Legal Article

Security Interest under SARFAESI Act

Shivendra Pratap Singh

Advocate

High Court Lucknow

Article | SARFAESI

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Published on: 3 Feb, 2023

The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) is an Indian law that allows banks and other financial institutions to recover non-performing assets (NPAs) through the sale of security interests. The act provides a framework for the securitization and reconstruction of financial assets, and enables banks and financial institutions to enforce security interests in a manner that is consistent, efficient, and transparent.

Under the SARFAESI Act, a security interest is a right that a lender has over a borrower’s assets, which serves as collateral for a loan. The security interest is created when the borrower executes a security agreement and provides a security deposit. The security deposit can be in the form of an immovable property, movable property, or a financial instrument.

The SARFAESI Act provides that a security interest may be enforced if the borrower has defaulted on the loan. The act provides a number of enforcement mechanisms that banks and financial institutions can use to recover their debt, including taking possession of the security, selling the security, and appointing a receiver.

One of the key features of the SARFAESI Act is that it enables banks and financial institutions to take possession of the security without having to go through the court process. This is a significant departure from traditional debt recovery mechanisms, which often involve lengthy court proceedings and can be time-consuming and expensive.

Under the SARFAESI Act, banks and financial institutions can take possession of the security by giving the borrower a notice of default and giving the borrower a specified period of time to rectify the default. If the borrower fails to rectify the default, the bank or financial institution may take possession of the security.

Another important feature of the SARFAESI Act is that it provides for the appointment of a receiver. A receiver is an independent third-party appointed by the bank or financial institution to manage the security and ensure that it is sold in a manner that is consistent with the provisions of the act. The receiver has the power to sell the security and distribute the proceeds among the creditors.

The SARFAESI Act also provides a procedure for the sale of security interests. Banks and financial institutions may sell security interests to other banks, financial institutions, or investors. The act provides that the sale must be conducted in a transparent and fair manner, and that the proceeds from the sale must be used to pay off the debt owed by the borrower.

The SARFAESI Act has been widely praised for its efficiency and effectiveness in helping banks and financial institutions to recover non-performing assets. The act has also been instrumental in reducing the level of NPAs in the Indian banking sector. However, the act has also been criticized by some for its lack of transparency and its potential to infringe on the rights of borrowers.

In conclusion, the SARFAESI Act provides an important framework for the securitization and reconstruction of financial assets, and enables banks and financial institutions to enforce security interests in a manner that is consistent, efficient, and transparent. While the act has been praised for its efficiency and effectiveness, it is important to ensure that it is applied in a manner that is consistent with the principles of fairness and transparency.