The SARFAESI Act was passed on December 17, 2002, to lay out procedures to enable Indian creditors to recover their debts swiftly. The SARFAESI Act allows banks and other financial institutions to immediately sell residential or commercial properties that have been pledged with them to get better loans from borrowers. Before the passage of this Act, businesses had to resort to civil suits in the courts to recover their debts, which was a lengthy and time-consuming procedure.
According to the SARFAESI Act, if a borrower defaults on a mortgage secured by collateral backed by a financial institution, the financial institution is given broad rights to collect its debts from the borrower. The lender can seize possession of the borrower’s pledged goods, take over control of them, engage any man or woman to control them or ask the borrower’s borrowers to pay their dues as well, concerning the asset, after providing a 60-day letter. This restoration approach saves banks and other financial institutions a significant amount of time that would otherwise be wasted due to judicial action.
One of the Act’s most significant flaws is that it does not apply to unsecured creditors. This, as well as other flaws in the restoration methods, were addressed in the 2016 Insolvency and Bankruptcy Code. Experts suggest that ARCs, or Asset Reconstruction Companies, which buy distressed assets, provide an alternate option for banks to unload questionable debt and ensure a more focused and green resolution.
What is the significance of this?
To begin with, cooperative banks were no longer covered under the classification of banks for which the SARFAESI Act became applicable. In 2003, a notification was made (without modifying the legislation) to include cooperative banks in the category of banks eligible to use SARFAESI.
The authorities revised the Act in 2013 to include cooperative banks under the category of institutions entitled to use it.
However, petitions have been filed questioning the notification’s jurisdiction and Parliament’s ability to alter the SARFAESI Act. The Supreme Court addressed the issue on May 5, 2020, when it ruled in favor of cooperative banks under the SARFAESI Act.
Because of the involvement of civil courts and cooperative tribunals, this pass helps cooperative banks to avoid undue delays in the restoration of their bad loans. With large deposits from ordinary investors, India’s banking system has 1,544 city cooperative banks (UCBs) and 96,248 rural cooperative banks. Given their scale, the quick restoration of defaulted loans is important for the smooth operation of such cooperative banks.
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