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SARFAESI Act, 2002: meaning, process and exam notes
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The SARFAESI Act, 2002 (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act) lets banks and notified financial institutions recover bad loans by taking possession of the borrower's secured assets and selling them, without going to court first. It was enacted to speed up recovery of non-performing assets, which used to take years in civil courts.
What the Act does
- Enforcement of security interest. A secured creditor can seize, lease or sell the pledged or mortgaged property of a defaulter.
- Asset reconstruction. It allows the setting up of asset reconstruction companies (ARCs), registered with the RBI, which buy NPAs from banks and try to recover or restructure them.
- Securitisation. It lets financial assets be converted into securities and sold to investors.
- Central registry. CERSAI records security interests to prevent fraud such as double mortgages.
The enforcement steps
| Step | What happens |
|---|---|
| Classification | The loan is an NPA and is secured |
| Demand notice (Section 13(2)) | The bank gives the borrower 60 days to pay |
| Enforcement (Section 13(4)) | If unpaid, the bank may take possession, take over management, or sell or lease the asset |
| Appeal (Section 17) | The borrower can approach the Debts Recovery Tribunal (DRT) within 45 days |
| Further appeal (Section 18) | To the Debts Recovery Appellate Tribunal |
Where the Act does not apply
Section 31 excludes, among others, agricultural land, loans of ₹1 lakh or less, and cases where the outstanding is less than 20% of the principal and interest. It also does not cover unsecured loans, for which a bank must use the DRT or the Insolvency and Bankruptcy Code.
Example
A manufacturer defaults on a ₹5 crore loan secured by a factory building. After the account becomes an NPA, the bank sends a notice. If the manufacturer does not pay within 60 days, the bank can take over the factory and auction it. The owner can challenge the bank's action before the DRT.
How bank exams ask about it
Questions test the full form, the year (2002), the notice period (60 days), what the Act allows without court intervention, who can use it, and the registry for security interests. A frequent distractor asks which law covers unsecured loans. See the overview in banking awareness.
Where to check
The text of the Act and RBI circulars on ARCs are at rbi.org.in and indiacode.nic.in.
Frequently asked questions
Can NBFCs use SARFAESI?
Notified NBFCs and housing finance companies can, along with banks. Check the current notification.
Does the borrower lose all rights after the notice?
No. The borrower can appeal to the DRT and can still repay to stop the sale in many cases.
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