MCQ Test: SARFAESI Act - 2 - Bank Exams MCQ

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) came into force on 21st June, 2002. This act was enacted by the Parliament of India to provide a legal framework for securitization and asset reconstruction, and to enable banks and financial institutions to enforce their security interests in non-performing assets (NPAs) and recover dues from defaulting borrowers.

The SARFAESI Act empowers banks and financial institutions to take possession of collateral securities and sell them without the intervention of the court, in order to recover their outstanding dues. It provides banks with additional powers and expeditious methods for the recovery of loans, thereby strengthening the financial system and improving the asset quality of banks.

Section 26D Right of enforcement of securities- No secured creditor shall be entitled to exercise the rights of enforcement of securities under Chapter III unless the security interest created in its favour by the borrower has been registered with the Central Registry

Section 2 (a) “Appellate Tribunal” means a Debts Recovery Appellate Tribunal established under section 8(1) of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993

Section 18 Appeal to Appellate Tribunal - No appeal shall be entertained unless the borrower has deposited with the Appellate Tribunal fifty percent of the amount of debt due from him, as claimed by the secured creditors or determined by the Debts Recovery Tribunal, whichever is less. Appellate Tribunal may, for the reasons to be recorded in writing, reduce the amount to not less than twenty-five percent of debt as referred herein above.

An asset reconstruction company (ARC) shall not commence or carry on the business of securitization or asset reconstruction without both of the following conditions being fulfilled:

(a) Obtaining a certificate of registration granted by the Reserve Bank of India (RBI): The ARC must obtain a certificate of registration from the RBI before it can commence or carry on the business of securitization or asset reconstruction. The certificate of registration is granted by the RBI after fulfilling certain regulatory requirements and conditions.

(c) Having net owned fund of not less than two crore rupees or such other higher amount as the RBI may specify: The ARC must have a minimum net owned fund of at least two crore rupees, or any higher amount specified by the RBI. The net owned fund refers to the owned fund as reduced by accumulated losses and intangible assets. This requirement ensures that the ARC has a minimum level of financial strength and stability to carry out its activities.

Therefore, both obtaining a certificate of registration from the RBI and having a minimum net owned fund are essential for an ARC to commence or carry on the business of securitization or asset reconstruction.

The SARFAESHI Act, 2002 gives powers of “seize and desist” to banks. Banks can give a notice in writing to the defaulting borrower requiring it to discharge its liabilities within 60 days. If the borrower fails to comply with the notice, the Bank may take recourse to one or more of the following measures:

1. Take possession of the security for the loan
2. Sale or lease or assign the right over the security
3. Manage the same or appoint any person to manage the same

The SARFAESI Act also provides for that establishment of Asset Reconstruction Companies (ARCs) regulated by RBI to acquire assets from banks and financial institutions. The Act provides for sale of financial assets by banks and financial institutions to asset reconstruction companies (ARCs).

SARFAESI ( Securitization and reconstruction of financial assets and enforcement of security interest act )- It is the act that passed in the Indian parliament in the year 2002 which provides rights to banks to cover their outstanding amount of loan through the borrower assets.

• It is not applied to Agricultural land.
• It is not applied when the outstanding amount is less than Rs.1 lakh or less than 20%.

CERSAI is a Government of India company, licensed under section 8 of the Companies Act, 2013. Its Registered Office is in New Delhi.

The company has been incorporated with a majority shareholding of the Central Government, Public Sector Banks and National Housing Bank initially for the purpose of operating a Registration System under the provisions of Chapter IV of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). 

The importance of the Security Interest Registry and its contribution To the Ease of Doing Business (EoDB) score of the country under the sub-head Getting Credit has been significant.

Asset Reconstruction Company (Securitization Company/Reconstruction Company) is a company registered under Section 3 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SRFAESI) Act, 2002. It is regulated by Reserve Bank of India as an Non Banking Financial Company (u/s 451 (f) (iii) of RBI Act, 1934).

The Securitization and Reconstruction of Financial assets and Enforcement of Security Interest act, 2002 (SARFAESI) is an Act which lays down a relatively simple procedure for banks and other financial institutions to re\cover their debts from borrowers. The Act was recently amended in January 2013 by The Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2011, Section 18C of the new Act allows for the filing of a caveat by the lender in cases in which an appeal is expected. It takes away a major portion of the rights of the borrowers, as they will be unable to procure an ex-parte order if a caveat has been filed and the tribunal will compulsorily be required to hear the lender. The Caveat or in such a circumstance shall have full opportunity to oppose any order which might be adverse to its interests.

The SARFAESI Act grants the power to banks and financial institutions to initiate the enforcement of security interest. Both banks and financial institutions can take action under this act to recover their NPAs by enforcing the security interest on the collateral provided by borrowers.