SARFAESI Act 2002: All you need to know

The SARFAESI Act empowers financial institutions to gain control of securities without any intervention of the court, in case the borrower defaults

What is SARFAESI Act?

The SARFAESI Act is ‘an act to regulate securitization and reconstruction of financial assets and enforcement of security interest and to provide for a central database of security interests created on property rights, and for matters connected therewith or incidental thereto’.


SARFAESI full form

Banks in India have been provided with the right to possess the security provided by the defaulting borrower against the loan and sell it to recover losses, without any intervention by any court of law under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 (SARFAESI Act, 2002), which provides them with a mechanism to significantly reduce their NPAs. The law is known by its short form SARFAESI Act or simply SARFAESI. 





With a view to offer financial institutions a cushion in case of defaults, the government, in 2002, came up with the SARFAESI Act, 2002. Among other things, the law enables banks to gain control over and auction the security against the loan, in case the borrower defaults.

The the SARFAESI Act, 2002, is ‘an act to regulate securitisation and reconstruction of financial assets and enforcement of security interest and to provide for a central database of security interests created on property rights and for matters connected therewith or incidental thereto’. After enforcing it on June 22, 2002, the SARFAESI Act 2002 was extended to the entire country.

See also: What to do if you default on your home loan EMI


SARFAESI Act: Applicability

The SARFAESI Act mainly provides legal recourse for matters dealing with:

  1. Registration of asset reconstruction companies.
  2. Acquisition of rights or interest in financial assets.
  3. Measures for assets reconstruction.
  4. Resolution of disputes.


SARFAESI Act procedure

Banks have to follow certain protocols before they are able to repossess a property to and claim it to recover their dues. The process under which they operate is SARFAESI Act procedure.  Under the SARFAESI Act procedure, if a borrower is unable to repay his loan (this includes home loans) for a period of six months, the bank has the legal right to send a notice to him, asking him to clear the dues in 60 days. If the borrower fails to meet this liability, the financial institution has the right to go for a distress sale of the property, to recover the dues.

A person in default, aggrieved by the bank’s order, may appeal to the appellate authority established under the law, within a period of 30 days from the date on which the order is passed.

Once the bank gains control of the property, it has the right to either sell or lease it out. It can also transfer the right over the property to another entity. The proceeds gained through the sale are used to first clear the outstanding dues of the bank. The remaining money, if there is any left, is paid to the defaulting borrower.


What if you are buying a bank auction property?

Although the bank auctions the property, it may not be the absolute owner of the property. This means, the buyer will have to get a lot of paperwork done. Also, the bank is not responsible to get the property vacated either. Consequently, the property may still be occupied by the previous owners, even after you have made the purchase.

See also: Risks in buying property in auction


SARFAESI Act news updates

SARFAESI Act notice period

Fresh 30-day notice not must if borrower hinders property sale under SARFAESI Act, says SC

September 25, 2021: If the sale of a mortgaged property under the SARFAESI Act is hindered because of an act of the borrower during the 30-day notice period, a fresh notice of 30 days is not required to be given to the owner, the Supreme Court has ruled while giving its verdict in the S Karthik versus N Subhash Chand Jain case.

While dismissing a special leave petition by the borrower, the top court said that a litigant could not be allowed to block the proceedings under the SARFAESI Act if he was initiating various legal remedies to thwart the ongoing process and defeat the very purpose of the said law.

In the S Karthik versus N Subhash Chand Jain case, the appellants were the guarantors for a loan the borrower had taken from a bank. When the borrower failed to repay the loan, the bank started the process to sell the mortgaged property to recover its dues. However, the Chennai Debt Recovery Tribunal stayed the proceedings. Following a second notice for sale, the bank, however, sold the property. In their petition, the appellants pleaded that the notice issued by the bank for the sale was against Rule 8 and Rule 9 of the SARFAESI Act.

Recall here that Rule 9(1) of the SARFAESI Act says that the sale of an immovable property should not take place before the expiry of 30 days from the date on which a public notice for the sale is published in the newspapers or a notice of sale has been served to the borrower. Sub­rule (6) of Rule 8 also says that the borrower should be served with a notice of 30 days for the sale of the immovable secured assets.

In its sale notice, the bank has given only 10 days’ time to the borrower. In their plea to the Madras High Court, the petitioners claimed that the sale was null and void and must be set aside since the second sale notice could not be considered a fresh notice, but only a continuation of the first one. The HC later dismissed the plea.

Giving its verdict in the case, the SC said: “Since the sale as per the first sale notice could not be held due to the reasons attributable solely to the guarantors, there was no necessity of again following the same procedure of providing a 30 days’ clear notice,” the SC said in its order.

“The SARFAESI Act was enacted with the purpose for securitization and empowering banks and financial institutions to take possession of the securities and to sell them without the intervention of the court. If we look at the facts in the present case, it would show that every attempt has been made to frustrate the purpose of the SARFAESI Act,” the apex court said in its order.

Banks free to repossession property under SARFAESI Act: Punjab and Haryana High Court

August 25, 2021: Financial institutions that are currently staring at large-scale loan defaults due to the financial stress caused by the Coronavirus pandemic, are free to repossess properties under various sections of the SARFAESI Act, the Punjab and Haryana High Court has said.

“This court has not granted any stay on the proceedings to be undertaken by the banks/financial institutions, under Sections 13 and 14 of the SARFAESI Act. It is further clarified that this court has also not granted any kind of interim stay in respect of the steps to be taken by the banks/financial institutions for recovering the amount on account of car loans and gold loans,” the HC said.

The HC had, in an interim order, on April 28, 2021, said that ‘any bank or financial institution shall not take action for auction in respect of any property of any citizen or person or party or anybody corporate till June 30, 2021’. It has now, however, clarified that ‘the object and purpose of passing the interim order was only to stay the auction proceedings in respect of residential accommodations’.

“In these difficult times that the citizens and country are faced with, the occupants of the domestic/residential units were not rendered homeless and exposed to further miseries. The interim order has a limited purpose and operations, as indicated. Further, this court, in the interim order itself, has granted liberty to the authorities concerned to approach this court with particular instances, for any clarifications if some hardship was/is being caused on account of the interim arrangement,” it said.



What is SARFAESI full form?

SARFAESI stands for Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest.

What is SARFAESI Act?

The SARFAESI Act empowers banks to take possession of and auction the pledged securities of defaulting borrowers, to recover the pending dues.

Is SARFAESI Act applicable to cooperative banks?

In 2020, the Supreme Court upheld amendments made to the SARFAESI Act in 2013, which included cooperative banks under the ambit of the Act.


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