Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act: Banking Awareness Special Series

Team Adda247 and Bankers Adda have introduced a Special Banking Awareness series for SBI and IBPS Interviews 2021. In this series, we will be introducing the candidates with some banking awareness topics Daily that will improve their general awareness and will also ensure that the candidates do not lack in any banking term when it comes to the interview round. Today the topic of our Banking Awareness Series is Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act.

Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act

Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, which is also known as SARFAESI, Act is a law which allows banks and financial institution to auction residential or commercial properties to recover their unpaid loan. ARCIL, the first asset reconstruction company of India was set up under this act.

Narasimham Committee I and II and Andhyarujina committee were formed to examine banking sector reforms which have considered as the need for changes in the legal system in respect of these areas. Committees suggested new legislation for Securitization and empowering banks and financial institutions to gain possession of the securities and to sell them without any intervention of the court. Under this act, if the borrower of a financial institution or bank makes any default in repayment of a loan or any Instalment then his account will be classified as a non-performing asset (NPA). 

Objectives behind SARFAESI Act:

• The banks and other financial institutions recover their non-performing assets (NPAs) efficiently and in a timely manner. 
• Banks and financial institutions could their unpaid loan amount or losses from borrowers by auction their assets, if borrowers failed to pay their loans. 

Role of SARFAESI Act:

• Securitisation of financial assets and issue of security receipts: Acquire financial assets by issuing debentures or bonds or by agreement. Realize the same and redeem the security receipts issued to the QBs.
• Reconstruction of financial assets: In this role, measures management, sale, debt restructuring, and settlement in a proper way or takes possession of the assets which is subject to RBI’s guidelines. 
• Enforcement of Security Interest: Enforcing security Interest by the secured creditors without the intervention of the court. 
• Other Functions: It acts as an agent of banks or financial institutions for recovery of unpaid loans, acts as manager of the secured assets appointed by the lender, even acts as a receiver appointed by the court.