A Presentation on

SARFAESI ACT and NPA Management

Submitted By :

Anurag Ghosh (16PGDMBFS08)

INTRODUCTION

• The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act of 2002 allows banks and financial institutions to auction properties (residential and commercial) when borrowers fail to repay the loans.

• It was passed in 2002 and amended in 2004.

• It helps the bank to reduce their burgeoning NPA’s by adopting measures of recovery and reconstruction.

• Upon loan default the bank can seize the securities or mortgages that are kept with bank.

INTRODUCTION (contd.)

• SARFAESI is applicable for secured loans only where banks can enforce the underlying securities like ( hypothecation , pledge and mortgages)

• In such cases courts intervention is not required and the property can be croaked unless and until the property is invalid or fraudulent.

• But if the loan given out is unsecured in that case the bank or financial institution needs to move to the court.

HISTORY

• Before SARFAESI Act, Recovery of Debts due to Banks and Financial Institutions Act of 1993 was used for recovery of the loans.

• It had various features like Debt Recovery Tribunal and Debt Recovery Appellate Tribunals.

• There were money loopholes in the existing law which was exploited by the borrowers and the lawyers.

• This in turn made the government to form a committee to come up with a new act which is much more stringent and has no loopholes. A committee led by Mr.Andhyarujina was appointed.

• The committee various new legislations to empower bank and financial institution to take possession of the NPAs.

SARFAESI=POWER

• In short SARFAESI act gives the power to the Banks and Financial Institution to recover the NPAs by the taking possession of the assets.

SCENARIO OF LOANS AND ADVANCES IN INDIAN BANKS

• The incidence of Non- performing assets (NPAs) is affecting the performance of the credit institutions both financially and psychologically

• The threat of burgeoning credit risk is looming

• 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”.

• Indian banks now have close to Rs 6, 00,000 crore bad loans.

CURRENT SCENARIO OF NPA

CREDIT POLICY IN INDIAN BANKS

• The main aim of the credit policy is Indian Bank is to provide adequate credit flow to the productive sectors of the economy and cater to them for their betterment.

• Aims at priority sector lending.

• The bank rate, the base rate, CRR , Repo Rate is the parameters which the RBI uses to control the liquidity in the market.

• there is a chance of growth government wants the people to take more and more loans; it want to infuse liquidity in the market.

• Currently due to burgeoning NPA’s the credit policy has been stringent. Banks has been vigilant while giving out loans.

DATA ANALYSIS ON INDIAN BANK NPA’s AND ITS CREDIT

RISK We have taken the current NPA’s from the balance sheets with respect to its

loans and advances.

WHY SARFAESI IS IMPORTANT?

• In data analysis and while going to the recent NPA scenario of the banks it is found that the amount of NPA is burgeoning.

• Two ways by which the banks can reduce this NPA is by either recovering the assets or by proper credit risk management , but the former measure seems more apt in this scenario.

• And in order to recover the assets banks needs to take strict measures.• If in every case the bank needs to take the help of Judicial court to resolve the

issue then it would not help the cause.• SARFAESI gives the bank the ultimate power to recover the secured assets

from the borrower without intervention of court.• So it saves a lot of time.• Currently this act has been turning to be very beneficial in recovering the

assets. Hence increasing the profitability of the banks.

HOW IT WORKS?

• The SARFAESI act 2002 gives powers to “seize and desist” to the banks.

• Banks can give a notice in writing to the defaulting borrower requiring it to discharge its liabilities within 60 days.

• If the borrower fails to comply with the notice ,the bank may take the recourse to one or more following steps :

i. Take possession of the security of the loan.ii. Sale or lease or assign the right over the security.iii. Manage the same or appoint any other person to manage the same.

(Contd.)

• The SARFAESI Act also provides for the establishment of Asset Reconstruction Companies (ARC) regulated by RBI to acquire assets from banks and financial institution.

• The act provides for sale of financial assets by banks and financial institutions to asset reconstruction companies (ARCs). RBI has issued guidelines for the banks on the process to followed for sales of financial assets to ARCs.

PRE CONDITIONS

• The act consists of four conditions for enforcing the rights those are :

I. The debt is secured.II. The debt has been classified as an NPA by the banks.III.The security to be enforced is not an agricultural land.IV. The outstanding dues are one lakh and above and more than 20% of the

principal loan amount and interest there on.

RIGHTS OF THE BORROWER

• The borrower can at any time clear its dues before the sale is concluded and avoid loosing the security.

• The borrower will be entitled for compensation for such acts.

• In case of illegal actions is taken by banks or the bank’s officer than legal action can be taken against that authority.

• For any grievance redressal the borrower can approach the DRT and thereafter the DRAT in appeal. The limitation period is 45 days and 30 days respectively.

METHODS OF RECOVERY• Securitization

The process of issuing marketable securities backed by a pool of existing assets such as auto or home loans. After an asset is converted into a marketable security it is sold. A securitization or reconstruction company may raise funds by selling the same.

• Asset Reconstruction Enacting the SARFAESI act has given birth to ARC’s in India. It can be done by proper management of asset of the borrower or selling the asset of the borrower or by part of the property.

RESOLUTION OF DISPUTES

• Whenever there is a scenario of any dispute related to securitization and reconstruction such disputes shall be settled by conciliation or arbitration and conciliation act 1996,as if the parties to the dispute has consented in writing for determination of such dispute by conciliation or arbitration and the provision of that act shall apply accordingly.

SPECIAL SITUATION

• Provision of act not to apply in certain cases like :

I. Any security interest for securing repayment of any financial asset not exceeding one lakh rupees.

II. Any security interest created in agricultural land.III.Any case in which the amount due is less than twenty percent of the principal

amount.IV. The SARFAESI act is not applicable to NBFCs , however it is applicable to

PFIs.

CASES RELATED TO SARFAESI ACT

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 favor 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 Securitization 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 Securitization 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.

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.

CONCLUSION

• The high level of NPA has led to low interest income and loan loss provisioning requirements which reduced the profitability of the banks.

• The act is intended to strengthen the recovery of the banks in order to recover NPA in a faster rate.

• The act empowers the bank to seize and sell the assets without the intervention of court.