Were you aware that failing to make timely loan payments could lead banks to invoke the SARFAESI Auction Act? Curious about its implications? This act empowers financial institutions to auction your property if you fail to make your home loan payments. Before taking a home loan, it is essential to understand everything this act entails. Read on to learn about the SARFAESI Act.
See also: Can banks auction property if borrower defaults on loan EMIs?
SARFAESI Act: Full form and meaning
Standing for under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, the SARFAESI Act, 2022, is defined as “an act to regulate the securitization and reconstruction of financial assets, as well as the enforcement of security interests, and to establish a central database of security interests created on property rights, as well as matters connected with or incidental thereto.” Essentially, under this act, India’s financial institutions have been authorised to seize the collateral offered by a borrower who defaults on a loan and sell it to recover losses, without requiring court intervention. This act helps in considerably reducing the banks’ non-performing assets (NPAs).
SARFAESI Act: Purpose
The SARFAESI Act of 2002 was enacted by the government to furnish financial institutions with a safety net in case of default. This legislation empowers banks to take possession of and auction the security held against a loan if the borrower fails to meet his/her obligations. The SARFAESI Act, which came into force on June 22, 2002, was subsequently extended to cover the entire nation.
SARFAESI Act: Application and exclusions
The SARFAESI Act encompasses any asset, whether movable or immovable, provided as security through methods, such as mortgage, hypothecation, or the establishment of a security interest. However, certain exclusions outlined in Section-31 of the act are exempted. The applicability of the SARFAESI Act does not extend to the following situations:
- Agreements like sale, hire-purchase, lease, or other conditional agreements where a security interest has not been established.
- Non-Performing Asset (NPA) loan accounts constituting less than 20% of the principal and interest.
- Real estate protected under Section-60 of the Code of Civil Procedure from 1908 that is not subject to attachment or sale.
- Issues related to security, or money under the Sale of Goods Act, 1930 or the Indian Contract Act.
- Unpaid-seller rights of a seller as per Section-47 of the Sale of Goods Act, 1930.
How does the SARFAESI Act work?
Banks are obligated to adhere to a prescribed set of procedures before acquiring possession of a property to recover outstanding debts. They operate within the framework of the SARFAESI Act, a federally mandated procedure. In the SARFAESI Act procedure, a borrower who is unable to repay his loan, including home loans, for six months is legally entitled to receive a notice from the bank, giving them 60 days to settle the debt.
If the borrower is unable to fulfil this obligation, the financial institution is authorised to sell the property for recovering the outstanding debt. If a defaulting individual believes that the bank’s order has infringed upon his rights, he can lodge an appeal with the appellate body established by law within 30 days of the order issuance. Upon acquiring ownership of the property, the bank can choose to sell or lease it to another party, or transfer ownership to a third party. The proceeds from the sale are used to settle the bank’s existing debts, prioritising them. Any remaining funds, if applicable, are returned to the defaulting borrower.
SARFAESI Act: Methods of recovery
The SARFAESI Act delineates three primary methods for the recovery of Non-Performing Assets (NPAs):
- Securitisation: Securitisation involves converting existing assets, such as home or auto loans, into marketable securities. These assets can be sold after transformation, and securitisation or asset reconstruction companies can raise funds exclusively from Qualified Institutional Buyers (QIBs) through schemes designed for acquiring financial assets.
- Asset reconstruction: Asset reconstruction grants authority to asset reconstruction companies. This process may involve managing the borrower’s business by selling or acquiring it, or rescheduling debt payments as per the Act’s provisions.
- Enforcement of security without court interruption: The Act empowers banks and financial institutions to issue notices to individuals who have obtained a secured asset from the borrower, demanding payment of the due amount. It allows them to assert the borrower’s right to receive payment from a debtor without court interference.
SARFAESI Act: Rights of borrowers
Under the SARFAESI Act, borrowers retain the following rights:
- Borrowers can settle dues to prevent the forfeiture of their securities before a sale is finalised.
- Borrowers are entitled to compensation in case of default by an officer.
- Section 17 of the SARFAESI Act allows borrowers to seek resolution for their grievances against the creditor or authorised officer through the Debt Recovery Tribunal.
What is a SARFAESI auction?
The SARFAESI auction is a lawful procedure in India enabling financial institutions to recoup outstanding amounts from borrowers who have defaulted on their loans. The auction, conducted by the bank or a designated agency, allows prospective buyers to bid for the property or asset in question. This transparent and efficient auction process serves as a mechanism for banks to reclaim their funds and mitigate the impact of non-performing loans.
Sale certificate in a SARFAESI auction
The sale certificate holds significant importance as a document issued by the authorised officer under the SARFAESI Act, 2002. Awarded to the successful bidder in a SARFAESI auction, it formally confirms their ownership rights over the acquired property. This certificate acts as tangible evidence of the purchase and is a crucial requirement for the buyer to assume control of the property. Key components within the sale certificate encompass:
- Pertinent information about the property, including its dimensions, address, and boundaries.
- The name of the buyer and the agreed-upon purchase price.
- Any encumbrances or liabilities associated with the property are outlined.
The sale certificate carries legal validity, safeguarding the buyer against potential third-party claims. Notably, issuance of the certificate occurs only after complete payment of the bid amount and relevant charges. It is imperative for the buyer to meticulously review the certificate, ensuring accuracy, before assuming possession of the property.
SARFAESI auction: Benefits
The SARFAESI auction proves to be an advantageous mechanism for both banks and buyers. Here’s a summary of the benefits that a SARFAESI auction introduces:
- Swift and efficient NPA recovery: The SARFAESI auction provides banks with a rapid and efficient avenue to recover Non-Performing Assets (NPAs), aiding in the timely resolution of financial matters.
- Transparency in auction process: The auction process under SARFAESI ensures transparency by allowing public participation. This openness contributes to a fair and accountable procedure.
- Potential cost savings for buyers: Buyers engaging in SARFAESI auctions can acquire properties at potentially lower prices compared to the market value. This aspect can be advantageous for those seeking cost-effective property investments.
How to participate in a SARFAESI auction?
If you wish to participate in a SARFAESI auction, follow this step-by-step guide for registration:
- Step 1: Visit the e-auction platform endorsed by the Reserve Bank of India (RBI).
- Step 2: Register yourself by providing and verifying your personal details along with the submission of the Know Your Customer (KYC) form.
- Step 3: Explore the available properties and select those that interest you.
- Step 4: To initiate a bid, make the payment for the Earnest Money Deposit (EMD).
- Step 5: Thoroughly review the details of the chosen property and proceed to place your bid.
FAQs
What is the full form of the SARFAESI Act?
The full form of the SARFAESI Act is the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act.
What is a SARFAESI auction?
A SARFAESI auction is a process through which banks can auction properties to recover unpaid loans.
Which types of properties fall under the SARFAESI Act?
Every movable or immovable asset presented as security against a mortgage or loan can fall under the SARFAESI Act.
Who can participate in a SARFAESI auction?
Any individual or entity can participate in a SARFAESI auction by meeting the eligibility criteria set by the bank.
Which loan types aren’t covered by the SARFAESI Act?
Loans, security, or money issued under the Sale of Goods Act, 1930, or the Indian Contract Act aren’t covered by the SARFAESI Act.
How can I find SARFAESI auctions?
Information about SARFAESI auctions can be found on bank websites or through public notices in newspapers.
Is the SARFAESI Act applicable to nationalised banks?
Yes, the SARFAESI Act was enacted to provide nationalised banks with added security against loan defaulters, empowering them to execute and control the auction of security.
Is it advantageous to buy a property from an auction?
Buying a property through a SARFAESI auction can be advantageous as property prices are often lower than the market rate. However, this decision should be made judiciously.
| Got any questions or point of view on our article? We would love to hear from you. Write to our Editor-in-Chief Jhumur Ghosh at jhumur.ghosh1@housing.com |
