Tuesday, 8 July 2014


It is not very easy to default to defraud the banks and financial institution by the defaulting borrower since various statutory protections are provided to the lending banks and financial institutions.The activities of borrowing and lending are inseparable activities and there is a change from savings based economy to credit based economy not only in individual’s budget but also in the budget of a country.

When a person borrows money, a duty is cast on him not only to repay the money borrowed but also to pay interest in time at the agreed rate on the amount borrowed. Therefore so long as the amount due is not repaid there remains a liability on the borrower. A duty is cast on the lender also to realize the money lent with interest. In spite of the fact that the lending institution take precautions and take sufficient security for the money lent, some debts become bad and irrecoverable in the ordinary course of business. Bad debt or non-performing asset would mean an asset or account of a borrower which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset in accordance with the direction or guidelines relating to asset classification issued by the Reserve Bank of India. 

DRT Act, 1993 and SRFAESI Act 2002
Recovery of debts has become a very difficult task for the banks and financial institutions and their bad debts or non-performing assets are on the rise. The process of realization or Recovery of non-performing assets (NPA) through the normal process is time consuming. To hasten or speed up the recovery process and keeping in view the alarming increase in NPAs, the Government of India has enacted the Recovery Debts Due to Banks and Financial instructions Act 1993 popularly known as DRT Act. The DRT Act had some deficiencies inasmuch as it did not provide for assignment of debt to securitization companies and the secured assets could not be liquidated in time. Therefore, the union Government has brought in a legislation called the Securitization and Reconstruction of Financial Assets and Enforcement of security Interest Act 2002 to remedy the deficiency. It is generally referred to as SRFAESI Act. The SRFAESIA Act is not in derogation of The DRT Act. The purpose of DRT Act as well as SRFAESI Act is recovery of debt through non-adjudicatory process and to provide cumulative remedies to the secured creditors. 

The SRFAESI Act provides for setting up of asset reconstruction companies, special purpose vehicles, asset management companies etc. by removing all fetters on the rights of the secured creditor, he is given rights of the secured creditor; he is given a right to choose one or more of the cumulative remedies. To give more teeth to the Act, the SRFAESI Act, 2002 has been amended in the year 2004 under the enforcement of security interest and Recovery of Debts Laws (Amendment) Act, 2004 Where under certain changes have been introduced in the act by insertion of amendment or addition to the exestuation sections. It is made specific in the preamble that the Act undertakes to regulate (1) securitization: (2) reconstruction of financial assets and (iii) enforcement of security interest all these three concepts are independent of each other. 

Enforcement of Security Interest:
As far as the general public is concerned, Chapter III Enforcement of Security Interest contained in Sections 13 to 19 is very important. The following are the requirement for initiating action for enforcement of security under SRFAESI Act.

1)The account of the borrower should have been classified as non-performing asset strictly in accordance with the guidelines of the Reserve Bank of India and such other authority;
2.Assets should not be those which have been accepted under sec.31 of the SRFAESI Act and security interest can be enforced only in respect of assets which are specifically charged;
3.The action should be initiated well within the limitation period therefore it will be proper to institute a suit in a civil court or DRT as per pecuniary limit applicable for such suits.
4.Action can be initiated only where the N.P.A. is Rs 1lakh and above. 

Section 13 of the Act empowers the secured creditor to enforce the security interest in case the borrowers the secured creditor to enforce the security interest in case the borrower defaults in repayment of secured debts and whose accounts categorized as non-performing asset without the intervention of the court or tribunal. The secured creditors are required to give notice under sec.13 (2) of the Act 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 amount due and secured assets intended to be enforced. Upon receipt of the notice under sec. 13(2) of the Act, no borrower shall transfer by way of sale lease or otherwise any of his secured assets referred in the notice may be served by7 delivering or transmitting at a place 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 acknowledgment due, by speed post, by courier, are any other means of message or electronic mail service. If it is found that the borrower is avoiding and the service of notice 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 authorized agent. The demand notice may also be published in two leading newspapers having good circulation in the area, out of which one shall be in local language. 

Under section 13(3A) If  on receipt of the notice under sub-sec. (2) the borrower makes any representation or raises objection and if the secured creditor come to the conclusion that such  representation or objection is not acceptable or tenable, he shall communicate within one week of receipt of such representation or objection the reasons for non-acceptance of the representation or objection to the borrower, provided that the reasons so communicated or likely action of the secured creditor at the stage of communication of reasons shall not confer any right upon the borrower to prefer an application to the debt recovery Tribunal under sec. 17 or the Court of District Judge under sec. 17A.

Similarly Sec. 19 of the principal Act has been substituted with the following.
19. Right of borrower to receive compensation and costs in certain cases.
If the debt Recovery Tribunal or the Court of District Judge, on an application made under sec17 or sec17 A or the appellate Tribunal or the High Court on an appeal preferred under sec.18 or sec 18A holds that the possession of secured assets by the secured creditor is not in accordance with the provisions of the Act and rules and directs the secured creditors to return such secured assets to the concerned borrowers, such borrower shall be entitle to the payment of such compensation and cost as may be determined by such tribunal or Court of District Judge or Appellate Tribunal or High Court referred to in sec.18B.

If the borrower / guarantor pays the dues in full no further action under the Act in necessary.If dues are paid only partly and the borrower/guarantor seeks further time, the authority may decide further time, the authority action with due consideration of law of limitation and the borrower or guarantor intimated accordingly. It the borrower/ guarantor fails to meet their liabilities in full within 60 days from the date of the notice, the bank / financial institution can initiate action to enforce the security rights conferred it by the Act.  

Possession and sale:
The secured creditor or his authorized officer may take recourse to one or more of the measures provided in sec.13 (4) of the Act to recover his secured debt that has the following 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 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 from the borrower and from whom any money is to pay the secured creditor so much of the money as is sufficient to cover the secured debt. 

Both in the 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 be also published in two leading widely circulated newspapers, of which one shall be of the local language. The public notice shall contain important details of the property, the amount of dept, reserve price, time and place of public auction earnest money to be deposited etc. The notice shall be affixed on the conspicuous part be put on website. Sale by any other modes than auction/tender shall be on terms settled between the parties.After confirmation and completion of sale process, the authorized completion of sale process, the authorized officer shall issue a sale certificate in favor of the purchaser in the prescribed format. 

If the secured assets are movable properties, the authorized officer shall take the possession in the presence of two witnesses. The panchanama shall conform to the prescribed format. After taking possession, the authorized officer, shall prepare an inventory of the property as per the format prescribed and shall deliver a copy of such inventory to the borrower or his authorized agent. If the property is subject to speedy or natural decay or expenses for keeping such property are likely to exceed the value of the property the authorized officer may sell it at once. It is the duty of the authorized 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 of. 

While taking possession or sale of the secured asset, the secured creditor may request the help of chief metropolitan Magistrate or District secured assets fall. 

Right of appeal.
Under sec.17 of the Act the person aggrieved by the actions of the secured creditor as provided in sec13(4) may make an application to the Debt Recovery Tribunal having jurisdiction, within 45 days from the date on which action has been taken. Similarly any person aggrieved by the order made by DRT under section 17 may prefer an appeal to the appellate tribunal within 30 days from the date of the order. 

Transaction not covered under the Act.
The following transactions are excluded from the provisions of the SRFAESI Act.
a)A lien on any goods money or security given by or under the Indian Contract Act, Sale of Goods Actor Any other law for the time being in force;
b)Pledge of movables within the meaning of sec.172 of the Indian Contract Act.
c)Any conditional sale hire purchase or lease or any other contract in which no security interest has been created;
d)Any property not liable to attachment;
e)Any security interest created in agricultural land;
f)Any security interest for securing payment of any financial asset not exceeding rupees 1lakh; 

The provisions of the Limitation Act 1963 are application to the Act Therefore taking possession of the property or appointing a management of the securities are to be carried out within the period stipulated in the Limitation Act 1963 The housing loan borrower may note that if they default in payment of dues to banks and the loan account become NPA the banks can initiate action under the SRFAESI Act issue notice to the borrowers, take possession of the building and proceed to realize the dues by sale of the mortgaged property therefore it is suggested that the housing loan borrowers may repay the housing loan as per schedule to protect their property. 


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