All About 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 bank’s dues, the excess amount is given to the borrower.

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.

Suppose, Mr.Paraajay has opened factory with Rs.100 crores. He financed this, via mixture of Debt + equity in following way. 
  Holder Rupees in Cr.
Equity (IPO->Shares) Paraajay and his family 20
Juntaa (public) 30
Debt (loans, Bonds) Business loan from SBI 40
  Bonds 10
Total   100
  • Initially the company runs well and good.
  • But then Mr.Paraajay doesn’t revise his MBA books often, so he forgets the business concepts. His company starts making losses.
  • He fails to pay loan EMIs for many months.
  • SBI gives him notice to correct his behavior.
  • Still, he doesn’t start paying money.
  • SBI declares this Rs.40 crores loan NPA (Non-Performing Asset).
  • Once a loan is declared as non-performing asset, SBI can take actions under SARFAESI act, to recover the loan money.
Bank have following powers under SARFAESI Act
  1. Take possession of Mr.Paraajay’s assets without requiring court order. (Commericial or residential, fixed or moving assets.)
  2. Auction / Sale them
  3. Change the administration/ Management of those assets.
  4. If Mr. Paraajay had sold away the mortgaged asset to third party Mr. X, bank can order Mr.X to surrender that Asset.
  5. If Mr.X owes money to Mr.Paraajay, he can be ordered to pay money.
  • *ARCs explained after a few paragraphs.
  • SARFAESI applies only to loans above Rs.10 lakhs.
  • By the way SARFAESI applies only to those assets “mortgaged/secured” to get the loan.
  • E.g. if Mr.Paraajay had taken business-loan, SBI would have asked him to sign away his factory/machinary/vehicles/land etc. specific items as mortgage.
  • Hence SBI can attach only ^those assets.
  • But SBI cannot take away Paraajay’s personal home-furniture, expensive wrist-watch or his son’s bicycle in the name of SARFAESI.
  • Similarly, Agricultural land is exempted from SARFAESI attachment.

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