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A Project Report

On

SARFAESI Act and NPA Management

Submitted By

Anurag Ghosh (16PGDMBFS08)

Submitted To

Prof. Deepak Tandon

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ACKNOWLEDGEMENT

I would like to express our gratitude towards Prof. Deepak Tandon for guiding us all throughout the project. Mr. Tandon has been a guiding light for us who has constantly motivating me topursue our area of interest. I have always wanted to work in this kind of project which allows meto brain storm and think. The project given to me was like a learning first and challenge later. I thoroughly enjoyed the brainstorming. I am privileged to work on the project like this which deals with one of the important part of banking sector.

At the same time I express my gratitude towards IMI, New Delhi for providing me with such a platform where I can challenge my limits and surpass the same towards a new horizon of success.

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METHODOLGYI focused on different sets of data, facts and figures. The insights that you can get from data is more than enough. I focused on both sets of data basically primary and secondary sets of data which I have gathered from different sources like RBI, All Banking Solution etc. I have analyzed and studied the data closely. Apart from this I have checked on different sources of data from different banking sites. I have rigorously analyzed the NPA’s of different banks and came to know the about the burgeoning problem of NPA’s that the banks are dealing with. This problem basically indicates towards the credit risks. I focused on proper financial data and used different statistical techniques like regression and correlation for further data analysis. I have considered the NPA and checked the balance sheets of top 5 banks of India. Looked into their total loans and advances and burgeoning NPA’s.

And for understanding of SARFAESI I have analyzed different cases of SARFAESI. I have taken into consideration small caselets. The caselets contains the real life cases that have been filed by the creditor side and with respect to that judgment has been passed by the court. I have analyzed the courts judgment whether it was in lines with the rules of SARFAESI act and whether the judgment was really a good one or not. So this document contains different cases.

Hence tried to find out the efficacy of SARFAESI act in proper NPA Management.

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INDEX

TOPIC PAGE

OVERVIEW ABOUT SARFAESI AND NPA MANAGEMENT 5

RECENT GLOBAL ECONOMIC SCENARIO IN TERMS OF LOANS AND ADVANCES

6

SCENARIO OF LOANS AND ADVANCES IN INDIAN BANK 7DATA ANALYSIS ON INDIAN BANK’S NPA AND ITS CREDIT RISK 8-9WHAT IS SARFAESI ACT? 10SARFAESI ACT AND RULES 11DEBT RECOVERY TRIBUNAL 12HOW DOES SARFAESI ACT OPERATE 13-15CASES RELATED TO SARFAESI ACT 16-21RECOMMENDATIONS 22CCONCLUSION 23BASEL AND IT’S IMPACT ON CREDIT RISK MANAGEMENT 20CREDIT RISK MANAGEMENT IN BANKS AFTER GLOBAL FINANCIAL CRISIS

21

MANAGING AND MITIGATING CREDIT RISK BY DIFFERENT TECHNIQUES OF CREDIT RISK MANAGEMENT

22-23

BIBLIOGRAPHY AND REFERENCES 24

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OVERVIEW ABOUT SARFAESI AND NPA MANAGEMENT

Indian Banking sector contributes largely to the country’s GDP. Indian Banking sector can be called as the lifeline of India. The central bank of India along with in sub ordinate banks controls the financial stability of India. The banking system is so much stabilized that during the US subprime crisis markets of India was not at all impacted. We can take the global economic scenario or the euro zone crisis where the top notch banks of Europe are facing financial crisis and have to run to their country’s central government for the package of bail out. But for Indian Banks it has been a different ball game all together and for this credit goes to Reserve Bank of India. The Indian Banking has been continuously adding value to the country’s economy.

But in recent times Indian Banking is somewhat is troubled waters due to the burgeoning problem of NPA or Non Performing Assets. This problem has been bothering the Indian Banks a lot. The main revenue of the banks come from the interest they earn by giving out loans from which it maintains its operational cost. The person or the organization who had taken loan from the banks are defaulting sometimes they are not even the interest on the loan for 90 days and this is leading to NPAs. This in turn is reducing the revenue of the banks and in turn reducing the profitability. The burgeoning number of NPAs in banking sector has created deep concerns among the Indian banking sector as the assets of Indian Banks are reducing. The general percentage of NPA to the total banking assets needs to be within 4% but now it overshoot to almost 12%.

The central bank has been taking certain measures to curb this burgeoning problem. Various acts are being enforced to enhance better NPA Management and in this regard SARFAESI act has been a landmark. It helps in better NPA Management and it has been yielding results and recovering the NPAs. Somewhere somewhat down the line some stringent measures were required from the government and central bank’s end to maintain a check.

The SARFAESI act will be discussed thoroughly along with NPA Management and DRT in this article.

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RECENT GLOBAL ECONOMIC SCENARIO IN TERMS OF LOANS AND

ADVANCESThe global economic scenario is not in a good shape at all. The banking sector is in a very bad shape after the US subprime crisis and the fall of Lehman brothers; after that crisis banking sector worldwide has not been able to get out of this shockwave. It is a ray of hope that in this turmoil situation also Indian Banks have been doing well. The failure to somewhat extent is due to failure of the most important leg of the bank that is the credit section. The subprime crisis also took place due to the very same reason, the failure of the borrowers to repay the loans. A situation starting in 2008 affecting the mortgage industry due to borrowers being approved for loans they could not afford. As a result, a significant rise in foreclosures led to the collapse ofmany lending institutions and hedge funds. And this is not only the case in USA banks in Japan and all over Europe has been facing the same scenario.

Total economic growth is also slowing down due as a result lending from banks are also slowing. The banks are turning into risk averse, and are very careful while giving loans. This both the scenario has impacted both the global banks and worlds economic growth directly as there has been a symbiotic relation.

All the pioneer global banks are working on the same to curb the crisis by implementing different norms and following different best practices, certain conventions are being devised.

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SCENARIO OF LOANS AND ADVANCES IN INDIAN BANKS

As per the Reserve Bank of India (RBI), India’s banking sector is sufficiently capitalized and well-regulated. The financial and economic conditions in the country are far superior to any other country in the world. Credit, market and liquidity risk studies suggest that Indian banks are generally resilient and have withstood the global downturn well. The Indian banking system consists of 26 public sector banks, 25 private sector banks, 43 foreign banks, 56 regional rural banks, 1,589 urban cooperative banks and 93,550 rural cooperative banks, in addition to cooperative credit institutions. Still, Public-sector banks control nearly 80 percent of the market, thereby leaving comparatively much smaller shares for its private peers. Since 1992, the banking sector reforms were introduced which faced new challenges in the ever changing scenario. The challenges were many amongst them vital challenges were “4 Cs” i.e. Credit, Customer, Computer, and Capital Restructuring. In the changing scenario, the banks are under tremendous pressure to redefine their priorities, in order to manage these challenges effectively for their survival and growth. The incidence of Non- performing assets (NPAs) is affecting the performance of the credit institutions both financially and psychologically. Nonperforming assets (NPA) is not only non – performing but also makes the banker and the bank non-performing as it

1. Prevents or delays recycling of funds.2. Denies income from the assets by way of interest3. Making profit by way of provision.

NPA is a disorder resulting in non –performance of a portion of loan portfolio leading to no recovery or less recovery/income to the lender.NPA represent the quantified “Credit Risk”. It also plays havoc on the mental make-up of the banker where in the banker tries to go slow on lending, fearing future NPAs, it may lead to delay and denial of credit resulting in low off – take of lendable funds.

Indian banks now have close to Rs 6, 00,000 crore bad loans. As a point of comparison, that’s the total asset size of a big lender like Bank of India.

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DATA ANALYSIS ON INDIAN BANKNPA’s AND ITS CREDIT RISK

We have taken into consideration the top 5 banks of India for understanding the scenario and its analysis

NPA(Crores) Loans & Advances(Crores)

Bank of Baroda 40,521.04 383,770.18

State Bank Of India 98,172.80 1,463,700.42

HDFC 4,392.83 464,593.96

ICICI 26,221.25 435263.94

PNB 55,818.33 412,325.80

On closer look on this data we found that with higher loans and advance NPA increases. We have tried to analyze the same with different statistical approach like regression and correlation.

REGRESSION ANALYIS

NPA(Crores) Loans & Advances (Crores)

NPA(Crores) 1

Loans & Advances (Crores) 0.813978566 1

We found that there is strong correlation between loans and advances and NPA , So banks should be very much cautious about lending out loans.

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The above graph shows the parabolic relation between NPA and Loans and Advances, which also signify more amount of loans and advances without proper security can expose a bank to credit risk which results in more and more NPA

Therefore the credit policies are being considered while giving out loan; different protective measures are taken on this regard.

y = 0.0002x2 - 14.828x + 568039R² = 0.98

0.00

200,000.00

400,000.00

600,000.00

800,000.00

1,000,000.00

1,200,000.00

1,400,000.00

1,600,000.00

0.00 20,000.00 40,000.00 60,000.00 80,000.00 100,000.00 120,000.00

Loans

&

Advances

NPA

Series1

Poly. (Series1)

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WHAT IS SARFAESI ACT?The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (also known as the Sarfaesi Act) is an Indian law .It allows banks and other financial institution to auction residential or commercial properties 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 many right for enforcement of security interest under section 13 of SARFAESI Act, 2002. If borrower of financial assistance makes any default in repayment of loan or any installment and his account is classified as Non performing Asset by secured creditor,then secured creditor may require before expiry of period of limitation by written notice to the borrower for repayment of due in full within 60 days by clearly stating amount due and intention for enforcement. Where he does not discharge dues in full within 60 days, THEN WITHOUT INTERVENTION OF ANY COURT OR TRIBUNAL Secured creditor may take possession (including sale,lease,assignment) of secured asset, or take over management of business of borrower or appoint manager for secured asset or without taking any of these action may also proceed against guarantor or sell the pledged asset, if any.

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SARFAESI ACT AND RULES

SARFAESI Act (The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002) was enacted to regulate securitization and reconstruction of financial assets and enforcement of security interest created in respect of Financial Assets to enable realization of such assets.

The SARFAESI Act provides for the manner for enforcement of security interests by a secured creditor without the intervention of a court or tribunal. If any borrower fails to discharge his liability in repayment of any secured debt within 60 days of notice from the date of notice by the secured creditor, the secured creditor is conferred with powers under the SARFAESI Act to

a) take possession of the secured assets of the borrower, including transfer by way of lease, assignment or sale, for realizing the secured assets

b) takeover of the management of the business of the borrower including the right to transfer by way of lease, assignment or sale for realizing the secured assets,

c) appoint any person to manage the secured assets possession of which is taken by the secured creditor, and

d) require any person, who has acquired any of the secured assets from the borrower and from whom money is due to the borrower, to pay the secured creditor so much of the money as if sufficient to pay the secured debt.

The Central Government has prescribed Security Interest (Enforcement) Rules, 2002 pursuant to the powers conferred on it under the SARFAESI Act. The foregoing enforcement measures must be exercised by a secured creditor in accordance with the Enforcement Rules and are further subject to guidelines issued by the RBI.

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DEBT RECOVERY TRIBUNAL

Government of India has constituted 33 Debt Recovery Tribunals and 5 Debt Recovery

Appellate Tribunal across the country. The idea was to keep in line with the international

trends on helping financial institutions recover their bad Debt quickly and efficiently.

These debt recovery tribunals are located across the country. The Debt Recovery

Tribunal is located across the country. In Big Cities, there are more than one DRTs.

However, there are some states which don’t have DRTs. The Banks & Financial

Institutions and other parties in these States have to go to Debt Recovery Tribunal located

in other states having jurisdiction over there area. Thus the territorial jurisdiction of some

Debt Recovery Tribunal is very vast. For example, the Debt Recovery Tribunal located in

Guwahati has jurisdiction over all the seven North Eastern States. Similarly, the territorial

jurisdiction of the Debt Recovery Tribunal located at Chandigarh too has a very wide

jurisdiction over the States of Punjab, Haryana, and Chandigarh.

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HOW DOES THE SARFAESI ACT

OPERATE

This chapter of the project is going to deal with number of ways how a secured debt can be

recovered, how securitisation and asset construction takes place, how security interest is enforced

through this act and last but not the least what are the remedies available to both the parties in

case of any dispute related to the act.

One of the important sections of the SARFAESI Act, 2002 which will be dealt herein in this

chapter is Section 13.

RECOVERY OF SECURED DEBTS IN FOUR WAYS:-1

∑ Take possession of the secured assets of the borrower including right to transfer by way

of lease, assignment or sale for realizing the secured asset.

∑ Take over the management of the business of the borrower including right to transfer by

way of lease, assignment or sale for realizing the secured asset.

∑ Appoint any person to manage the secured assets the possession of which has been taken

over by the secured creditor.

∑ Require at any time by notice in writing any person who has acquired any of the secured

assets from the borrower and from whom any money is due or may become due to the

borrower, to pay the secured creditor, so much of the money as is sufficient to pay the

secured debt.

RECOVERY OF LOANS IN TWO WAYS BY THE BANKS AND FINANCIAL

INSTITUTIONS:-

∑ Enforcement Of Security Interest without intervention of court/ tribunal

∑ Securitisation And Asset Reconstruction

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In the first scenario, Banks and Financial Institutions give loans and advances to borrowers for

a period of time against a secured asset at a certain rate of interest. If there is a default made by

the borrowers, then loans amount becomes due and classified such accounts as Non-performing

asset. Banks and financial institutions take recourse to section 13 of the SARFAESI Act, 2002

whereby banks and financial Institutions can recover loans by selling of the secured asset

through an auction without any intervention of the court.

In the second scenario, Banks and Financial Institutions give loans and advances to borrowers

for a period of time against a secured asset at a certain rate of interest. If there is a default made

by the borrowers, then loans amount becomes due and classified such accounts as Non-

performing asset. Hence banks devise a plan of engaging SPV’s i.e. special purpose vehicle

which is also known as securitization or asset Reconstruction Company and in turn directs such

companies to take over the NPA’s at a certain price such if not the whole amount at least some

portion of it can be recovered by them.

Now, an million dollar question pops up what the Securitisation company will do with such

assets? Hence these companies or SPV’s devise a plan or scheme for each financial asset taken

over from the banks and FI’s. According to such scheme if anybody is interested in it then they

are going to invest in such schemes and they will be issued ‘security receipts’ whereby they will

get some fixed returns from their investment. The persons who are interested in investing is

technically termed as Qualified Institutional Buyers (QIB’s). These entire big process stated is

Asset-Reconstruction.

Mechanism behind the enforcement of security interest:-

Let us take the example where Mr. A (borrower) took a loan from XYZ bank amounting to Rs 50

lakh for business purpose at a certain rate of interest for a period of 3years. But later it was found

out that Mr. A could not repay the entire amount due after 3 years.

As there was a default in repayment of debt or installment, hence banks and FI’s classified such

accounts as NPA’s gives them a notice of 60 days to repay the loan amount due according

section 13 (2). Now, the borrower can make any representation or objection if he wants and send

to bank and FI’s. The secured creditor i.e. banks and FI’s must give a reply to such

representation within 7 days according to section 13(3A). After the Notice period expires, debts

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is being recovered by the banks and financial institutions without intervention of the court in

mainly four ways as mentioned under section 13(4).

ÿ Imp. Points to be kept in mind :-

When the secured asset is immovable property and the borrower made a default then after

the notice period, Possession notice is given under Rule 8(2) of the security

(enforcement) Interest Rules, 2002. By virtue of Section 14 of the SARFAESI Act, 2002

Chief Metropolitan Magistrate or District Magistrate is to assist secured creditor in taking

possession of secured asset.

REDRESSAL OF GRIEVANCES IN CASE OF DISPUTE:-

ÿ According to Section 17 says any aggrieved borrower in relation to Section 13(4) may

make an application to DRT within 45days from date of such measures taken.

ÿ The respective DRT must dispose of such grievance within 60days from the date of

application.

ÿ If the application not addressed within 4 months then he may apply to DRAT (Debt

Recovery Appellate Tribunal) for expeditious disposal of the case. Normal Appeal can

also be made to DRAT within 30days from the date of decision given by DRT (Debt

Recovery Tribunal). Provided further that no appeal shall be entertained unless the

borrower has deposited at first-hand with the Appellate Tribunal 50% of the amount of

debt claimed by the secured creditors or determined by DRT whichever is less.

ÿ Section 17A says that in case of borrower residing in J&K, application to be made to

court of district judge in that state.

To summarize the entire structure of courts in relation to address the grievances of the parties

involved in ascending order:-

1. Debt Recovery Tribunal (DRT)

2. Debt Recovery Appellate Tribunal (DRAT)

3. High Court via writ petition.

4. Supreme court via Special Leave Petition

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CASES RELATED TO SARFAESI ACT, ITS RULINGS AND JUDGEMENT

We are going to analyze the SARFAESI with some caselets and see if the judgment taken with respect to the SARFAESI act is in lines.

CASELETS

CASE 1: Canara Bank Ashram Road vs. Collector of Stamps C/SCA/2113/2012, Gujarat High Court

CASE FACTS: The petitioner is a nationalized bank. A company named M/s. Dairyden Limited (“Borrower”) had availed of financial facilities from the petitioner bank to the tune of Rs.11.55 Crore sometime in the year 2003. At the time of availing of the financial facilities Borrower created a mortgage in favor of the petitioner bank by deposit of title deeds in respect of the land Borrower defaulted in repayment of the credit facility availed of and accordingly the account of Borrower Limited was classified as a non performing asset. The petitioner bank thought fit to proceed against Borrower under the provisions of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. A notice under Section 13, Clause (2) of the SARFAESI Act was served upon Borrower and pursuant to the same the symbolic possession of the secured asset was taken over by the petitioner bank under Section 13, Clause (4) of the Act in the year 2007. Thereafter, the petitioner bank filed an application with the District Magistrate, under Section 14 of the SARFAESI Act praying for that police protection for purpose of taking over the actual possession of the secured asset from the Borrower. The said application of the Petitioner was allowed. Pursuant to the order passed by the District Magistrate, the physical possession of the secured asset was taken over by the petitioner bank on 18th December 2009 by drawing a panchnama. The petitioner bank thereafter placed the property in question for auction, where M/s. Palco Recycle Industries Limited (“Bidder”) being the highest bidder got the property and 'Sale Certificate' was issued by the petitioner bank. In support of said sale, the necessary stamp duty was paid by the bidder. Consequently, authorities under the Gujarat Stamp Act, 1958 took the view that no stamp duty was paid by the petitioner bank where it acquired the possession of the mortgaged property in question from the Borrower, the petitioner bank was liable to pay the deficit stamp duty.

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Judgment

1. Whether action of taking possession pursuant to the provisions of the SARFAESI Act would constitute a conveyance and is liable for stamp duty? The court held that any panchnama drawn at the time of taking over of the physical possession of the secured asset under provisions of Section 13 or pursuant to the order of the District Magistrate under Section 14 of the SARFAESI Act could not be termed as an instrument creating any right or liability in favour of the bank so as to bring it within the ambit of conveyance.

2. Whether debtor is entitled to get back the secured property even if the creditor has taken possession of the same?

On conjoint reading of all sub-sections of Section 13 indicates that after taking possession of the assets the secured creditor gets a right to sell the property for realization of its dues as if the sale has been made by the secured creditor himself. Sub-section (8) clearly indicates that if the dues of the secured creditor together with all costs, charges and expenses incurred by him are tendered to the secured creditor at any time before the date fixed for sale or transfer, the secured asset shall not be sold or transferred by the secured creditor and no further steps shall be taken by him for transfer or sale of that secured asset.

Therefore, even after taking possession, if before sale of the property, a debtor pays the amount as mentioned in sub-section (8) to the secured creditor, in that event no further steps should be taken by the secured creditor and the debtor will be entitled to get back the possession.

Analysis of the Judgment

This is a very good judgment. The secured creditor has been empowered to take possession of the asset for realization of his dues. And at the same time if the secured creditor faces difficulties in repossessing the asset the same can be resolved through exercising rights conferred by section 14 of the Act .The purpose for which the asset is possessed by the secured creditor is “realization of the dues”. The secured creditor solely gets a right of possession for realization of dues by sale of the asset. Further section 13 (8) clearly provides that “If the dues of the secured creditor together with all costs, charges and expenses incurred by him are tendered to the secured creditor at any time before the date fixed for sale or transfer, the secured asset shall not be sold or transferred by the secured creditor, and no further step shall be taken by him for transfer or sale of that secured asset.” Thus in my view the judgment is very much effective as it follows every laws laid by the SARFAESI act, and it at the same time helps in the resolution of disputes and proper NPA Management.

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CASE 2: Poonam Garg vs. Chief Manager, SBI WP (C) 527/2012, High Court of Delhi

CASE FACTS: The question that arose in this particular writ petition is that Whether the Debts Recovery Appellate Tribunal has jurisdiction to condone the delay under Section 5 of the Limitation Act, 1963 in filing of an appeal under Section 18 of the SARFAESI Act, 2002?

Judgment: While section 18 of the Securitization Act prescribes a period of limitation of 30 days for filing of an appeal before the Tribunal from an order passed under Section 17 by the Debts Recovery Tribunal, Section 20 of the RDDBFI Act stipulates a period of 45 days for filing of an appeal to the Appellate Tribunal from an order passed by the DRT. Another significant and material difference between the provisions of Section 18 of the Securitization Act and Section 20 of the RDDBFI Act is that while the proviso to Section 20(3) of the RDDBFI Act enables the Appellate Tribunal to entertain an appeal even after the expiry of the prescribed period of 45 days, if it is satisfied that there was sufficient cause for not filing the appeal within the prescribed period, there is no such stipulation or provision contained in Section 18 of the Securitization Act. When the legislature enacted the Securitization Act, it was certainly aware of the provisions of appeal to an Appellate Tribunal under the RDDBFI Act. Being aware of the provisions, it specifically provided for a different period of limitation of 30 days for an appeal under the Securitization Act and also consciously excluded a provision similar to the proviso to Section20(3) of the RDDBFI Act. The only conclusion that can be drawn from this is that the legislative intent was clear, in that the delay in filing an appeal under Section 18 of the Securitization Act could not be condoned. it is clear that the Debts Recovery Appellate Tribunal does not have the power to condone the delay in the filing of an appeal under Section 18 of the Securitization Act.

Analysis of the Judgment

This judgment is bad in my view. In our view, if a court which has the power to adjudicate a dispute has an inherent power to condone the delay in filing of the appeal. If, a meritorious matter cannot be heard by a court or a quasi judicial body due to delay, the same would amount to denial of justice. The rules and acts laid by the SARFAESI are not followed properly.

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CASE 3: Union Bank of India Main Branch vs. Chief Judicial Magistrate on 6 August, 2010

CASE FACTS: Brief background of the case is that M/S Vivek Iron Industries, Suthatti Bazaar, Station Road, Post Sadar, District Jaunpur, respondent No.2, had taken financial assistance in the shape of cash credit limit on 18.12.1995 and in lieu thereof had created equitable mortgage by depositing the title deed with the Bank. The account of respondent No.2 became irregular and it was declared as NPA on 31.03.2001; the Bank issued notice under Section 13 (2) of the SARFAESI Act, followed by notice under Section 13 (4) of the SARFAESI Act. Notional possession of the property in question was taken on 19.03.2005. The Bank claimed that it was unable to get the physical possession of the secured asset; as such an application under Section 14 of the SARFAESI Act was moved for giving assistance for taking possession of the secured asset on 02.12.2009. In the said proceedings, respondent No.2 appeared and raised objection that the proceedings were barred by limitation under Section 36 of the SARFAESI Act. The Chief Judicial Magistrate accepted the said objection and rejected the application of the petitioner. At this juncture, present writ petition has been filed.

Judgment: Sri Sanjeev Singh, learned counsel for the petitioner, contended with vehemence that totally erroneous view of the matter has been taken by the Chief Judicial Magistrate in respect of limitation, whereas period of limitation is 12 years according to clause 62 of Part V of the Schedule and the limitation would be counted under Section 36 of the SARFAESI Act from the date claim in respect of financial asset is made within the period of limitation, and here date of creation of mortgage was 18.12.1995, so proceedings were well within limitation. In such a situation and in this background, in the garb of claim being time barred, the Chief Judicial Magistrate has transgressed and overstepped his jurisdiction.

Analysis of the Judgment

The judgment was not in a proper form and was totally erroneous. SARFAESI rules were not followed in proper way.

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CASE 4: MARDIA CHEMICALS LTD V. UNION OF INDIA (2004) 4 SCC 311

CASE FACTS: In a notice dated July 24, 2002 to Mardia Chemicals Ltd., the Industrial

Development Bank of India (for short `the IDBI') under Section 13 of the Ordinance, then in

force, required it to pay the amount of arrears indicated in the notice within 60 days, failing

which the IDBI as a secured creditor would be entitled to enforce the security interest without

intervention of the court or Tribunal, taking recourse to all or any of the measures contained in

sub-section (4) of Section 13 namely, by taking over possession and/or management of the

secured assets. The petitioner was also required not to transfer by way of sale, lease or otherwise

any of the secured assets. Similar notices were issued by other financial institutions and banks

under the provisions of Section 13 of the Ordinance/Act to different parties who filed petitions in

different High Courts.

Issues of the case:-

1. Whether it is open to challenge the statute on the ground that it was not necessary to

enact it in the prevailing background particularly when another statute was already in

operation?

2. Whether the terms or existing rights under the contract entered into by two private parties

could be amended by the provisions of law providing certain powers in one sided manner

in favour of one of the parties to the contract?

3. Whether Section 13 of the Act ultra vires of the Constitution?

4. Whether the requirement of 75% of the amount due before appeal to the DRT is onerous

and therefore Section 17 of the Act is ultra vires to the Constitution?

Key points drawn from the case:-

The Court upheld section 13. So it can be argued that the main structure of the statute has

survived. Thereby in other words the SARFAESI Act, 2002 gained constitutional validity.

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CASE 5: MAHAVIR PLANTATIONS P. LTD. AND K.K. STEEL ENTERPRISES V. ICICI

BANK LTD. AND ORS. [2005]127 COMPCAS 456

CASE FACTS: The first respondent-bank, namely, ICICI Bank, granted financial assistance to

the second respondent for which the appellant herein had executed corporate guarantee in favour

of the first respondent-bank. As the second respondent has not fulfilled its obligation, the first

respondent issued a notice to the second respondent on November 20, 2002, under Section 13(2)

of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest

Act, 2002 (hereinafter referred to as "the Act"), calling upon the second respondent to pay the

amount due within 60 days from the date of the notice failing which the bank is at liberty to take

recourse in accordance with law and the said action was challenged by the second respondent

before the DRT-II, Chennai, in Securitisation Appeal No. 19 of 2004, and DRT by its order dated

January 19, 2005, held that the second respondent is liable to pay a sum of Rs. 7,32,19,141.28 as

mentioned in the notice issued under Section 13(2) of the Act, along with interest and other

expenses within 30 days from the date of the judgment failing which the bank is entitled to and at

liberty to proceed with under the SARFAESI Act to recover the amount imposing certain

conditions.

Key points drawn from the case:-

It was held that Demand Notice via Rule 3 of the Security Interest (Enforcement) Rules, 2002 to

borrower under SARFAESI Act is mandatory. Proceedings without such notice will be vitiated.

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RECOMMENDATIONS

∑ Further regulatory support and incentives to facilitate the transfer of NPA’s by banks and financial institution to RCO’s.

∑ Establishment of clear valuation guidelines and acceptance of NPA valuation methodology would eliminate contentions over NPA’s being undersold at auctions.

∑ Providing the flexibility to RCO’s in determination of resolution strategies.

∑ Bringing in the legislative solutions and otherwise resolve the issue of collusion between RCO’s and borrowers.

∑ Bringing in better borrower protection mechanism without allowing debt settlement period to increase by penalizing the frivolous litigation severely.

∑ Incentivizing the growth of the third party debt collection agencies while regulating the same to protect the right of the borrowers.

∑ Clarify and resolve conflicts and interferences between clauses of various acts prevailing in allied and overlapping sectors to improve consistency and implementation.

∑ Proper implementation of the laws must be ensured.

∑ DRT must be more effective in improvising the act.

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CONCLUSIONSecuritisation is expected to become more popular in the near future in the banking sector.

Although the enactment of SARFAESI Act sought to mobilize blocked funds of the banks in the

non-performing assets, the various provisions of the acts have created deep sorrows for the

genuine buyers. The various provisions meant to balance the requirements of the borrowers and

the banks, but it is seen that in real scenario the balance of favour is tilted towards the banks.

These powers are, at majority being misused by the banks to appropriate their interests against

the interests of the buyers or investors.

In the interest off the industrial growth of the country, it is pertinent that the powers, in this act

even if are held to be constitutional should not be acted in an arbitrary manner or in haste. The

courts and the legal fraternity should step up to strike a balance between the industrial growth in

consonance with the policy formulated by the financial institution and State policy on one hand

and recovery of public money on the other. An educated and diligent approach can help in

achieving the object of the Act to make the intention of the legislators a success.

Hence it can be said that it will be very much pertinent for the civil courts to assume a more

social responsibility for the larger interest of the borrowers on one hand and to share the

responsibilities of the banks to mobilize their funds from the numerous non-performing assets.

Lastly the SARFAESI acts helps in the proper NPA Management. Not only this the DRT helps in the proper implementation of the SARFAESI act too.

24 | P a g e

BIBLIOGRAPHY AND REFERENCES∑ www.capgemini.com/resource-file-

access/resource/pdf/Credit_Risk_Management__Trends_and_Opportunities.pdf

∑ http://www.allbankingsolutions.com/banking-tutor/basel-iii-accord-basel-3-norms.shtml

∑ http://www.firstpost.com/business/rs-600000-crore-npas-over-90-with-psbs-is-the-bad-loan-story-turning-scary-2822560.html

∑ http://www.sas.com/en_us/insights/risk-management/credit-risk-management.html

∑ http://www.slideshare.net/sumant3063/credit-risk-management-presentation

∑ www.rbi.org.in

∑ www.investopedia.com

∑ www.moneycontrol.com

∑ www.linkedin.com

∑ https://indiankanoon.org/docfragment/492218/?formInput=sarfaesi%20limitation%20act

∑ http://www.iarc.co.in/content.php?cid=MjA=

∑ www.indiakanoon.org

∑ http://www.articlesbase.com