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How banks misuse SARFAESI Act provisions for loan recovery

Updated: Aug 08, 2016
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How banks misuse SARFAESI Act provisions for loan recovery

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act 2002 is a powerful instrument in the hands of the banks and financial institutions (FIs) as secured creditors. This Act helps them enforce securities held as collateral to loans disbursed by them should such loans turn out as non-performing assets (NPAs) during the currency of the loan without interference from the Courts. Section 13 of the Act gives power to the secured creditor even to evict the tenant. It is our observation that the banks have been overenthusiastic in taking recourse to SAFRAESI Act provisions as a first resort of recovering the micro, small and medium enterprises (MSME) loans, mostly violating guidelines of Reserve Bank of India (RBI).

The entire process under the Act involves several factors of fairness and technicalities. During our interactions with the borrowers and banks in the State Level Inter-institutional Sub-committee (SLIIC), we have noticed the banks jumping into coercive actions throwing overboard the due processes.  It is surprising that tech-savvy systems of banks have not put in the measured timelines before pressing the red button to put the credit traffic of the MSMEs on halt. 

RBI’s timelines are as follows:

  • If the account does not reflect credits into the account, 90 days preceding the date of balance sheet of the firm. Temporary deficiencies like late/ non-submission of stock statements or balance outstanding exceeding the drawing power, non-renewal of limits should not get categorised as NPA. 
  • If the borrower does not pay three instalments continuously after 90 days but up to 12 months the account becomes sub-standard and NPA. Section 13 (2) empowers the Bank/ FI to serve a notice to the borrower for taking possession of the assets held as security for the money lent by it. But there is precursor to this action: the Bank/FI shall serve notice to the borrower to discharge his full liabilities within 60 days from the date of notice that should also detail out the legal consequences and penal provisions. 

Going by these two directions under the Act, the borrower should be getting at least 17 months’ time before the Bank could proceed against the defaulting MSMEs. 

If the borrower becomes a ‘wilful defaulter’ as defined by the RBI Master Circular on wilful defaulters vide RBI circular (RBI/2014-15/73 DBR.No.CID.BC.57/20.16.003/2014-15 dated July 1, 2015) SARFAESI Act proceeding can be issued even without notice to the borrower.

Who is a wilful defaulter?

  • Deliberate non-payment of the dues despite adequate cash flow and good net worth; 
  • Siphoning off of funds to the detriment of the defaulting unit; 
  • Assets financed either not been purchased or been sold and proceeds have been misutilised; 
  • Misrepresentation / falsification of records; 
  • Disposal / removal of securities without bank's knowledge; 
  • Fraudulent transactions by the borrower. 

Banks/ FIs throwing overboard these norms, classify all the MSME NPAs as wilful defaulters to apply the SARFAESI lever. As per the Act, valuation of the asset has to be done and notify that valuation to the borrower before issuing public notice for auction of property. Bank has to give 30 days’ notice to the borrower regarding its right to proceed against the mortgaged property if he does not pay up the entire principal and interest.  

However, we have noticed that in most cases all the above timelines are followed more in breach with impunity by the banks. For example, a public sector bank (PSB) branch in Jammikunta proceeded with sale of property within 15 days of declaring the asset as NPA. They have also fixed a reserve price without consulting the impugned borrower or without taking into consideration any objections raised by the borrowers as required under section 13 (3) (A) and proceed for auction of the properties. This is the case with most collateralised MSME NPAs. On top of this, in Jammikunta, the bank has also engaged agents for enforcing coercive recovery measures.  

In quite a few other cases, the banks sold off assets to asset restructuring companies (ARCs). Here the process is that the bank bundles a few NPAs and sells them off at a discount, which is not disclosed either to the borrower or to the SLIIC sub-committee. Although it may be in order for the bank to entertain request of the enterprise under one-time settlement (OTS) within the rules of the RBI, its preference is to transfer to ARC at a far lesser price than OTS would have got to the bank. 

What is ARC and how does this operate?

All transactions of securitisation, reconstruction and creation of security interest shall be registered with a Central Registry maintained with the Union Government. Within 30 days of securitising the asset, details of securities have to be filed with the central registry by paying the required fees.

RBI has issued guidelines in 2003 on the form of offer and details to be incorporated therein. The most usual form is the Security Receipt (SR) and an agreement with the originator to continue to service the assets of the securitisation. It can also take the form of a debenture at no less than 1.5% above the Bank Rate. The ARC should notify a separate scheme for each financial asset acquired or proposed to be acquired. Scheme-wise the account shall be maintained. Although Security Receipt is a tradable receipt among the investor institutions there is no such evidence thus far. 

Realisation of the asset is held and applied towards redemption of the investments as assured while issuing the security receipt. It acts like a trustee managing the assets and does not become the owner of the assets. ARC can sell or lease out the assets for realising the value of the assets. The recovered amount of the discounted price of the asset will be shared between the Bank and ARC in 85:15. For example, if a loan of Rs100 lakh is sold for Rs60 lakh to the ARC and the ARC realises only Rs50 lakh on sale or the entire armoury at its command, the Bank will get Rs42.50 lakh for fully wiping out the account from its books. Once the asset is sold off, it ceases to be NPA in its books. 

If the intention of the Bank were to recover as much as possible from the stressed asset, it would be wise to explore OTS as first option within the RBI guidelines. We have noticed that in no more than 5% of cases that this option is exercised as the bonafides in OTS transaction is suspect. It would be prudent on the part of the RBI to ensure that the OTS option is exhausted before going for securitisation and sale of the asset.

The other option is to seek the Banking Ombudsman’s intervention as Arbitrator to settle the distressed asset closure in cases where either the borrower or the bank has reason to believe that a mutually agreed price of the loan would be a better option than proceeding against the asset under SAFRAESI Act.

About Author: K Manicka Raj (IAS) is Director of Industries, Government of Telangana and B Yerram Raju is Adviser, MSE Facilitation Council, Department of Industries, Government of Telangana. The opinions expressed are personal.

More blogs by the authors can be read at http://www.moneylife.in/author/dr-b-yerram-raju.html

AUTHOR

K Manicka Raj & B Yerram Raju

COMMENTS

  1. 06/10/2023 1:20 PM

    was bank employee, upto 2018 , i took 4 loan from the bank under employee scheme one housing under publick scheme, where i am residing, another under construction, not possession, handed over yet, one car loan, on Overdraft account, total almost 30 lakhs, i have no jobs, no other source of income, bank asked me to pay loans with intt, i pray ed to the bsnk for OTS, but bank refused it three times,, there akso a OTS SCHEME in bank, what should i do now pl advise

    Reply to this comment
  2. Zara Shaikh
    Zara Shaikh 02/10/2023 1:04 PM

    there is provision of filing aaplication under section 17 of Sarfaesi act to challenge misdoings of the bank.

    Reply to this comment
  3. 23/09/2023 8:11 AM

    Drt

    Reply to this comment
  4. Towfinancesolutions
    Towfinancesolutions 21/09/2023 6:02 PM

    Easy finance from start to finish are all about service and solutions. Whether you are looking for a loan for a car, motorbike, camper, RV, Jetski or boat we have the solution from over 40 lenders.

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  5. Imran
    Imran 16/09/2023 7:20 PM

    My loan with NBFC was Flooded by Duplicate ECS presentation which got Bounced since respective months EMI was already paid. Due to unexpected/illegal Bounces my CIBIL got down. By taking undue advantage of my CIBIL record and With the reason of Bounces in my account NBFC identified my account as NPA and basis on Credit & Risk policy assigned my loan to ARC with giving me intimation. Now ARC is asking to pay Complete loan amount or go for OTS. I have requested Original lender and ARC both that since I am not Defaulter so will pay the Deby as per loan agreem via EMI but none of them is entertaining my requeting and threatening for Legal action for Possession of Property and Auctioning of same. Kindly suggest

    Reply to this comment
  6. Makarand
    Makarand 08/09/2023 11:52 AM

    Sir, in my case bank employee carried eauction in a pre planned way after NPA. niether served any single notice 13/2,13/4 nor taken possession. One day suddenly I come to know that my 7/12 extract changed with others name. When enquired it revealed that notices deliberately sent on wrong adress making confusion in Pin code and district so that notice seems to be sent as showing that they followed procedure but it must not be served. Obviously it returned with INSUFFICIENT ADDRESS marking. But importantly that no notice sent to my permanent residential address in the bank's record and willfully sent on property open plot adress with wrong adress. What now wether DRT or High court writ? Can I file criminal complaint of forgery and fraud.

    Reply to this comment
  7. Sandeep
    Sandeep 05/09/2023 11:21 PM

    If the NPA loan outstanding amount is Rs. 5,00,000.00 in a nationalised Bank, is the SARFASI Act applicable?

    Reply to this comment
  8. Naeem Khan
    Naeem Khan 26/08/2023 8:38 AM

    If 3 emi bounced after corona period and the same pending till but I'm paying regularly emi only except bounced emi still finance company took action under sarfeci act also I'm ready to clear dues but not hearing and also I didn't got any notice or any order copy from concern authority what should I do at this situation please guide to save my property

    Reply to this comment
  9. Shah
    Shah 10/08/2023 2:33 PM

    You may call me on 9911734196

    Reply to this comment
  10. Anand
    Anand 28/07/2023 9:42 AM

    Can a person having his account NPA in one Bank, borrow funds from another Bank against fresh neat and clean property,,(not mortgaged earlier).Hw will use this fresh propert as collateral. It will be fresh company. Thanks. Anand

    Reply to this comment
  11. Akshay
    Akshay 26/07/2023 12:03 PM

    KNN India's blog on "How Banks Misuse SARFAESI Act Provisions for Loan Recovery" is an eye-opening piece. It sheds light on a critical issue that affects borrowers and the financial sector. The well-researched content highlights the importance of responsible lending and ethical practices. Thanks for raising awareness on this crucial matter!

    Reply to this comment
  12. Ravi deshatwar
    Ravi deshatwar 18/07/2023 12:29 AM

    Sir my lone is 2 cr but my mortgage proparti more then lone but bank harass my proparti plese help me

    Reply to this comment
  13. Alka Singh
    Alka Singh 21/06/2023 5:04 PM

    Sir, My parents took a reverse mortgage on their flat. My father passed away 3 years ago and my mother who is 92 years old has been informed by the bank that it is NPA and the bank will take legal action under SARFAESI and will evict her after 60 days. The terms of RM clearly stated that the surviving spouse can stay till the end. Kindly advise what we should do as we do not have 25 lacs demanded by the bank.

    Reply to this comment
  14. Ram
    Ram 22/04/2023 7:03 PM

    Banks mortgage on forge title deed borrower or gurantor already sold that property. Banks also registered on portal CERSAI After that transfer to ARC and get order U/s 14. Now face the problem original purchaser who have original parental deed and possession of property. Many these type cases pending DRT instyle of SA. Why a DM/CMM can't refuse application u/s 14 on ground invalid security Intrest. This is his power given order as unsatisfied. This way low Pendecncy in DRTs.

    Reply to this comment
  15. ceepee
    ceepee 31/03/2023 10:48 PM

    I am also having the same experience. After a long study i found it is our sin to born in this grate nation.

    Reply to this comment
  16. Anuj Thakur
    Anuj Thakur 08/03/2023 10:06 AM

    Sir, after receiving demand notice u/s 13(2) of SARFAESI Act, the next thing which has to be done by the borrower is to send Representation/Objections to the said notice as per section 13(3-A).

    Reply to this comment
  17. A/C KAMLESH
    A/C KAMLESH 20/02/2023 7:50 PM

    Dear sir /Madam I belong to A/C Adivasi community group of members Sir in year 2017 I have taken homeloan 1.2cr and Was regularly paying emi till December 2020 And paid 30 EMI Appr. 30 lacs Than after due to pandemic corona and economic slow down of fail to pay emi till date Than after bank declare the account in default as NPA from 10-01-2021. My business shut and for same I have asked for financial help to President, PM, FM, CM, reserve bank,banks but nobody have help or neglect us though we belongs to A/C Adivasi Now bank letter as demand notice received on 9-02-2023 And with refer subject:- Notice under securitization 13(2) of securitization and reconstruction of financial assets and enforcement of security interest act, 2002. 1)As bank have given 60days and given demands and enforced threatening us as below A)in terms of provision 13(13) of the Act borrower/s are prohibited from transferring either by way of sale,lease or otherwise any of secured assests without prior consent of banks B)your kind attention is invited to provisions of sub- section (8) of section 13 of the sarfaesi act where under you can tender the entire amount of outstanding dues together with all costs, charges and expenses incurred by the bank only till the date of publication of the notice for sale of the secured assets by public auction,by inviting quotations ,tender from public or by private treaty.Please also note that if the entire amount of outstanding dues together with the costs, charges and expenses incurred by the bank is not tendered before publication of notice for sale of the secured assets by public auction, by inviting quotations, tender from public or by private treaty, you may not be entitled to redeem the secured assets ***** This is to inform you that before BANK DEMAND NOTICE Dated 9/02/2023 ***Receive first notice if bank adv as notice - RECALL NOTICE with dated 11/11/2021 ****Receive Second notice by bank as notice - Without Prejudice with dated 03/09/2022 *****Receive third notice by bank as notice - without prejudice with dated 05/01/2023 ***** Receive notice by bank as notice - DEMAND NOTICE with dated 09/02/2023 As on till date today I don't have (zero ) business per month As I been engineer and having 22 year of experience till date as I belong to adivasi group center government suppose to support and give us financial help Even i have not been taken any subsidy loan or received Pls guide us for your help as per you experience and expertise Awaiting for your valuable feedback Thanking you A/C Kamlesh MUMBAI -MAHARASHTRA

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  18. Dhiren Bhandari
    Dhiren Bhandari 14/01/2023 9:22 AM

    Request for Expert Responses To Various Querries Regarding Illegal Uses of SARFAESI towards Guarantor?

    Reply to this comment
  19. Babythomas
    Babythomas 26/09/2022 2:03 PM

    Sur our homeloan NPA and Bank took action with sarfasi act.

    Reply to this comment
  20. Babythomas
    Babythomas 11/09/2022 12:02 PM

    Sir me and son took a homeloan with his gulf salary acvount homel, but in covid pandemic his job loss, now SBI start sarfaesi act, what can we do Sir, we are from very poor family no other income, niw hus bew jibs u interview finished, he will get a job in gulf shortly, sir what can we do, my elder child is suffering with autism, please give ne a advice Sir, Thank you.

    Reply to this comment
  21. Om verma
    Om verma 25/07/2022 2:06 PM

    Yes banks are misusing really it specially ICICI BANK. I have taken a loan from ICICI Bank for housing but in which instalment are being paid regularly but the bank issued notice under sec 13(2) And 13(4) of SARFAESI act because there is a clean OD account in some intrest has become due which has been hold by the bank in my SB account under lien but transferred to account concerned.Now they are adamant to take possession of the property. Can a bank take possession of the property which is not mortgaged to bank for a particular facility.

    Reply to this comment
  22. Vikash Vidyarthi
    Vikash Vidyarthi 23/07/2022 1:54 AM

    Dear sir, Can banks demand EMIS and keep penalizing the borrower once they have declared his asset as NPA & initiated actions of 13(2) against him. Regards, Vikash Vidyarthi

    Reply to this comment
  23. subho
    subho 18/07/2022 11:12 AM

    Bank of Baroda took over Vijaya Bank. Vijaya bank had extended OD against the property of my PVT Ltd company's one of the founder directors. The other director was myself. The OD fund was actually used by the other director only whose property was mortgaged. Now after a couple of years, the director resigned by keeping his mortgage alive. My wife was inducted as the other director. Thereafter the resigned director somehow managed/bribed the bank officials to get his mortgaged released by converting the OD into CGTMSE funded CCH (Infact as per the MSME provisions, this change over is illegal--- No secured loan could be converted by a bank into unsecured). Later on when the functioning of the company got stalled, the account became NPA. The bank officials forged the signature of my wife in preparing documents that she has extended mortgage of her flat. Now the bank has moved DRT. I have also lodged a criminal complaint with the evidences in hand with police. How could I get the perpetrators behind bars if you could let me know. Rgds

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  24. jitu
    jitu 06/07/2022 9:36 AM

    RBL bank gave loan on security of immovable asset. They made guarantor to legal heir , now default made by borrower, instead going borrower they are herrasing gurantor. Is this way correct. They put the property on sale at 60% of market price. Taking undue advantage of borrower. RBI must take cognizance of this.

    Reply to this comment
  25. Robert Brown
    Robert Brown 03/07/2022 6:31 PM

    Wow! Great writing mate! I was looking for a blog that could give me every little detail but I was a bit sad until I came here. Your way of writing is amazing and your attention to detail is amazing. Covered almost everything in just one blog. Thanks for sharing. Kudos! Cheers!

    Reply to this comment
  26. A K
    A K 23/05/2022 4:17 PM

    We have same scenarios sir. Fraudulent loans were provided on our properties with forged signs and higher valuations to different borrowers whom we dont even know. Now, the banks are coming for symbholic possessions. What can we do?

    Reply to this comment
  27. Manoj
    Manoj 16/05/2022 11:53 AM

    If the bank is not able to recover full outstanding amount by selling the mortgaged assets of the borrower, it can approach DRT which in turn can sell the uncharged assets of the borrower (which are linked to borrower’s PAN)

    Reply to this comment
  28. Rajiv
    Rajiv 21/03/2022 7:25 AM

    It is so true that the banks are misusing the Sarfaesi Act, which was meant to strengthen the banks. We are a MSME Unit based in Delhi. In December, 2020 a fire destroyed my complete factory. The CC limit from Axis Bank was against stock which was primary guarantee. My house was given as collateral. While the claim of our audited stock is still pending, the bank has sent me a notice under the sarfaesi act. My request to convert the collateral to LAP OD was declined. With no defaults in 35 years of business, I have been declared an NPA due to the ill-intention of the bank and the strength an act like this has provided them.

    Reply to this comment
  29. bhagyasri
    bhagyasri 16/12/2021 11:19 AM

    We have same scenarios sir. Fraudulent loans were provided on our properties with forged signs and higher valuations to different borrowers whom we dont even know. Now, the banks are coming for symbholic possessions. What can we do?

    Reply to this comment
  30. G K Reddy
    G K Reddy 07/10/2021 12:29 AM

    I have deposited few Lakhs in KANVA SOUHARDA CO-OPERATIVE CREDIT LTD. This society has cheated depositors to a tune of 650 crores. Many Directors have availed unsecured loans. Does SARFESAI ACT 2002 apply here.

    Reply to this comment
  31. Vasu
    Vasu 01/09/2021 6:14 PM

    Sir. My property in collateral the borrower not paid amount I got letter that is sarfeisa act under please clear the amount in one month. I don't what to do how to release my documents please advise me

    Reply to this comment
  32. moneymaxfingrow
    moneymaxfingrow 09/08/2021 6:18 AM

    Great blog. Thanks for the sharing

    Reply to this comment
  33. moneymaxfingrow
    moneymaxfingrow 19/07/2021 6:01 AM

    Great post. It is very useful and informative article. Keep more like this.

    Reply to this comment
  34. Y K
    Y K 10/03/2021 10:29 AM

    We are MSME company, declared NPA by the Bank in 2016 because of the state government policies. Loan was against Building, Machineries and CC Limit was against Stocks of RM, SIP, FG and debtors. Bank wants auction and to sell Land and Property considering Land and building only. DRT instructed Bank to include all movable assets after our objections and to submit their valuation. But Bank is not considering Stocks like RM, SIP, FG and some machineries as well Bank's valuer valued cost of building and machineries on very very lower side without considering our valuer's valuation. Although the valuation of the movable property is higher than the NPA amount yet Bank's intension is to sale the land worth of 10 times of NPA amount. Moreover, Bank took possession on the entire Movable and Immovable assets of the company and on other's land too, adjacent to the land of the borrower, without demarcation and not included in their inventory made at the time of taking possession. Administration also in favor of the Bank and did not consider our request. Hon'ble High court is also on strike. Pl give opinion what to do?

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  35. Suresh Nallawar
    Suresh Nallawar 26/12/2020 5:15 PM

    Dear Sir My borrower Coop bank last 17 years continuous creating and not followed RBI guidelines for msme agro based unit of cotton seed oil industry.I'm suffered from this bankers thinking about very negative for borrower he has trying poor practices just like groccery shop keeping.16 june 2020 buyer's lowyer paper published in Dainik bhasker hindi news paper then I'm shocked how can sold my industrial property without any notice and price should not disclosed.please help me sir and how can save my property from this bank belong RSS all 80% to 90% director's and employees. Regards Suresh Nallawar 7588072309

    Reply to this comment
  36. Anupall Dutta
    Anupall Dutta 24/12/2020 12:40 PM

    ICICI Bank is sending Sarfaesi notice when matter is pending before Supreme Court on EMI moratorium extension and there is interim stay order on NPA by Supreme Court.What is the way out? Is this not contempt of court?

    Reply to this comment
  37. Kiran
    Kiran 30/07/2020 9:31 AM

    You can mail me or call me at 9176172115

    Reply to this comment
  38. SASI KUMAR
    SASI KUMAR 12/06/2020 5:11 PM

    Sir , after completion of registration the property which that sold in auction by sarfaesi act, How much time bank can take to surrender the home ...

    Reply to this comment
  39. Rishi
    Rishi 07/05/2020 4:06 AM

    If bank sanction the home loan on the basis of Tri-Party agreement (among builder+borrower+Bank) and it was the condition of this agreement that once the lease will be executed in the name of borrower the documents will be submitted by the builder to the bank as mortgage, Bank disburse the loan amount direct to the builder. but builder allow the physical possession to the borrower without lease deed. In case of loan repayment defaulter can bank proceed under SARFAESI against the said property and borrower in the absence of valid lease deed in the name of borrower.

    Reply to this comment
  40. 27/02/2020 10:02 AM

    Bank can attach the property by filing civil suit

    Reply to this comment
  41. Payal gupta
    Payal gupta 08/01/2020 1:17 AM

    I m fighting from last 2 yr from bank as I have mortgage my property for cc limit and I have ask them for ots but they denied I have paid almost 95%of amount now they come with other story tat property has extension of loan 2 some other person...and I have signed the papers itz a matter of fraud but they are harassing me to pay other person loan...and not following any kind of RBI guidelines...

    Reply to this comment
  42. Praveen
    Praveen 31/08/2019 1:44 PM

    Dear sir. Please advice if the banks can proceed with ohysical lossession and sale of property where it is evident that the bank officers are involved in forgery and fir has been registered against the culprits.

    Reply to this comment
  43. abc
    abc 29/08/2019 3:51 PM

    Bank make payment at the instructio of borrower .borrower is responsible to pursue the vendor for collection of machines. In default legal action by the borrower was compulsory.

    Reply to this comment
  44. Gopikishan Tulsiram kabra
    Gopikishan Tulsiram kabra 28/06/2019 12:13 PM

    if a business loan is taken on goods hypothication and failed to repay. bank is entitled to take over his home even it is not mortgaged?

    Reply to this comment
  45. Adv. Panjab B Ingle
    Adv. Panjab B Ingle 15/03/2019 2:44 PM

    Dear Sir, Pl let me know about possession procedure of property under SARFAESI, act. Rgds, Adv. Panjab B. Ingle

    Reply to this comment
  46. Nilesh Narigara
    Nilesh Narigara 16/06/2017 8:40 AM

    A Bank has transffered loan amount directly to the supplier's account. Then the supplier not delivered machineries. In this case the Borrower become a victim of fraud by the supplier. If the Bank misused the provisions of SARFAESI Act for recovery of this loan and taken possession of the mortgaged property, what is right of the Borrower?

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