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SARFAESI Act, 2002 in Layman Words [Refer Text Book after reading tis !a"ter# Wat is $%A& Bank gives loan to a person. Person fails to make regular payments. Bank gives him notice to correct his behavior. But he doesn’t. Bank declares that loan as Non-Performing Asset (NPA) (Bad !oan) "urrently #ndian banks have NPAs $orth more than %s. & lakh crores.
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'e(t Reco)ery tri(*na+s& • •
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Prior to 's banks had very hard time recovering bad loans. Because often borro$ers (loan takers) $ould file frivolous cases in civil courts then *taarikh * taarikh pe taarikh, taarikh pe taarikh….. proceeding taarikh….. proceeding $ould go on for years. +o &'', overnment established ebt %ecovery /ribunals to deal $ith NPA matters. No$ borro$er cannot approach civil court they’ve to go to special s pecial ebt %ecovery /ribunal (%/). /his led to some relief but then %/ %/ss clogged do$n by truckload of cases.
Wat is te SARFAESI Act and at is its (asic mecanism& +ecuritisation and %econstruction of 0inancial Assets and 1nforcement of +ecurity #nterest Act 22 +uppose 3r. P4 has opened factory $ith %s.& crores. 5e financed this via mi6ture of ebt 7 e8uity in follo$ing $ay. •
-o+der
R*"ees in !r.
P4 and his family
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4untaa (public)
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Business loan from +B#
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Bonds
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18uity (#P9-:+hares) ebt (loans Bonds)
/otal
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#nitially the company runs $ell and good. But after some time then his company starts s tarts making losses and he fails to pay loan 13#s for many months. +B# gives him < days notice to correct his behavior. +till he doesn’t start paying money. +B# declares this %s. ; crores loan NP NPA A (Non-Performing Asset). Asset). 9nce a loan is declared as non-performing asset +B# can take actions under +A%0A1+# +A%0A1+# act to recover the loan money money.. Bank has follo$ing po$ers under +A%0A1+# +A%0A1+# Act= &. After Af ter send sending ing < < days days notice notice to to repay repay the the loan loan if such such notic noticee remaine remainedd un-res un-respon ponded ded then then Bank Bank can can take take possess possession ion of of 3r. 3r. P4’s assets $ithout re8uiring court order ("ommercial or residential fi6ed or moving assets.) 2. Auction > +ale them. ,. "hange "ha nge the the admin administ istrat ration ion>> 3anage 3anagemen mentt of thos thosee assets assets.. ?#n ?#n case case it had had been been P4 (P) (P) !imit !imited ed then then the the e6pel e6pelled led dire directo ctors rs not not entitled to any compensation @inding up petition cannot be filed $ithout +B# permission ;. #f 3r 3r. P4 had had sold sold a$ay a$ay the the mortg mortgage agedd asset asset to to third third party party 3r. 3r. bank bank can can order order 3r 3r. to surr surrend ender er that that Ass Asset. et. C. #f 3r 3r.. o$ o$es es mo mone neyy to to 3r 3r. P4 P4 th then en he ca cann be be ord order ered ed to pa payy mon money ey.. <. #f more more tha thann one one Banks Banks are are the the cred credito itors rs the thenn actio actionn decid decided ed by by <D <D of val value ue of of credi creditor torss shall shall be taken taken A""ea+ str*ct*re in SARFAESI Act& • • • • • •
/he borro$er (loan taker) has follo$ing options= et a stay order from ebt %ecovery tribunal (%/) against the auction>sale of his properties. (5e cannot file case in "ivil courts.) 0ight the case in %/. #f unhappy $ith %/ verdict he can appeal to ebt %ecovery Appellate /ribunal (%A/). (%A/). •
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Bank/ %oer to A*ction • • •
0irst +B# contacts the e6perts gets valuation of 3r. P4’s P4’s assets. 16pert says “those assets are worth Rs.50 crores according to present market value of land/ building/ machinery whatever. /hen +B# $ill give advertisement in ne$spapers E $e are auctioning 6yF land> machinery> building. 3inimum bidding amount is %s. C crores. @hoever $ishes to bid send us application along $ith %s.C as deposit and their other documents etc.
Problem= sometimes bidders do not take interest in buying such properties factories etc. /o fi6 this problem +A%01+# has a provision= if no one else comes to bid in the auction, !ank itself can buy that property.
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-ere comes te ne "ro(+em/ • • • •
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+uppose +B# attached a $arehouse of 3r. P4. #f the land $as in good urban area +B# could open a ne$ branch office there (or housing for its employees). But if plot>factory>house is in some remote area useless for +B#’s personal business. Gnder the Banking regulation Act a bank cannot keep such immovable property beyond H years (ma6 &2 years $ith %B#’s permission). +o ultimately +B# $ill have to auction it to someone.
Wat is AR!& Asset reconstruction company (A%"). /hey buy NPA (Bad loans) from Banks and try to e6tract ma6imum money out of it profit. /hey’ve to register $ith %eserve Bank of #ndia. 16amples= &. A%"#! (#ndia’s first and largest asset reconstruction company (A%")) 2. %eliance Asset %econstruction "ompany !imited by Anil Ambani #n our e6ample +B# has NPA $orth %s.; crores. A%" $ill buy the NPA file from +B# at a lo$er rate say ,C crores. ($ell +B# is making loss yes but something is better than nothing.) Besides banks have hundreds of bad loan cases they donot have time or manpo$er to pursue individual case sometimes no bidders are interested in auction. #n such cases it’s better for bank to transfer NPA to A%". But that doesn’t mean A%" $ill give ,C crores to the +B# from its o$n pocketI /hen ho$ $ill the Asset reconstruction company (A%") arrange for the moneyJ via +ecurity %eceipts. • • •
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Wat are Sec*rity Recei"ts SR1& #n above e6ample A%" needs %s.,C crores to buy a Non performing asset from +B#. +o A%" $ill issue Esecurity receipts (+%)K $orth %s.,C c rores. 9nly Lualified #nstitutional buyers (L#B) can buy these security receipts (+%). +% are not EbondsK they donot carry fi6ed interest rate. A%" $ill promise to pay money on +% $hen it gets money the bad loan. Although A%" usually promise 'D profit on +%. #f A%" fails then decision taken by atleast HCD of L#Bs is binding on A%". isputes arising in bet$een in the parties involved to be solved as per Arbitration and "onciliation Act &''< Lualified institutional buyers (L#B) buy those security receipts (+%). +o %s.,C cr. cash goes from L#B -: A%" -: +B#. AR!s aim e6tract ma6imum money out of this investment. But ho$ A%" $ill have one or more of the follo$ing options= &. Auction the assets fully or partially (i.e. sell the machinery no$ rent the building and $ait for land prices to go up for t$o years and then sell it) 2. +ell the property in combination $ith other NPA properties of other defaulters (similar to Ebuy one large piFFa and get 2D discount on any medium siFed piFFasK). ,. %estructure the 13#s of 3r. P4. 0or e6ample instead of & lakh per month give us HC per month. ;. "hange the 3anagement of that asset i.e. appoint its o$n directors>officers. ?#n case it had been P4 (P) !imited then the e6pelled directors not entitled to any compensation @inding up petition cannot be filed $ithout A%" permission C. 9rder 3r. P4 to outsource or lease his business to another company. • • • • • •
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!entra+ Registry •
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Previously borro$ers used to forged property documents and get loans from multiple banks by giving them duplicate proper ty documents as security. +o $hen borro$er refuses to pay up loan many banks $ould make claim for the same propertyI /o fi6 this problem %eserve Bank of #ndia (%B#) setup "entral %egistry in 2&& under +A%0A1+#. /his central registry has details of all properties against $hich loans have been taken. Any person or bank can inspect records of this registry to make sure the mortgaged property is genuine.
