consider the borrower's response with due care and provide the borrower with the reasons for not accepting the objections.

Right of Appeal: Under Section 13(4) of the SARFAESI Act, a borrower may file an appeal with the Debt Recovery Tribunal (DRT) within 45 days of the creditor taking any measures against the borrower. If a person is dissatisfied with the DRT's ruling, he/she may file an appeal with the Appellate Tribunal within 30 days of receiving the DRT's order.

If the DRT or Appellate Tribunal finds that the creditor's possession of the borrower's assets was wrongful, it may direct the creditor to return the assets to the borrower. In such cases, the borrower may be entitled to compensation and costs as determined by the DRT or Appellate Tribunal. The Tribunal can also order the return of the secured assets even if they have been transferred to a third party by the creditor.

The borrower may reclaim their property by paying all outstanding dues before the transfer is concluded.

Right to Fair Valuation of Assets: The lender must issue a notice specifying the fair value of the borrower's assets, along with the reserve price, date, and time of the auction, before selling the assets. This value is determined by the bank's valuers. If the borrower believes the asset is undervalued, he may contest the current auction. In such cases, the borrower has the right to seek a new buyer and introduce them to the lender.

Right to Balance Proceeds: Lenders are required to refund any excess amount recovered after realising their dues. Borrowers should ensure that they receive this money, as it rightfully belongs to them.

Right to Compensation: If the creditor's possession of the borrower's secured assets is not in accordance with the provisions of the SARFAESI Act and related rules, the borrower may be entitled to compensation and costs as determined by the Debt Recovery Tribunal or the Appellate Tribunal. In such cases, the court may direct the creditor to return the secured assets to the borrower along with the compensation and costs determined by the court.

References:

https://blog.ipleaders.in/overview-of-the-sarfaesi-axt-2002/

https://redlaw.in/remedies-available-to-the-borrowers-against-action-of-secured-creditor/

https://m.economictimes.com/wealth/borrow/your-rights-if-you-cant-repay-a-loan/your-lender-must-follow-the-due-process/slideshow/71007270.cms