Author: Venkata Saravana Kumar Bommaraju, Acharya Nagarjuna University

The Secularization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (also known as the SARFAESI Act which allows the Indian banks and financial institutions to recover the loan amount from the defaulters who owe to the bank. It is enacted to govern the securitization and reconstruction of financial assets as well as enforcement of security interest, and to provide for a centralized data base of security interest formed on property rights, associated therewith and incidental thereto.

This law does not apply to unsecured loans below ₹100,000 or where remaining debt is below 20% of the original principal. This law allowed the creation of an asset reconstruction company (ARC) and allowed banks to sell their non-performing assets to ARC. Banks are allowed to take possession of the collateral property and sell it without the permission of a court. Under this act, the secured creditors can only recover the loans only when the debtor defaults in paying the amount beyond the 60days from the date of notice issued.banks cannot directly acquire and sell the secured assets of the defaulted debtor. it must transfer the assets recovered from the debtor later it has to transfer to the assets which is considered as non-performing assets to the asset reconstruction company 

Before SARFAESI act, financial institutions faced bad debts which are also known as the non-performing assets. There are many factors from the side of public and private institutions which led to accumulation of the non performing assets that are liable to be recovered. In the process of recovery, there is a long and cumbersome judicial process of recovering dues. The civil court and debt recovery tribunals were overwhelmed with cases, causing recovery delays that crippled bank liquidity. To address this the Narasimham committee (1991and 1998) and Andhyarujina committee recommended new laws to empower creditors.  Later, the SARFAESI act came into existence in December 2002. it came to recuperate the non-performing assets of the bank and financial institutions.

• regulate securitisation and reconstruction of the financial assets of the borrower.

• enforcement of the security interests.

• provide for a central database created on security interest on property rights. 

• It enables banks and financial institutions to recover NPAs efficiently.

• It allows securitization and asset reconstruction through specialized companies. 

• it enables secured creditors to enforce their security interests without court intervention.

• regulates asset reconstruction companies and securitization companies.

• improve credit discipline and promote a financially active system.

Section 13 of enforcement of security interest

under this section the secured creditor, prior 60 days’ notice written in nature, to the borrower shall be given under sub section 2. if does not pay the principle along with interest, the secured creditor can take action to 

if borrower didn't pay the principal amount along with the  

• to take possession of the secured assets or 

• selling or leasing it to recover dues. Or

• appointing a manager to manage the assets.

• In this process no court intervention is needed unless the borrower disputes the action.

Section 14 assistance chief metropolitan magistrate

The borrower resists the bank and can seek the help of the magistrate to take possession of the secured assets.

Section 17 right to appeal

The borrower can appeal against the bank's action before the debt recovery tribunal within 45 days of receiving notice.

Section 9 functions of the asset reconstruction company

asset reconstruction company can acquire bad debts and recover them by:

• change in the management

• restructuring the loans or

• converting debts into equity.

Section 35 overriding effect

The SARFAESI act has an overriding effect over other inconsistent laws, except the insolvency and bankruptcy act 2016 and other statutory acts which do not deal with similar objectives as that of the SARFAESI act. it provides the pecuniary objective for the lenders to recover their loans and interest.

Securitization

It means pooling of financial assets like loans and selling them to investors as securitized instruments. This transfers risks and liquidity from banks to investors.

Assets reconstruction 

These are the companies registered under the Reserve Bank of India Act and regulation thereof. To be eligible for having status of asset reconstruction company, they shall have to maintain a substantial capital of 2crore rupees. Before granting status, the RBI will be looking to the eligible criteria of the applied company and later it will grant the status. Apart from this, if any substantial changes take place, RBI shall be apprised of these changes.  In case the company doesn't oblige to the conditions stipulated, RBI with prior intimation will cancel the status of ARC. aggrieved company can appeal to the central government against the order. At the period of rejection, cancellation, of ARC status, the company will be considered as ARC until the funds collected are refunded to the investors and depositors.  asset reconstruction companies take over non-performing assets from banks and restructure or sell them for recovery. This transfer of the non-performing assets takes place through issuing of the debenture bonds or other securities in nature of the debenture or for consideration agreed upon between financial institution and company. by this act, the financial institution gets subrogated into the shoes of the banks as lender. any pending request for the payments on the assets of the borrower assets whether tangible or intangible in nature shall be transferred to the asset reconstruction company. transferring of the assets to ARC will not be hindered by the pending proceeding before the courts. After acquiring the assets, if multiple suits fail against the assets, ARC can request the debt recovery appellate tribunal cases to be tried by the single DRT. Before and after transferring of the lien on the assets, the borrower and concerned statutory authorities shall be informed concerning these changes. After getting the borrower's assets, ARC can change and manage functions of the borrower company according to its feasibility to realize the assets of the defaulted company. These acts shall be in accordance with the rule and regulations issued by RESERVE BANK OF INDIA.

In the process of transferring assets from the financial institution to the ARC, these can take over with their own funds available in maintaining a separate account and issue security interests to the qualified institutional buyers or from other investors gathered under a separate account. After realization of the assets, this money shall be transferred to the investor by maintaining a separate account. These asset reconstruction companies can also function as agents, managers or receivers on behalf of the banks and financial institutions. If any dispute arises between the inter creditor (asset reconstruction company- qualified institutional buyer, investor - ARC, banks - ARC) it must be mandatory to be resolved through the arbitration despite lack of formal arbitration agreement. 

Example- ARCIL (asset reconstruction company India Ltd), Edelweiss ARC, JM Financial ARC, etc.

1. it applies to banks, NBFCs, and financial institutions.

2. The loan amount should be 1lakh or more.

3. the non performing asset value must be at least 20% of the principal and interest.

4. this act is not applicable to

5. agricultural land

6. aircraft/ships.

7. cases where less than 1 lakh is due.

1. while sarfaesi empowers bank to take action against borrower, it also provides the borrowers to protect himself:

2. to take action against the borrower, 60 days’ notice shall be issued before taking possession.

3. representation opportunity to object to the notice.

4. right to appeal to the DRT and further appeal to the debt recovery appellate tribunal. 

5.  right to redeem the property before the final sale.

Mardia Chemicals Ltd. v. ICICI Bank (2004) 

The Supreme Court upheld the constitutional validity of SARFAESI but struck down the requirement of depositing 75% of dues before filing an appeal — making the Act more balanced.

 Transcore v. Union of India (2006)

The Court clarified that SARFAESI and DRT proceedings can run simultaneously, giving banks flexibility in recovery mechanisms. 

1. fast recovery of the bad loans. 

2. increased investor confidence in the banking system. 

3. rise in ARCs and secondary market for non-performance assets.

As per RBI data, SARFAESI accounts for nearly 30–40% of total bank recoveries, showing its effectiveness as a recovery tool.

SARFAESI focuses on secured asset recovery, while IBC deals with overall insolvency resolution. In practice, banks often use SARFAESI first, and if recovery fails, they proceed under IBC for complete restructuring or liquidation.

The SARFAESI Act, 2002, stands as a cornerstone of India’s debt recovery framework. It revolutionized the recovery landscape by reducing judicial delays and enhancing creditor confidence. However, ensuring a fair balance between creditor rights and borrower protection remains essential.

In the era of financial reforms and IBC, SARFAESI continues to serve as a vital tool for maintaining the health and stability of India’s banking sector.

1. The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

2. Reserve Bank of India (RBI) Reports on Trends and Progress of Banking in India

3. Mardia Chemicals Ltd. v. ICICI Bank (2004) 4 SCC 311

4.  Transcore v. Union of India (2006) 5 SCC 772