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Debt Recovery provisions under the SARFAESI Act
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Debt Recovery provisions under the SARFAESI Act
Debt Recovery provisions under the SARFAESI Act

SARFAESI Act

As observed, the tribunals were overburdened with thousand's of pending cases, with respect to that the 'Securitisation & Reconstruction of Financial Assets & Enforcement of Security Interest Act, 2002 (SARFAESI Act) was introduced by the government. This Act allows banks and other financial houses to deal with the collateral security attached with the NPA to recover the outstanding debt without the intervention of a court or a tribunal.

The lenders would approach the DRT's to recover their bad debts that are not recovered even after dealing with collateral security. Consequently, the borrowers would also approach the DRT's to challenge the actions of the lenders under the SARFAESI Act and hence choking the tribunals.

 

Principal objects of the Act:

• Fast track mode of the debt recovery process that introduced a time limit of 30 days to the district magistrate for the completion of the process.

• Regulation of Asset Reconstruction Companies (ARC) that purchase NPA's from the banks at a discount, allowing banks to recover a partial amount.

• Earlier RBI could only determine the policy and issue directions to ARC, and now, under the Act, the RBI can audit and inspect ARC's entirely.

• When the secured creditor acquires a majority stake in the company by converting debt into shares, even after paying the outstanding dues of the borrowers the secured creditors shall not be liable to restore the business to the debtor. This shall stand as a warning to the borrowers and deter them from defaulting due to the fear of losing the business.

• Under the Act, there shall be a Central database of the property rights and registry that shall prevent the secured creditors from taking possession of collateral security unless registered with the Central registry. These secured creditors shall have priority over all other claims, including claims of the government.

• In an attempt to avoid frivolous appeals, one has to deposit 50% of the debt amount before the appeal. However, this amount can be brought down to 25%, but under no circumstances, it can be waived off entirely.

• The Act also deals with enhancing the infrastructure of the DRT's and the procedural requirements to ensure no delays in dealing and disposing of the matters. These steps include increasing of retirement age of the chairpersons of DRT and DRAT, electronic form filing etc.

• Stamp duty has been waived off for transfer or assignment of assets in favour of ARC to reduce transaction costs.

 

What is NPA?

When a bank gives loan to a person and fails to make regular payments despite receiving notices from the bank, the bank will declare that loan as a Non-Performing Asset (NPA).

 

What do you mean by DRT?

In 1993, Debt Recovery Tribunals (DRT's) were established in India to facilitate the debt recovery process and deal with NPA matters involving banks and other financial houses. The government recently doubled the monetary limit to rupees twenty lakh; hence, DRT's can take cases from banks for disputed loans above Rs 20 Lakhs.

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