- Mohammad Anas Dorajiwala and Arwa Hussain
INTRODUCTION
The SARFAESI Act was enacted in India to tackle the rising problem of non-performing assets among banks and financial institutions. It enables these institutions to address issues related to liquidity, long-term assets, growing NPAs, and loan recovery delays, thereby aiding in the reconstruction of distressed assets. This legal framework seeks to achieve timely and effective recovery of non-performing assets held by financial institutions and banks by empowering them to liquidate residential and commercial assets through auctions in the event of a borrower defaulting on their debt, thereby expediting the recovery process. The SARFAESI Act serves as a vital tool in the fight against the rising tide of non-performing assets that have plagued financial institutions and banks in India, bolstering their ability to mitigate the impact of bad loans on their balance sheets.
MISUSE OF THE SARFAESI ACT BY BANKS IN LOAN RECOVERY
The SARFAESI Act's Section 13 confers considerable power on secured creditors, allowing them even to evict tenants. However, there have been concerns about the misuse of this provision by banks, who have reportedly sidestepped Reserve Bank of India (RBI) guidelines to recover loans rapidly. The Act's implementation involves complex technicalities and considerations of fairness. For instance, non-payment of loan instalments for 90 days before the balance sheet date can result in classification as a non-performing asset (NPA), but temporary issues like late document submission should not be included[1]. Missing three consecutive payments within 12 months leads to the account becoming sub-standard and NPA.[2] Section 13 permits the financial institution to issue a notice to take possession of security assets.[3]
However, the borrower must receive a notice and an opportunity to repay the loan, including an explanation of legal consequences and penalties, within 60 days.[4] The guidelines require banks to give borrowers at least 17 months to repay their loans before using the SARFAESI Act.[5] But banks have been treating all non-performing loans as "wilful defaulters" to use the SARFAESI Act against them. A wilful defaulter is someone who intentionally doesn't pay back their loans even though they have enough money to do so.[6] They may also misuse funds or lie about their financial situation. They may sell assets that were bought with the loan or remove them without telling the bank. In some cases, they may even commit fraud.
Banks and financial institutions might label all MSMEs (small businesses) that have not paid their loans as wilful defaulters to use SARFAESI laws. According to this law, the property pledged as collateral must be assessed and the borrower must be notified of its value before it is put up for public auction[7]. The bank must also inform the borrower of their right to take action against the mortgaged property if they do not repay the principal and interest within 30 days.[8]
Banks have been found to frequently flout the legally mandated timelines. For instance, a public sector bank in Jammikunta sold a property within just 15 days of declaring it as an NPA, without consulting with the borrower or entertaining any objections raised by them. Such instances are widespread in the context of MSME NPAs used as collateral. In Jammikunta, the bank went a step further and engaged agents to coerce the borrower into repaying the loan, in violation of the guidelines under Section 13(3)(A) of the SARFAESI Act. These practices illustrate the need for greater adherence to the legal provisions governing the loan recovery process to ensure that the rights of borrowers are not trampled upon.
As observed in the case of the United Bank of India vs. Satyawati Tondon and Ors., the bank's attempt to auction the property of a borrower who had defaulted on a loan. The Delhi High Court ruled in favour of the borrower, stating that the bank had not given proper notice to the borrower and had not followed the proper procedures under the SARFAESI Act. The court also noted that the bank had failed to consider Tondon's request for restructuring of the loan. The bank appealed the decision to the Supreme Court of India, but the court upheld the lower court's decision, stating that the bank had not followed the proper procedures and had acted arbitrarily.[9]
The case of Vishal N. Kalsaria vs. Bank of India & Ors. was similar, as it involved the bank's attempt to recover a loan by auctioning the borrower's property. However, the borrower disputed the legality of the auction notice, claiming that they had not received adequate notice. The Gujarat High Court sided with the borrower, ruling that the bank had not complied with the SARFAESI Act's procedures and had not considered the borrower's request for loan restructuring. The bank challenged the decision in the Supreme Court, but the court agreed with the lower court's ruling, stating that the bank had acted arbitrarily and had not followed the proper procedures.[10]
In both cases, the court emphasized the importance of following the proper procedures under the SARFAESI Act and providing adequate notice to borrowers before taking any action to recover loans. It also highlighted the importance of considering a restructuring of loans as an option before resorting to recovery measures.
One of the fundamental rights available to borrowers under the SARFAESI Act is the ability to challenge any notices issued by banks under Section 13 to take symbolic possession of their security.[11] Specifically, borrowers may appeal these actions in the Debts Recovery Tribunal under Section 17 of the Act, particularly in cases where they believe the bank has acted arbitrarily or unlawful manner. The Act establishes a 45-day time limit for filing an appeal under Section 17. However, borrowers are permitted to file appeals beyond the prescribed time limit if they can provide a reasonable explanation for the delay.
Borrowers have the right to contest both wrongful possession of their property by the bank and wrongful sale notices issued by the bank. It is worth noting, however, that if a borrower challenges the bank's sale notice but fails to question the possession of the property taken by the bank following the notice issued under Section 13(4), they must first convince the DRT why they did not contest the bank's initial step of taking possession of the property.[12] This is because the borrower must demonstrate that the bank's possession of the property itself was illegal to challenge the sale notice issued by the bank.
CONCLUSION
In conclusion, while the SARFAESI Act has undoubtedly improved the loan recovery process for defaulting borrowers, it is crucial that the rights of the borrower must not be compromised in the process. Any successful implementation of the Act must maintain a balance between the relevant stakeholders, ensuring that lenders do not unilaterally infringe on the rights of borrowers, as the right to property is a constitutional right. Recent developments in the Act have been introduced to fulfil the legislation's criteria, with the judiciary playing a vital role in interpreting and clarifying legislative provisions. The Supreme Court's decisions have rightly expanded the scope of the SARFAESI Act, which is an essential step towards strengthening the financial institutions of the country, given its significant role in the betterment of the country's economy.
Reference:
[1] Section 2(j)(ii) of SARFAESI act [2] “Reserve Bank of India” Notifications, www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12171&Mode=0. [3] The securitisation and reconstruction of financial assets and enforcement of security interest act, 2002 § 13. [4] Section 2(j)(ii) of SARFAESI act [5] RBI/2014-15/73 DBR.No.CID.BC.57/20.16.003/2014-15 dated July 1, 2015 [6] RBI/2014-15/73 DBR.No.CID.BC.57/20.16.003/2014-15 dated July 1, 2015 [7] Section 13(2) of the SARFAESI act [8] Master Circular on ‘Wilful Defaulters’, Reserve Bank of India https://www.rbi.org.in/Scripts/BS_ViewMasCirculardetails.aspx?id=9907. [9] United Bank of India v. Satyawati Tondon, (THE SUPREME Ct. INDIA 2010). [10] VISHAL N. KALSARIA v. BANK OF INDIA & ORS, (THE SUPREME Ct. INDIA 2016). [11] Section 17 of the SARFAESI act [12] Section 17(2) of the SARFAESI act