Easy availability of housing finance makes property purchases quite convenient for a large number of people. However, because of unprecedented situations, a certain percentage of loan accounts turn non-performing every year. The financial stress caused by the ongoing Coronavirus pandemic in India, is a proof of that.
There has been a significant increase in delinquencies, with loans against property and credit cards being the most affected segments in 2020, credit information bureau TransUnion Cibil said, in a report. This is despite the fact that the Reserve Bank of India (RBI) had announced a moratorium on loan repayments for six months, ending August 2020, under which a loan account could not be termed as a non-performing asset (NPA) for non-payment.
In case of NPAs, banks have the right to possess the security provided by the defaulting borrower against the loan and sell it to recover losses, without any intervention by any court of law. Banks in India have been provided with this right under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, which provides them with a mechanism to significantly reduce their NPAs.
What is the SARFAESI Act 2002
With a view to offer financial institutions a cushion in case of defaults, the government, in 2002, came up with the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act, 2002). Among other things, the law enables banks to gain control over and auction the security against the loan, in case the borrower defaults.
The law is ‘an act to regulate securitisation and reconstruction of financial assets and enforcement of security interest and to provide for a central database of security interests created on property rights and for matters connected therewith or incidental thereto’. After enforcing it on June 22, 2002, the SARFAESI Act was extended to the entire country.
SARFAESI Act procedure
If a borrower is unable to repay his loan (this includes home loans) for a period of six months, the bank has the legal right to send a notice to him, asking him to clear the dues in 60 days. If the borrower fails to meet this liability, the financial institution has the right to go for a distress sale of the property, to recover the dues.
A person in default, aggrieved by the bank’s order, may appeal to the appellate authority established under the law, within a period of 30 days from the date on which the order is passed.
Once the bank gains control of the property, it has the right to either sell or lease it out. It can also transfer the right over the property to another entity. The proceeds gained through the sale are used to first clear the outstanding dues of the bank. The remaining money, if there is any left, is paid to the defaulting borrower.
What if you are buying a bank auction property?
Although the bank auctions the property, it may not be the absolute owner of the property. This means, the buyer will have to get a lot of paperwork done. Also, the bank is not responsible to get the property vacated either. Consequently, the property may still be occupied by the previous owners, even after you have made the purchase.
See also: Risks in buying property in auction
SARFAESI Act news updates
Banks free to repossession property under SARFAESI Act: Punjab and Haryana High Court
August 25, 2021: Financial institutions that are currently staring at large-scale loan defaults due to the financial stress caused by the Coronavirus pandemic, are free to repossess properties under various sections of the SARFAESI Act, the Punjab and Haryana High Court has said.
“This court has not granted any stay on the proceedings to be undertaken by the banks/financial institutions, under Sections 13 and 14 of the SARFAESI Act. It is further clarified that this court has also not granted any kind of interim stay in respect of the steps to be taken by the banks/financial institutions for recovering the amount on account of car loans and gold loans,” the HC said.
The HC had, in an interim order, on April 28, 2021, said that ‘any bank or financial institution shall not take action for auction in respect of any property of any citizen or person or party or anybody corporate till June 30, 2021’. It has now, however, clarified that ‘the object and purpose of passing the interim order was only to stay the auction proceedings in respect of residential accommodations’.
“In these difficult times that the citizens and country are faced with, the occupants of the domestic/residential units were not rendered homeless and exposed to further miseries. The interim order has a limited purpose and operations, as indicated. Further, this court, in the interim order itself, has granted liberty to the authorities concerned to approach this court with particular instances, for any clarifications if some hardship was/is being caused on account of the interim arrangement,” it said.
What is SARFAESI full form?
SARFAESI stands for Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest.
What is SARFAESI Act?
The SARFAESI Act empowers banks to take possession of and auction the pledged securities of defaulting borrowers, to recover the pending dues.
Is SARFAESI Act applicable to cooperative banks?
In 2020, the Supreme Court upheld amendments made to the SARFAESI Act in 2013, which included cooperative banks under the ambit of the Act.