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How banks misuse SARFAESI Act provisions for loan recovery

How banks misuse SARFAESI Act provisions for loan recovery 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


About Author

K Manicka Raj & B Yerram Raju


  1. 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.

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  2. 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.

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  3. 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

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  4. 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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  5. 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.

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  6. 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
  7. 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?

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  8. 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)

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  9. 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.

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  10. 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
  11. 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
  12. 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
  13. moneymaxfingrow
    moneymaxfingrow 09/08/2021 6:18 AM

    Great blog. Thanks for the sharing

    Reply to this comment
  14. 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
  15. 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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  16. 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

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  17. 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
  18. Kiran
    Kiran 30/07/2020 9:31 AM

    You can mail me or call me at 9176172115

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    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 ...

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  20. 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.

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  21. 27/02/2020 10:02 AM

    Bank can attach the property by filing civil suit

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  22. 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...

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  23. 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
  24. 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.

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  25. 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
  26. KNN India
    KNN India 19/03/2019 7:06 AM

    Adv. Panjab B. Ingle Sir, In reference to your query regarding process of possession of property under SARFAESI Act, you may visit “ How to recover through SARFAESI Act...

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  27. 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
  28. 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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