Sarfaesi Act – [Non-Performing Assets (NPA) to Loss Assets]
The loan given by a bank to an Individual is the Assets of the bank.
loan given to an Individual by the Bank is the Liabilities of the Individual.
The loan amount received by an Individual for some specific purpose from the
bank has to be returned on an Installment basis. In case the installment amount
is not paid to Bank till ninety (90) days, the bank declares it as
Non-Performing Assets (NPA). If the repayment of loan is not done from Ninety
One (91st ) days onwards up to Twenty-Four (24) months, then after the audit,
if it is confirmed that the loan will no longer be paid, the Bank declares it as
Loss Assets. Thereafter, the bank adopts legal options for loan recovery.
SARFAESI ACT, What are the legal provisions of the bank for loan recovery?
Banks have the rights of loan recovery under the following legal provisions-
1) Companies Act – 1956 (Sec 137)
2) Recovery of Debt Act – 1993
(i) Debt Recovery Tribunal (DRT)
(ii) Debt Recovery Appellate Tribunal (DRAT)
3) SARFAESI Act – 2002
NPA FULL FORM
NPA Full Form: Non-Performing Assets of a Bank (Assets and Liability)
As per the provisions of the Companies Act – 1956 (Sec 137), Banks had been empowered to file Case against the Defaulters in Civil Court for loan recovery. But many cases related to Civil Matter were already in pending for hearing in Civil Court, so Banks were in very tough time for settlement of the cases related to loan recovery within due time. Such cases in Civil Court remained pending for many years and remained unsettled.
Under the Companies Act – 1956 (Sec 137), when the cases of loan recovery started pending for years, the government enacted a new law known as the Recovery of Debt Act – 1993. This law had provisions to settle the case of loan recovery within One Hundred Eighty (180) days. Under this, two special courts – “Debt Recovery Tribunal (DRT) and Debt Recovery Appellate Tribunal (DRAT) were formed.
DRT is like a High Court and DRAT is like Honorable Supreme Court. Under this law, for loan recovery, the Bank can file case against the borrower in DRT. There is also a provision on this law that if the Borrowers is not satisfied with the decision of DRT, then they can appeal against this decision in DRAT. In the beginning, this law was very effective and the settlements of cases were being done within stipulated time period. But with the passing of time, cases on this court also increased and unable to settle within One Hundred Eighty (180) days. Eventually, the government enacts SARFAESI Act – 2002, a new strong and effective law for speedy settlement of loan recovery cases.
SARFAESI ACT, How Banks have been empowered for speedy settlement of Cases related to Loan Recovery under the SARFAESI Act – 2002?
Banks have got an exclusive right under the SARFAESI Act – 2002 (Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act – 2002). As per the provision of this act, Banks can start the process of loan recovery without filing a case in any court (civil court, DRT, and DRAT). Once the loan amount declared as LOSS ASSETS by the Bank, a Sixty (60) days Notice is sent to Borrower. In the event of non-payment of loan within Sixty (60) days of Notice sent to borrower, the Bank can seize the items /mortgage of the Borrower. Such objects are called Encumbered Properties. Loan Recovery can be done by selling Encumbered Properties or by engaging it on lease/rent.
If Borrower is the owner of a big reputed company who has obtained a loan on the basis of stock, in such a situation, the bank can take over all the management of the company under its control. Thereafter, the company will run under the control of the Banks till recovery of loan.
Banks and PFI (Public Financial Institution)
are empowered under the SARFAESI Act – 2002 to initiate the loan recovery process by sending Sixty (60) days notice to Borrower.
But there are also some provisions of this law according to which the bank cannot do loan recovery using SARFAESI Act – 2002.
- SARFAESI Act – 2002 not applicable for recovery of Agriculture Loan.
- In case the outstanding loan amount is one lakh or less, then SARFAESI –Act 2002 not applicable
- If the outstanding loan amount is less than 20% of the total amount including interest, then SARFAESI –Act 2002 not applicable
The Bank and PFI have exclusive rights for loan recovery Under the SARFAESI – Act 2002.
Besides this, the Borrower has also been empowered to present his case. In the event of Borrower
not repaying the loan due to any valid reason, he/she can approach the bank within fifteen
days from the date of receipt of Sixty Days Notice of Bank. The request for extension of time
period of loan repayment can be submitted to Bank by the Borrower citing legitimate reasons.
However, if the bank rejects Borrower’s proposal, then appeal to the DRT and DRAT within
the next Forty-Five days can be made. 50% of the outstanding loan amount has to be deposited to DRAT before appeal.
If Borrower’s appeal in the DRAT is also dismissed, then the decision of the Bank or PFI will
be final and accordingly, the loan recovery process will be completed under SARFAESI – Act 2002.
Before taking a loan from Bank or PFI, we have to be fully prepared mentally and physically so that the loan amount can be repaid in full as an installment. By doing this, the CIBIL Score will remain good, have good remarks of the borrower and it will be helpful and easier to avail the next loan facility.