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SARFAESI Act, SARFAESI Act, 20022002

THE SECURITISATION AND THE SECURITISATION AND RECONSTRUCTION OF FINANCIAL RECONSTRUCTION OF FINANCIAL ASSETS AND ENFORCEMENT OF ASSETS AND ENFORCEMENT OF SECURITIES INTEREST ACT 2002SECURITIES INTEREST ACT 2002The basic purpose of The basic purpose of introducing this Act is to be introducing this Act is to be help banks and Financial help banks and Financial Institutions to recover their Institutions to recover their non-performing assets.non-performing assets.

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Sec. 1 of the Act states that theSec. 1 of the Act states that the Act Act is applicable to the whole of India is applicable to the whole of India including the state of J&Kincluding the state of J&K

The Act is applicable to all banking The Act is applicable to all banking companies which includes SBI, its companies which includes SBI, its subsidiaries, all private and public subsidiaries, all private and public sector banks, foreign banks and co-sector banks, foreign banks and co-operative banks. operative banks.

The Act has been applicable to The Act has been applicable to Regional Rural Banks from May2007.Regional Rural Banks from May2007.

Applicability of the Applicability of the Act.Act.

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Securities charged by way of lien or pledge Securities charged by way of lien or pledge Security interest in an aircraft/shipping vessel. Security interest in an aircraft/shipping vessel. Security interest in Agricultural land. Security interest in Agricultural land. Assets on conditional sale/hire purchase/lease. Assets on conditional sale/hire purchase/lease. Right of unpaid seller. Right of unpaid seller. The outstanding in the NPA to be recovered The outstanding in the NPA to be recovered

does not exceed Rs.1Lac. does not exceed Rs.1Lac. The Amount due is less than twenty percent of The Amount due is less than twenty percent of

the principal amount and interest thereon. the principal amount and interest thereon. Property not liable to attachment or sale under Property not liable to attachment or sale under

code of Civil Procedure. code of Civil Procedure.

As per Sec. 31, the Act do not As per Sec. 31, the Act do not apply in the following types of apply in the following types of

securities / circumstances.securities / circumstances.

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Identification of Eligible cases,Identification of Eligible cases, Authorized Officer : Issuing 60 days Authorized Officer : Issuing 60 days

notice under Sec.13(2) of the Act.,notice under Sec.13(2) of the Act., Objection, if any by borrower / Objection, if any by borrower /

guarantor should be replied within guarantor should be replied within a week of receipt of objection, a week of receipt of objection,

Taking possession: Immovable Taking possession: Immovable property: Symbolic or Actual.property: Symbolic or Actual.

Movable property: Actual physical Movable property: Actual physical possession and not symbolic possession and not symbolic possession.possession.

witness and Inventory.witness and Inventory.

STEPS UNDER THE ACT:-

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Safe custody of Secured assets.Safe custody of Secured assets. Valuation and Reserve PriceValuation and Reserve Price.. Sale procedure:-Sale procedure:- a) a) 30 days notice,30 days notice, b) Detail of o/s dues with upto date b) Detail of o/s dues with upto date

interest, interest, c) c) Description of asset proposed to be Description of asset proposed to be

soldsold,, d) Reserve price fixed,d) Reserve price fixed, e) e) Mode of sale proposed to be adoptedMode of sale proposed to be adopted,, f) Proposed date, time and place of sale,f) Proposed date, time and place of sale, g) g) News paper publicationNews paper publication

STEPS UNDER THE ACT CONTD.

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If the borrower(s)/guarantors) do not come forward for liquidation/ settlement, after expiry of 60 days, the authorized officer may take possession of the secured assets

If the possession is resisted by the If the possession is resisted by the borrowers/guarantors or otherwise borrowers/guarantors or otherwise deemed fit, the AO may file an deemed fit, the AO may file an application before the Chief application before the Chief Metropolitan Magistrate for seeking Metropolitan Magistrate for seeking his help in acquiring of the assetshis help in acquiring of the assets

EXPIRY of 60 days NOTICE PERIOD:-

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AO shall take possession as per Rule 8(1) AO shall take possession as per Rule 8(1) & 8(2) the possession of immovable & 8(2) the possession of immovable property can be taken by the AO:-property can be taken by the AO:-

By delivering a possession noticeBy delivering a possession notice Affixing the possession notice on the Affixing the possession notice on the

outer door or at some conspicuous part outer door or at some conspicuous part of the propertyof the property

Publishing the possession notice in two Publishing the possession notice in two leading newspapers, of which one in leading newspapers, of which one in vernacular language having sufficient vernacular language having sufficient circulationcirculation

PROCEDURE FOR TAKING POSSESSION :-

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A securitization company (SC) or A securitization company (SC) or Asset Reconstruction company Asset Reconstruction company (ARC) acquires non-performing (ARC) acquires non-performing asset from banks / FI by issuing asset from banks / FI by issuing bonds or debentures to them. bonds or debentures to them.

The ARCs help in focused and The ARCs help in focused and professional management of professional management of distressed credit in financial distressed credit in financial system to improve their economic system to improve their economic value and recovery of troubled value and recovery of troubled loans. loans.

SecuritizationSecuritizationcompaniescompanies

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Enforcing the security interestEnforcing the security interest Take-over or change in the Take-over or change in the

management of the business of management of the business of the borrowerthe borrower

Sale or lease the borrower’s Sale or lease the borrower’s businessbusiness

Settle the borrower’s duesSettle the borrower’s dues Restructure or reschedule the Restructure or reschedule the

debtdebt Acting as recovery agentsActing as recovery agents

The ARC/SC can provide The ARC/SC can provide the following services:the following services:

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Different parties required in Different parties required in securitization.securitization.

    The originatorThe originator     SPV or a TrustSPV or a Trust     A merchant bankerA merchant banker     A credit rating agencyA credit rating agency     The original borrowers or obligors.The original borrowers or obligors.   The prospective investors – the The prospective investors – the

buyers of securities or general public.buyers of securities or general public.

Mechanism or steps in Mechanism or steps in Asset securitizationAsset securitization

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SECURITIZATION PROCESSSECURITIZATION PROCESSAncillary service

provider

Special Purpose

Vehicle Investors

Structurer

Rating Agency

Obligor

Originator

Credit rating of Credit rating of securitiessecurities

Sale of assetsSale of assets

Interest and principalInterest and principal Issue of securitiesIssue of securities

Subscription of securitiesSubscription of securities Consideration for Consideration for

assets purchasedassets purchased

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Term loans to financially reputed Term loans to financially reputed companiescompanies

Receivables from Government Receivables from Government Departments Departments and Companiesand Companies

Credit card receivablesCredit card receivables Hire purchase loans like vehicle Hire purchase loans like vehicle

loansloans Lease FinanceLease Finance Mortgage loans etc.Mortgage loans etc. Housing loans.Housing loans.

Securitisable Securitisable Assets Assets

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    Additional Source of FundAdditional Source of Fund

    Greater ProfitabilityGreater Profitability

    Enhancement of Capital Adequacy RatioEnhancement of Capital Adequacy Ratio

    Spreading of Credit RiskSpreading of Credit Risk

    Lower Cost of FundingLower Cost of Funding

    Provision of Multiple InstrumentsProvision of Multiple Instruments

    Higher Rate of ReturnHigher Rate of Return

    Prevention of Idle CapitalPrevention of Idle Capital

    Better than Traditional InstrumentsBetter than Traditional Instruments

    Other BenefitsOther Benefits

Benefits of Benefits of SecuritizationSecuritization

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Securitisation benefits for Securitisation benefits for

banksbanks

Ø Innovative and low cost Ø Innovative and low cost source of fundsource of fundØ   Better capital adequacy Ø   Better capital adequacy normsnormsØ  Creation of More creditØ  Creation of More creditØ   Ø   Increased ProfitabilityIncreased ProfitabilityØ   Tool for Asset- liability Ø   Tool for Asset- liability Management and Risk Management and Risk ManagementManagement