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SARFAESI Act

15th May – SARFAESI Act

SARFAESI

The Supreme Court recently held that the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) will be applicable to cooperative banks, and not just commercial banks. This has been whole-heartedly welcomed by co-operative banks.

What is SARFAESI Act?

  • The SARFAESI Act was passed on December 17, 2002, in order to lay down processes to help Indian lenders recover their dues quickly.
  • The SARFAESI Act essentially empowers banks and other financial institutions to directly auction residential or commercial properties that have been pledged with them to recover loans from borrowers.
  • Before this Act took effect, financial institutions had to take recourse to civil suits in the courts to recover their dues, which is a lengthy and time-consuming process.

Provisions –

  • As per the SARFAESI Act, if a borrower defaults on a loan financed by a bank against collateral, then the bank gets sweeping powers to recover its dues from the borrower.
  • After giving a notice period of 60 days, the lender can take possession of the pledged assets of the borrower, take over the management of such assets, appoint any person to manage them or ask debtors of the borrower to pay their dues too, with respect to the asset.
  • This recovery procedure saves banks and financial institutions a lot of time which otherwise would be long drawn out due to the intervention of courts.
  • One of the major drawbacks of the Act is that it is not applicable to unsecured creditors. This and other drawbacks in the recovery mechanisms were plugged in the Insolvency and Bankruptcy Code, 2016.
  • ARCs or Asset Reconstruction Companies which buy out distressed assets are the other alternative that banks use to offload doubtful debt, to ensure more focussed and efficient resolution, say experts.

Significance of the move –

  • Co-operative banks initially were not covered under the definition of banks for which the SARFAESI Act was applicable. On May 5, 2020, the Supreme Court ruled in favour of co-operative banks invoking the SARFAESI Act.
  • This move helps co-operative banks avoid inordinate delays in the recovery of their bad loans due to the involvement of civil courts and co-operative tribunals.
  • The Indian banking system has 1,544 urban co-operative banks (UCBs) and 96,248 rural co-operative banks, with substantial deposits from retail investors.
  • Considering their size, for the smooth functioning of these co-operative banks, speedy recovery of defaulting loans is critical.
  • Allowing co-op banks recourse to the SARFAESI Act can expedite the process of liquidation or resolution.

SourceThe Hindu Business Line

QUESTION – Recently, the Supreme Court has allowed the Cooperative banks to invoke SARFAESI Act to help them recover their dues quickly. What is it? How will it benefit the cooperative banks?

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