SARFAESI Act 2002 and the CERSAI

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, allows banks and financial institutions to auction properties (residential and commercial) when borrowers fail to repay their loans. It enables banks to reduce their non-performing assets (NPAs) by adopting measures for recovery or reconstruction.  (In India, a Non-Performing Asset is broadly defined as one with interest or principal repayment installment unpaid for more than 90 days). 1,2

Currently, three legal options are available to banks for resolution of NPAs- the SARFAESI Act, Debt Recovery Tribunals and Lok Adalats. The SARFAESI Act has been the most important means for recovery of NPAs. The amount of NPAs recovered under the SARFAESI Act formed over half of the total amount of NPAs recovered in 2009-10.2

The Act provides three alternative methods for recovery of non-performing assets, namely: -

1. Securitisation: It means issue of security by raising of receipts or funds by Securitisation Companies(SCs) /Asset Reconstruction Companies (ARCs). A  SC/ARC may raise funds from the Qualified Institutional Buyers (QIBs) for acquiring financial assets. The SC/ARC shall ensure that realisations of financial asset are applied towards redemption of investments.

2. Asset Reconstruction: The SCs/ARCs for the purpose of asset reconstruction should provide for any one or more of the following measures:

·  the proper management of the business of the borrower
• the sale or lease of a part or whole of the business of the borrower
• rescheduling of payment of debts payable by the borrower
• enforcement of security interest in accordance with the provisions of this Act
• settlement of dues payable by the borrower
• taking possession of secured assets in accordance with the provisions of this Act.  3  

3. Enforcement of Security without intervention of the court.

Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI)

The SARFAESI Act also provided for the setting up of a central registry to to prevent frauds in loan cases involving multiple lending from different banks on the same immovable property. Thus the Central Registry of Securitization Asset Reconstruction and Security Interest of India (CERSAI), a government company licensed under section 25 of the Companies Act 1956 has been incorporated in 2011. 

With existence of central registry, it would be virtually impossible for a borrower to raise loans twice against the same property or raise loans using forged documents. In the past, there have been instances where borrowers have forged the title deed and borrowed money from multiple banks by giving duplicate documents (title deed) as security for home loan. As a result, when the borrower defaults on the loan, many banks would make claim for the same house.

The records maintained by the Central Registry will be available for search by any lender or any other person desirous of dealing with the property. 4

Sources:

1. http://www.business-standard.com/india/news/what-issarfaesi-act/439266/

2. http://www.ifmr.co.in/blog/2011/11/07/why-is-the-sarfaesi-act-of-critical-importance-to-lenders/

3. http://www.dnb.co.in/Arcil2008/SARFAESI.asp

4. http://www.bankingonly.com/detail-news.php?news_id=445