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Intro To Sarfaesi

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15 views9 pages

Intro To Sarfaesi

Uploaded by

sarah joy
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Securitisation and Reconstruction

of Financial Assets and


Enforcement of Security Interests
Act, 2002
Background
• 60s-70s- nationalization of banks
• After two decades India faced severe balance of payment crisis- India
was on verge of defaulting on its international debt obligations +
massive inflation (13%) + insufficient forex reserve + more importing
than exporting
• India had to airlift gold to International Monetary Fund (IMF) to loan
money to meet its financial obligations.
• This event called into question the previous banking policies of India
and triggered the era of economic liberalization in India in 1991.
• Banks were responsible for 80% of flow of money in the economy +
serious reforms needed + maintain international reputation and to
support country’s financial needs
• M Narsimhan committee was appointed by Manmohan Singh – 1991
& 1998.
• 1st report- recommended setting up of asset reconstruction fund + A
4-tier hierarchy for the Indian banking system with 3 or 4 major public
sector banks at the top and rural development banks for agricultural
activities at the bottom +
• 2nd Report- Banking Sector Committee- The Committee wanted the
banks to reduce their NPAs to 3% by 2002. It also recommended the
formation of Asset Reconstruction Funds or ARC. The
recommendations led to the introduction of SARFAESI.
NPA- Non-Performing Asset
(2(1)(o))
• Banks/FIs to recognize incipient stress in borrower accounts,
immediately on default, by classifying them as Special Mention
Account
• SMA accounts continues to remain overdue for more than 90 days
period, the accounts get categorized as NPA by such Banks/Fis
• if the account remains NPA for less than or equal to 12 months then it
is classified as Sub-Standard Asset
• if the assets remain NPA for more than 12 months they are classified
as doubtful assets
• At last – bad loans
Role of NPA
• Banks are evaluated on their standard of assets as well as their number
of branches and deposit volume.
• NPAs have detrimental impact on the bank's earnings, liquidity, and
solvency.
• Failure in the banking industry could have a negative effect on several
other industries
• declaring NPA is essential to identify the impairment of accounts and any
deferment in classification of such assets will not only be against the RBI
norms but would further lead to non-recognition of stress in the books
of the Lenders which will distort the financial statements published by
them.
SARFAESI - Objectives
• Regulate Securitisation & Reconstruction of financial asset- The Act
facilitates the creation of ARCs that specialize in the acquisition and
management of NPAs. Financial institutions can sell their NPAs to
these ARCs, which then undertake the task of asset reconstruction
and recovery.
• Enforcement of security interest- Secured creditors are empowered
to take possession of the secured assets and thereafter sell them,
without the court's permission and/or intervention, ensuring a faster
and more efficient recovery process.
How SARFAESI Works?
• Two Notices – Section 13 (2) (Demand Notice) + 60 days time limit +
Section 13(4) (Possession Notice)
Selling of secured assets
• Public auctions – open bidding process
• Private treaties
• Inviting tenders
Sale of immovable assets under the SARFAESI Act is governed by Rule 8 and 9
of the Security Interest (Enforcement) Rules, 2002 ('Rules').
• R. 8: This rule outlines the procedure for taking possession of the immovable
property, including the requirement to issue a public notice about the
intended sale.
• R. 9: This rule specifies the detailed process for the sale of the asset,
including its valuation, auction, and issuance of a sale certificate to the buyer.

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