The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 is an incredible instrument in the possession of the banks and Financial Institutions (FIs) as lenders. This Act assists them with upholding protections held as security to credits dispensed by them should such advances turn out as non-performing assets (NPAs) during the money of the advance without impedance from the Courts. Segment 13 of the Act offers the capacity to the got-leaser even to expel the inhabitant. This article talks about the legal provisions related to Non-performing assets and the steps that a bank can take when a property is declared as an NPA.
Let’s understand the SARFAESI Act 2002
An asset becomes non-performing when it ceases to generate income for the bank. Earlier an asset was considered a non-performing asset (NPA) based on the concept of ‘past due’. A ‘non-performing asset’ (NPA) was defined as credit in respect of which interest and/or instalment of principal has remained ‘past due’ for a specific period of time.
With a view to moving towards international best practices and to ensure greater transparency, 90 days overdue norms are provided for the identification of NPAs.
As such, with effect from March 31, 2004, a non-performing asset shall be a loan or an advance where:
- Interest and/or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan.
- The account remains ‘out of order’ for a period of more than 90 days, in respect of an overdraft/cash credit (OD/CC).
Identification of NPA accounts for the issue of demand notice under Section 13(2)
Each bank and financial institution must identify the account on which it intends to take action under the act and has to devise its own system of evaluation of the secured assets.
Bank and financial institutions should take the mentioned precautions steps to safeguard their interest
(1) Before the notice under 13(2) is issued, a thorough inspection of the security that are hypothecated to the secured creditors must be undertaken and a comprehensive report should be made, detailing complete security available at the time of inspection.
(2) Details of all the book debts along with the name of the parties along with addresses must be obtained during the course of the inspection.
A notice under Section 13(2) of the SARFAESI Act is sent to the borrower by registered post. The said notice is received by the borrower/guarantor and the acknowledgement is also to be signed by the borrower/guarantor.
Bank and financial institutions must record the acknowledgement of receipt of the notice
Service of demand notice under Section 13(2) following important point kept in mind:
Clause 2 of Section 13 enlists the following important points on Demand Notice:
(1) The demand notice should be signed by the authorised officer and its contents should be duly verified before dispatch of the notice.
(2) Notice to the borrower as well as guarantor must be issued under Section 13(2).
(3) Notice is to be served at the registered address.
(4) only those securities should be mentioned in the notice in which Security interest is to be enforced subject to Section 31 of the SARFAESI Act.
(5) Demand Notice under Section 13(2) of the act shall be delivered to the borrower or his authorised representative i.e. by Registered A.D. / speed post/courier/email.
(6) Proof of sending notice must be kept with the documents for future reference. If the demand notice has been delivered by hand, a copy of the said notice is duly signed/acknowledged by the concerned borrower.
(7) In case the borrower is avoiding service of notice, it is to be completed by affixing a copy of the notice on the outer door of the house/building of the borrower.
Notice format under Section 13(2) under SARFAESI Act, 2002
To be issued in bank letterhead
Letter No. ………………… Date:……………
Borrower & Guarantor
REF: Loan Agreement Number __________ For an Amount Rs. _______( In ______________ Words)
Sub: Notice under Rule 13(2) of the Security Interest (Enforcement) Rules, 2002 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act, 2002).
Whereas the undersigned being the Authorized Officer of the ___________(Authorized Person Name) of ___________ (Bank Name ) u/s 13(2) of the above said SARFAESI Act, 2002 and in exercise of the powers conferred u/s 13(2) of the said Act read with Rule 3 issued a Demand Notice on _________ calling upon the Borrower(s)/Guarantor(s)/Corporate Guarantor(s) M/s___________ to repay the amount in terms of the said notice within 60 days from the date of the said notice.
And whereas the Borrower(s)/Guarantor(s)/Corporate Guarantor(s) having failed to repay the amount and hence, the undersigned, in the exercise of the powers conferred u/s 13(4) of the said Act read with Rule 4 and/or Rule 8 of the Rules has seized/taken over the possession of the property/properties (hereinafter referred as the said properties) more particularly described herein below on ___________.
And whereas the undersigned in the exercise of the powers conferred u/s 13(4)(a) of the SARFAESI Act, 2002 proposes to realize the bank’s dues by Sale of the said properties.
( BANK NAME )
Expiry of 60 days’ notice period
If the borrower failed to pay the amount mentioned in the notice in full within the period 60 days of receipt of the notice, the secured creditor may take possession of the property by issuing the possession notice.
The creditor can take one or more of the following measures to recover his secured debt, namely:
(a) Take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment, or sale for realising the secured asset.
Provided that the right to transfer by way of lease, assignment or sale shall be exercised only where the substantial part of the business of the borrower is held as security for the debt.
Possession or sale of immovable property
The possession of the immovable secured assets may be taken by way of:
(a) Symbolic possession by affixing possession notice as nearly as possible prepared as per Appendix IV as per rules coupled with its publication,
(b) Constructive possession i.e. by complying with the formalities of symbolic possession coupled with an undertaking from the possessor that he will not part with or alienate any right in the property and shall handover the vacant possession of the property to the bank on a specific day and date, or
(c) Physical possession, i.e. through self attempt / peaceful possession / by obtaining necessary orders of CMM / DM u/s 14 of the SARFAESI Act.
The authorized officer is a quasi-judicial authority. The authorized officer may request the local police authorities for their assistance in taking the physical possession.
Service of possession notice
A possession notice as per Appendix IV of the rules is served upon the borrower to take or cause to be taken the possession of the immovable secured assets and also by way of delivering the said possession notice to the borrower and affixation of the notice on the conspicuous place of the property.
Photographs must be obtained evidencing the above facts and newspaper of the day of affixation of the notice must be kept alongside while taking the photographs.
After taking possession of the property by bank/financial institution (hereinafter called as “secured creditor“) publish the possession notice as soon as possible, but in any case not later than seven days from the date of taking possession. It is therefore noteworthy that this is a very important requirement for the secured creditor to abide by this rule in order to avoid any legal complication.
Subsequently, the possession notice has to be published, within seven days from the date of possession, in two leading newspapers, one of which being in a vernacular language.
The possession kit may include the following items and services and must be carried/arranged at the time of going in for physical possession:
- Copy of the SARFAESI Act and Rules thereunder.
- Copy of Notice under Section 13(2).
- Copy of the plan of the mortgaged property giving demarcations along with a copy of the title deed and map showing directions.
- Copy of the old valuation report for the details of the property.
- Sufficient padlocks, steel chain, service of lock opener may be arranged.
- Items like cloth and lac, candle, torch, emergency light, battery, matchbox, a brass seal of the bank and needle for sealing the locks.
- Bank’s stickers, fevicol and gum etc. for pasting the notices.
- Services of photographers/cameras and video cameras should also be arranged for recording the activity and status of the property during the course of taking over the possession.
- Prescribe possession notice appendix IV.
- Black paper, carbon paper, forms of Panchnama Inventory and other notices etc. as per rules.
Valuation of immovable secured assets
After taking possession under Rule 4(1), the authorised officer shall obtain estimated value if considered necessary and shall fix the reserve price of the assets to be sold in consultation with the secured creditor.
The valuation shall be obtained from the approved valuer. The valuer must be on the panel of the bank/FI which should be approved by the board of the director for valuation of assets under the SARFAESI Act.
Sale of immovable property
The authorised officer should keep in mind that it is the right of the borrower to file an application/petition in the DRT within a period of 45 days from the date of possession of secured assets; therefore, a minimum gap of 45 days must be kept between the date of possession and sale.
The sale of immovable secured assets can be affected by any of the following four modes;
(a) By obtaining quotations from the persons dealing with similar secured assets or otherwise interested in buying such assets, or
(b) By inviting tenders from the public
(c) By holding a public auction (including e-auction mode as per Rule 6 (1) and Rule 6 (2A) for movable and immovable respectively.
(d) by private treaty.
Sale through private treaty and by obtaining quotations
- It may be noted that there is a major change in respect of sale under rule 6(3) which now provides that the sale conducted by a secured creditor other than public auction or by inviting public tender shall be on such terms as may be settled between the secured creditors and the proposed purchaser in writing.
- Thirty days notice must be given to the borrower before effecting the sale of secured creditors.
- In case the sale is to be effected through tenders/ public auction, notice must be published in two leading newspapers, one of which should be in a vernacular language having the largest circulation in that locality.
- Complete details must be mentioned in the sale notice as under:
- Details of the borrower.
- Details of secured assets with quantity, identification, lot number etc.
- Reserved price, time, and manner of payment.
- Deposit of earnest money.
- Time and venue of public auction.
- Any other issue which is considered relevant.
Certificate of sale
After the sale, on payment of the sale price, the authorized officer shall issue a certificate of sale as per Appendix III annexure X.
NPAs can no doubt be said to be a hindrance to the free-flowing economy and there always remains a need to get rid of them as fast as possible.
Before SARFAESI Act came into the picture, debt recovery by financial institutions was indeed a cumbersome process. Indian borrowers always had a tendency to cling to their properties and not repay their loans. They resorted to all kinds of gimmicks to avoid the creditors. This used to result in unending litigations. The creditors had to take recourse to civil suits and wait for the court’s decree to recover their dues. The rate of default loans continued to rise.
In the process financial institutions also became reluctant to offer new loans. SARFAESI Act came as a breather to the Financial Institutions. The policy of the Act is to give power in the hands of the creditors to discard NPAs without the court’s interference which has made the debt recovery process easy and hassle-free.