Navigating India's SARFAESI Act: Balancing Efficiency and Borrower Rights
The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act) was enacted in India in 2002 to provide a legal framework for the securitization and reconstruction of financial assets and the enforcement of security interests by banks and financial institutions.?
?Banks and financial institutions can take possession of secured assets of the borrower, manage them, or sell them to recover dues, and enforce their security interests without the intervention of courts. This enables financial institutions to convert their loans into marketable securities.
These securities can be sold to Asset Reconstruction Companies (ARCs), which can then manage and recover the loans. This helps restructure the debt or manage the asset to recover the maximum value.
A notice is issued to the defaulting borrower to discharge their liabilities within 60 days. Following which, if the borrower fails to comply, the lender can take possession of the secured assets, sell or lease them, or appoint a manager to manage the assets.
Borrowers can file an appeal to the Debt Recovery Tribunal (DRT) within 45 days of the action taken by the lender. An appeal against the DRT order can be made to the Appellate Tribunal under Section 18 of the SARFAESI Act.
On June 24th, the Supreme Court refused to entertain a petition challenging SARFAESI condition of pre-deposit to appeal before DRAT. The Supreme Court of India declined to issue notice on a petition challenging the requirement of a 50% pre-deposit for an appeal to the Debt Recovery Appellate Tribunal (DRAT) under Section 18 of the SARFAESI Act.?
Section 18 of the SARFAESI Act allows an aggrieved person to appeal to the Appellate Tribunal within 30 days of a Debts Recovery Tribunal order, requiring a fee and a 50% debt pre-deposit (reducible to 25%) for the appeal to be entertained.
The petition, filed by a company director, in the case of Chetan Prabhashankar Joshi vs Board Of Directors Of Pegasus Assets, argued that the provisos mandating a pre-deposit of 50% or 25% (at the court's discretion) of the sum due before an appeal could be heard were arbitrary and violated natural justice.
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The petitioner contended that since banks often invoke SARFAESI for defaults as low as 5% of the loan amount, requiring a borrower to deposit 50% of the total loan amount to maintain an appeal rendered the appeal process redundant. The petitioner highlighted the impracticality of the provision, particularly for interim orders. The Supreme Court's vacation bench, comprising Justices AS Oka and Rajesh Bindal, noted that the petitioner already had a similar petition pending and suggested that the petitioner had alternative remedies available, including approaching the Bombay High Court under Article 226 of the Constitution. Given these factors, the Court refused to entertain the petition under Article 32 and disposed of the matter.?
The petitioner's argument centres on the burden placed on borrowers to access appellate mechanisms. The requirement to deposit a substantial percentage of the debt to appeal can be financially difficult, especially when the default amount may be a small fraction of the total loan. This situation raises questions about access to justice and whether the provisos effectively deny borrowers the right to a fair hearing, especially in cases of interim orders where the stakes may not justify such high deposits.
This case brings to light the ongoing tension between effective debt recovery and the protection of borrowers' rights. While the SARFAESI Act aims to streamline recovery and reduce NPAs, the rigid pre-deposit condition for appeals could be seen as an obstacle to justice, prompting calls for a more balanced approach that safeguards both lenders' and borrowers' interests.
SARFAESI act has been instrumental in helping banks reduce their NPAs by enabling quicker and more efficient recovery of bad loans. The threat of stringent recovery measures encourages borrowers to maintain their loan repayments, thus promoting better credit discipline. The act has also significantly reduced the dependency on the overburdened judicial system, allowing banks to recover loans more efficiently.
However, while some argue that borrower’s rights are being violated, as there’s a lack of judicial oversight, an extremely high deposit and a short notice period, the Act recognises this and has provided recourse.?
The borrowers have the following rights:
In conclusion, while the SARFAESI Act has been instrumental in reducing NPAs and streamlining the loan recovery process for banks, it faces criticism for potentially infringing on borrowers' rights due to the high pre-deposit requirement for appeals and limited judicial oversight. The Supreme Court's recent decision underscores the need for a balanced approach that ensures efficient debt recovery while protecting borrowers' access to justice. Ensuring fairness and providing adequate recourse for borrowers can help maintain this balance and uphold the principles of natural justice within the financial system.