What is the Sarfaesi Act?

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, allows banks and financial institutions to auction properties (residential and commercial) when borrowers fail to repay their loans. It enables banks to reduce their non-performing assets (NPAs) by adopting measures for recovery or reconstruction. When do properties fall under this Act? If a borrower defaults on repayment of his/her home loan for six months at stretch, banks give him/her a 60-day period to regularise the repayment, that is, start repaying. On failure to do so, banks declare the loan an NPA and auction it to recover the debt. How is the auction price decided? It depends on the market value of the property. Professional valuers determine the property value based on which banks fix a reserve or minimum bid price. The valuations tend to be on the conservative side as it is a distress sale. If the price fetched exceeds the banks dues, the excess amount is given to the borrower. Where can buyers get information about the auctions? Banks advertise such sales in at least one English and one regional newspaper, 30 days prior to the auction. Alternatively, you can look at websites like www.foreclosure.com. How can you bid? Interested bidders must submit their bids in a sealed envelope to the bank. Along with the bid, they must also deposit a certain percentage of the reserve price as earnest money deposit. This amount differs across banks and is refundable if one withdraws from the process or does not win. On the auction day, the sealed envelopes are opened in front of the bidders and the highest bid is announced. Bidders may or may not get another chance to revise their bids. If you win, you have to pay up to 25 per cent of your bid amount to confirm the purchase. The bank may allow you to pay the remaining in 10-15 days. You can apply for a loan for the same. What are the pros and cons of such buys? Typically, these properties are 20-30 per cent cheaper than the market price. Also, since the bank had previously lent against the property, there is clarity on property title. However, these properties are sold on an as-is basis. There may be pending dues or even litigations. These liabilities, unless checked carefully, can get transferred to you automatically. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) empowers Banks / Financial Institutions to recover their non-performing assets without the intervention of the Court. The Act provides three alternative methods for recovery of non-performing assets, namely: * Securitisation

* Asset Reconstruction * Enforcement of Security without the intervention of the Court The provisions of this Act are applicable only for NPA loans with outstanding above Rs. 1.00 lac. NPA loan accounts where the amount is less than 20% of the principal and interest are not eligible to be dealt with under this Act. Non-performing assets should be backed by securities charged to the Bank by way of hypothecation or mortgage or assignment. Security Interest by way of Lien, pledge, hire purchase and lease not liable for attachment under sec.60 of CPC, are not covered under this Act The Act empowers the Bank: * To issue demand notice to the defaulting borrower and guarantor, calling upon them to discharge their dues in full within 60 days from the date of the notice. * To give notice to any person who has acquired any of the secured assets from the borrower to surrender the same to the Bank. * To ask any debtor of the borrower to pay any sum due or becoming due to the borrower. * Any Security Interest created over Agricultural Land cannot be proceeded with. If on receipt of demand notice, the borrower makes any representation or raises any objection, Authorised Officer shall consider such representation or objection carefully and if he comes to the conclusion that such representation or objection is not acceptable or tenable, he shall communicate the reasons for non acceptance WITHIN ONE WEEK of receipt of such representation or objection. A borrower / guarantor aggrieved by the action of the Bank can file an appeal with DRT and then with DRAT, but not with any civil court. The borrower / guarantor has to deposit 50% of the dues before an appeal with DRAT. If the borrower fails to comply with the notice, the Bank may take recourse to one or more of the following measures: * Take possession of the security * Sale or lease or assign the right over the security * Manage the same or appoint any person to manage the same