SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND ENFORCEMENT OF SECURITY INTEREST (SRAFESI)
Banking is centuries old, being originated in temples of Greek, where the priests were the custodians of the money of public. So is the credit. We have a classical example of Lord Venkateswara borrowing from Lord Kubera to meet his matrimonial expenses, which he is repaying continuously. A honest borrower though he taxes his devotees.
Baking and Credit are inseparable. The debt is most preferred mode of capital mobilisation. One may notice a change from Savings based economy to credit based economy. Debt is like dual edged sword, which cuts on both sides, for borrower, the repayment and for creditor the recovery.
Over the years, the recovery of loans has become most crucial and critical. The juggernaut of non-performing assets has devastating influence on many banks.
We shall understand what is Non Performing Asset (NPA). The asset is the loan given by the banks. The loan has duties to perform. It has to earn interest regularly and has to be repaid in certain time either through instalments or in bullet payment as per the agreed terms. If it fails to perform its duties, it becomes non-performing asset. The consequences is that the asset of the bank, which is public money gets locked up and finally the banks may have to write it off and naturally it is the exchequer who ultimately suffers. Reserve Bank of India has prescribed certain parameters to classify the loans as non-performing assets depending upon the duration for which the interest and instalments remain unpaid. The banks have to provide for such non-performing assets out of their profits, which erode their profits gradually.
The recovery of non-performing assets through regular courts is time consuming and laborious process. The mounting percentages of NPA’s called for financial sector reforms. Article 247 of Constitution of India empowers the parliament to provide for establishment of additional courts for better administration of certain matters enumerated in union list. The banking, falls under union list. Recovery of Debts Due to Banks and Financial Institutions Act, 1993 popularly known as DRT was enacted to hasten the recovery process. This has many advantages. Primarily the focus on bank debts which leads to expeditious disposal to meet the urgent need. Second is the legal frame designed does not take within its fold the technical and complicated procedures avoiding delays. The DRT also protects the interest of both the creditor and borrowers. The Act faced Constitutional challenges before some High Courts, but was finally upheld by Supreme Court of India.
But the Banking Sector felt the task as incomplete as the act enables DRT to pronounce the verdict, indicting the default borrower to pay the dues or for sale of the securities. The reasons for default are many. It may be because of financial or managerial problems. It may also because of changed circumstances, policies of the government. There was need for legal framework to securitise or reconstruct the assets of the defaulting borrower as a logical end to DRT process. The lenders at times may have to step into the shoes of managers of the defaulters to efficiently manage the securities or may have to securitise them. As a result, The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 was enacted. It is generally referred as SRAFESI.
The Act was first introduced by means of ordinance on 21.6.2002, later the Act was passed by the parliament on 17.12.2002. The ordinance as well as Act was challenged as to its constitutional validity by Madria Chemicals Limited, Siddh Industries, Indore and others. M/s. Goyal Steels and others.
The most important is Madria Chemicals Ltd. etc., V Union of India and others etc. which was decided by Honb’le Supreme Court upholding the Act except appeal cum security deposit related clause under Section 17. However the judgement has thrown open several issues which needs deeper examination. The Indian Banks Association has submitted a detailed note to the Union Finance Ministry which is likely to come out with further amendments.
As far as the public are concerned, Chapter III, Enforcement of Security Interest containing Sections 13 to 19 is very important. We shall understand some words as defined in the Act.
“Appellate Tribunal” means Debts Recovery Appellate tribunal established under Section 8 of The Recovery of Debts due to Banks and Financial Institutions Act 1993.
“Asset reconstruction” means acquisition by any securitisation company or reconstruction company of any right or interest of any bank or financial institution.
“Bank” means a banking company or corresponding new bank or State Bank of India or subsidiary bank or such other banks, which the Central Government may specify by the notification for the purpose of this Act. By special notifications, the Central Government has brought co-operative Banks, Housing Finances companies under this Act.
“Borrower” means any person who has been granted financial assistance by any bank or financial institution.
It also includes guarantor or any person who has created, any mortgage or pledge as security for financial assistance granted.
“Default” means non-payment of any interest or principal debt or any other amount payable by the borrower to any secured creditor. Consequent upon which the account of the borrower is classified as non-performing Asset as per guidelines issued by the Reserve Bank of India.
“Financial Assistance” any loan or advance granted including Debentures, bonds subscribed or any guarantees given, or letter of credit established or any other credit facility extended.
“Secured Creditor” means any bank or financial institution or any group or consortium of banks or financial institutions in whose favour security interest is created for due repayment.
“Security Interest” means right title and interest of any kind whatsoever upon property; created in favour of any secured creditor and includes mortgage, charge, hypothecation, assignment, other than those which are specifically exempted under Section 31 of the Act.
Enforcement of Security – Notice
Section 13 of the Act empowers the secured creditor to enforce the security interest in case the borrower defaults in repayment of secured debt and whose account is categorised as non-performing asset. The secured creditor is required to give notice to the borrower to discharge all his liabilities in full within 60 days from the date of notice. The notice should be comprehensive furnishing full details of the amounts due, secured assets intended to be enforced. The notice may be served by delivering, or transmitting at a place where borrower or his agent is empowered to accept the notice or documents on behalf of the borrower.
It may also be delivered or transmitted where the borrower actually or voluntarily resides or carries on business or personally works for gain. The notice may be sent by registered post acknowledgement due, by speed post, by courier, or any other means of transmission of documents like fax message or electronic mail service. If it is found that the borrower is avoiding the service of the notice, or the service cannot be made, a copy of the demand notice may be affixed on the outer door or some other conspicuous part of the house or building of the borrower or his authorised agent. The demand notice may also be published in two leading newspapers, out of which one to be in local language. The newspapers shall have good circulation in the area.
If the borrower is corporate body, the demand notice shall be served on the registered office or any of the branches. In case of more than one borrower the notice has to be served on each of the borrower. The notice have to be served on guarantors and on persons who has given security for due repayment of loan.
In case the borrower fails to repay the amounts demanded in notice, within the stipulated time, the authorised officer shall proceed with enforcement of security. The board of the bank, trust or any other authorised has to appoint an authorised officer to enforce the security, who shall not be less than rank of chief manager or equivalent. Only authorised officer shall enforce the security.
Possession
The secured creditor has some options. He may take possession of the secured assets of the borrower including the rights to transfer by way of lease, assignment or sale.
He may take over the management of the secured assets of the borrower, including the right of transfer of lease, assignment, sale. He may appoint any person as the manager to manage the secured assets, the possession of which has been taken over.
The secured creditor may require by notice any person who has acquired any secured assets by the borrower and from any money is due or may become due to the borrower to pay the secured creditor so much of money as is sufficient to pay the secured debt.
If the secured assets are movable properties, the authorised officer shall take the possession in the presence of two witnesses and after panchanama was drawn and signed by the said two witnesses. The panchanama shall conform to the prescribed format. After taking possession, the authorised officer, shall prepare an inventory of the property as per the format prescribed and shall deliver the copy of such inventory to borrower or his authorised agents.
If the property is subject to speedy or natural decay or expenses for keeping such property is likely to exceed the value of the property the authorised officer may sell it at once. It is the duty of the authorised officer to take proper care and take steps for preservation and protection of the assets. If necessary, the assets may be insured until they are sold or disposed off. He shall get the assets valued. There are separate procedures for sale of movable and immovable properties. In case of taking possession of immovable property, a possession notice as prescribed has to be delivered to the borrower and by affixing a copy of notice on the outer door or at some conspicuous space of the property. Such possession should also be published in two leading, widely circulated newspapers. One shall be of the local language.
Sale
Both in case of movable and immovable properties, it is obligatory to serve a notice of thirty days to the borrower about the sale. The notice of sale shall also be published in two leading widely circulated newspapers, one shall be of local language. The public notice shall contain important details of the property, the debt, reserve price, time and place of public auction, earnest money to be deposited etc. The notice shall be affixed on the conspicuous part of the immovable property and may also be put on Website. Sale by any other modes than public auction / tender shall be on terms settled between the parties. After confirmation and completion of sale process, the authorised officer shall issue a sale certificate in favour of the purchaser in the prescribed format.
While taking possession or sale of the secured asset, the secured creditor may request the help of Chief Metropolitan Magistrate or District Magistrate in whose jurisdiction the secured assets, fall.
Rights to appeal
The Act provides for appeal by the aggrieved person, the borrower. Such person may appeal to the Debt Recovery Tribunal having jurisdiction. The limitation period is 45 days. Earlier Act stipulated that party preferring appeal shall deposit 75% of the amount claimed in notice with a discretion given to the DRT to waive or reduce such amount. Hon’ble Supreme Court in case of Madria Chemicals Vs. Union of India, held the provision as arbitrary and struck down this clause. There is no need to pay any deposit. The fee payable for appeal is as prescribed in Rule No. 7, Debt Recovery Tribunal procedures Rules 1993. If not satisfied with the verdict of DRT, the party may approach Appellate Tribunal within 30 days. The fees payable is as per Rule No. 8 of Debt Recovery Appellate Tribunal procedures / Rules 1999.
Limitation
Limitation Act 1963 is applicable to the Act. Taking possession, or appointing a manager or taking over the management is subject to limitations Act.
Act Not Applicable (Section 31)
The provisions of this Act is not applicable
1. A lien on goods, money, security, given by or under the Indian Contract Act 1872, or Sale of Goods Act 1930 or any other law in force for time being.
2. Pledge of movables within the meaning of Section 172 of Indian Contract Act 1872.
3. Creation of any security in any aircraft.
4. Creation of any security in any vessel (Merchant & Shipping Act 1958).
5. Any conditional sale, hire-purchase or lease or any other contract where no security interest is created.
6. Any rights of unpaid seller under Section 47 of Sale of Goods Act 1930.
7. Any properties not liable for attachment under Sub Section (1) of Section 60 of Code of Civil Procedure 1908.
8. Any security interest for securing repayment of any financial asset not exceeding one lakh rupees.
9. Any Security Interest created in Agricultural Land.
10. Any case where the amount due is less than 20% of the principal amount and interest thereon.
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