The SARFAESI Act, 2002

 The SARFAESI Act, 2002 — formally known as the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 — is a powerful legal tool in India that allows banks and financial institutions to recover non-performing assets (NPAs) without the intervention of courts.

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🏛️ Objective of the SARFAESI Act, 2002

To enable banks and financial institutions to:

• Recover bad loans (NPAs) efficiently

• Enforce security interests (i.e., sell mortgaged/hypothecated assets)

• Facilitate the securitisation of loans

• Support Asset Reconstruction Companies (ARCs) in managing distressed assets

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📘 Key Features and Provisions

1. 🏦 Applicability (Section 2)

• Applies to secured creditors such as banks, financial institutions, housing finance companies, and notified NBFCs

• Does not apply to agricultural land, unsecured loans, or loans under ₹1 lakh

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2. ⚠️ Non-Performing Asset (NPA)

• A loan is classified as an NPA if it remains overdue for 90+ days.

• Only after being declared NPA can action under SARFAESI be initiated.

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3. 📩 Section 13: Enforcement of Security Interest

Allows a secured creditor to:

• Serve a 60-day notice to the borrower to repay dues

• If no payment is made, the creditor can:

  • Take possession of the secured asset

  • Take over management of the borrower's business

  • Appoint a manager

  • Sell or lease the asset to recover dues

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4. 🏢 Asset Reconstruction Companies (ARCs) (Section 3)

• ARCs are specialized institutions that acquire bad loans from banks

• They reconstruct or securitize these assets to recover value

• Must be registered with RBI

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5. 📝 Securitisation (Section 5)

• Involves converting illiquid loans into tradable securities (pass-through certificates)

• Helps banks move bad assets off their balance sheets

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6. 🧑‍⚖️ Appeals (Section 17)

• The borrower can appeal to the Debt Recovery Tribunal (DRT) within 45 days of the enforcement action.

• Further appeals go to Debt Recovery Appellate Tribunal (DRAT).

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7. 🚫 Limitations

SARFAESI does not apply to:

• Unsecured loans

• Agricultural land

• Loans below ₹1 lakh

• Cooperative banks (as per original law; but later included partially by amendments and case law)

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🏛️ Important Case Law:

🧑‍⚖️ Mardia Chemicals Ltd. v. Union of India (2004)

• Challenged SARFAESI for being unconstitutional

• Supreme Court upheld its validity but allowed borrowers to approach DRT without pre-deposit in some cases

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🔄 Recent Developments

• RBI has allowed NBFCs with ₹100 crore+ assets to use SARFAESI (earlier limit was ₹500 crore)

• Digitization of enforcement process (e-auctions, public notices, etc.)

• Strengthening of Information Utilities under IBC for NPA reporting

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🧾 SARFAESI vs. IBC (Insolvency & Bankruptcy Code)

Aspect	SARFAESI	IBC
Focus	Asset-based recovery	Corporate insolvency resolution
Process	Lender-driven	Creditor or debtor-initiated
Forum	DRT	NCLT
Outcome	Enforce collateral	Revive or liquidate company
Speed	Generally faster (for secured assets)	Time-bound resolution (180–330 days)