The full form of the SARFAESI Act The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act of 2002.
It is the legislative act passed by the Indian parliament in the year 2002 to empower lenders, and it includes banks and other financial institutions to recover their bad loans efficiently.
What was the background behind the sarfaesi act?
Way back in the 90’s, it was observed by Narasimham Committee that banks were facing difficulty in recovering Non-Performing Assets (NPAs). Therefore, to strengthen the process, Debt Recovery Tribunals were set up in 1993, and the loan recovery process was established beyond the jurisdiction of ordinary courts.
In the year of 1998, Narasimham Committee – II observed that Debt Recovery Tribunals (DRTs) are required to strengthen with a law. Therefore, sarfaesi act was enacted in the year 2002.
What is SARFAESI Act?
The SARFAESI Act stands for the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act.
It is a legal framework established by the Indian government to handle non-performing assets (NPAs) and to facilitate asset reconstruction.
This act empowers banks and financial institutions to take action against borrowers that are defaulting and help them recover their dues.
Under this act, banks get the power to enforce their security interests to seize and sell the collateral without the need of the intervention of the court.
The act offers a faster and more efficient process to resolve bad loans and to lower the burden on the banking system. The sarfaesi act has played a significant role in strengthening the financial sector and improving debt recovery in India.
What are the objectives of SARFAESI ACT?
Three distinct approaches are outlined by this act for the recovery of non-performing assets (NPAs).
- Securitization: When various debt instruments are bundled, e.g., mortgages and consumer loans and they are sold through bonds, then it is called securitization. It enables the transfer of assets and reduces the burden on banks.
- Asset Reconstruction: In this process, non-performing or bad assets are transformed into productive assets. It is done with the assistance of asset reconstruction agencies. The aim of this process is to revive the value of distressed assets and maximize recovery for banks and financial institutions.
- Asset Reconstruction: In this process, non-performing or bad assets are transformed into productive assets. It is done with the assistance of asset reconstruction agencies. The aim of this process is to revive the value of distressed assets and maximize recovery for banks and financial institutions.
Enforcement of Security without Court Intervention According to this act, banks and financial institutions get enforced to establish security interests. They can initiate recovery proceedings without the need of intervening in the court. Thus, a systematic and more streamlined process for debt recovery can be established.