🏦 What is the SARFAESI Act?
The SARFAESI Act 2002 empowers banks to recover bad loans (NPAs) without court intervention. Think of it as a “fast-track” debt recovery tool! The sarfaesi act is essential for efficient loan recovery.
sarfaesi full form Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act
Key Objectives:
- Help banks seize and sell mortgaged assets (e.g., homes, factories).
- Speed up loan recovery to reduce NPAs.
📋 Key Features of SARFAESI
| Feature | What It Means |
|---|---|
| Applies To | Secured loans (e.g., home loans, business loans with collateral). |
| Not For | Unsecured loans (e.g., personal loans) or agricultural land. |
| Threshold | Loan amount ≥ ₹1 lakh + dues ≥ 20% of principal. |
The Three Main Pillars of the SARFAESI Act
- Securitisation: The process of pooling various loans and converting them into marketable securities.
- Asset Reconstruction: The business of taking over bad loans from banks (by specialized Asset Reconstruction Companies – ARCs) to resolve them.
- Enforcement of Security Interest: The power of the bank to take over and sell the collateral, which is the most commonly used part of the Act.
🔄 How SARFAESI Works: 4-Step Process
The SARFAESI Process: Step-by-Step Action Plan
| Step | Action | Timeframe |
| 1. Demand Notice | The bank’s Authorised Officer sends a legal notice to the defaulting borrower demanding full payment of the outstanding loan. | Borrower has 60 days to pay. |
| 2. Taking Possession | If the borrower fails to pay within 60 days, the bank can take physical or symbolic possession of the asset (e.g., lock the house or publish a notice). | After the 60-day period expires. |
| 3. Sale Notice | After taking possession, the bank gives a public notice for the sale of the asset. The borrower gets one last chance to pay and get their asset back. | 30 days notice before the sale. |
| 4. Sale of Asset | The bank sells the asset, usually through a public auction, to recover its money. | After the 30-day notice period. |
🏛️ Key Entities Under SARFAESI
The IBC Process at a Glance (The ER Treatment Plan): This table shows the step-by-step process, known as the Corporate Insolvency Resolution Process (CIRP).
| Timeframe | What Happens? (The Action) | Who is in Charge? |
| Day 0 | The Trigger: Someone who is owed money (a Creditor) files a case against the sick company for not paying its dues. | Creditors (Banks, Suppliers) or the Company itself. |
| Within 14 Days | The Admission: The “ER” admits the patient. The case is accepted or rejected. | National Company Law Tribunal (NCLT) – The special court for IBC. |
| Immediately after Admission | The “Pause” Button (Moratorium): A freeze is declared. The sick company is protected. No one can sue the company or try to recover their individual loan during this period. | NCLT |
| Immediately after Admission | The Doctor Takes Over: An Interim Resolution Professional (IRP) is appointed. The old company management (Board of Directors) loses all its powers. The IRP takes control. | Interim Resolution Professional (IRP) |
| Within 30 Days | The Family Meeting (Committee of Creditors): All the major lenders (Financial Creditors like banks) form a group called the Committee of Creditors (CoC). They are the decision-makers. | Committee of Creditors (CoC) |
| Day 30 to Day 180 | Finding a Cure (Resolution Plan): The Resolution Professional invites plans from outsiders on how to save the company (e.g., a new investor like Tata buying the company). | Resolution Professional (RP) manages the process. Interested Bidders submit plans. |
| By Day 180 | The Final Decision: The CoC votes on the best plan to save the company. The plan needs a 66% vote to be approved. | Committee of Creditors (CoC) |
| If Plan is Approved | New Management Takes Over: The NCLT approves the winning plan. The new owner takes control, and the company is saved! | NCLT & the New Owner |
| Max. 270 Days | Possible Extension: If a good plan is in sight but more time is needed, the process can be extended by another 90 days. | NCLT (on CoC’s request) |
Total Maximum Time: The entire process must be completed within 330 days. This strict timeline is the magic of IBC.
What if the Treatment Fails? (Liquidation)
If no resolution plan is approved within the 330-day timeline, the company is declared unsalvageable.
- The Action: The NCLT orders Liquidation.
- The Meaning: The company is shut down. All its assets (land, buildings, machines) are sold off piece by piece.
- The Payout: The money collected is
Key Players in the IBC “ER” – A Simple Glossary
| Player | The Main Decision-Makers. A group of lenders (mostly banks) who decides whether to save or liquidate the company. |
| National Company Law Tribunal (NCLT) | The Specialist Court or the “ER” that handles all IBC cases. |
| Committee of Creditors (CoC) | The Main Decision-Makers. A group of lenders (mostly banks) that decides whether to save or liquidate the company. |
| Resolution Professional (RP) | The Expert Doctor manages the day-to-day operations of the sick company during the process. |
| Insolvency & Bankruptcy Board of India (IBBI) | The Main Regulator. The “Medical Council” that sets the rules for the IBC process and regulates the Resolution Professionals. |
| Financial Creditor | A lender to whom the company owes money (e.g., Banks, financial institutions). They have voting rights in the CoC. |
| Operational Creditor | A lender to whom the company owes money for goods or services (e.g., Suppliers, Employees). They do not have voting rights in the CoC. |
⚖️ Comparison Table
| Aspect | NCLT 🏢 | DRT 🏦 | Civil Suit ⚖️ |
|---|---|---|---|
| Purpose | Corporate insolvency & company disputes | Debt recovery by banks/financial institutions | Disputes not covered under specialized laws like IBC or SARFAESI. |
| Applicable Law | Companies Act, 2013, IBC, 2016 | RDBA, 1993, SARFAESI Act, 2002 | Civil Procedure Code, 1908 |
| Jurisdiction | Companies and LLPs | Secured/Unsecured debts > Rs. 20 Lakhs | Individuals/entities for various issues |
| Time Taken | Faster (within 330 days for IBC cases) | Faster compared to civil courts | Slower due to procedural delays |
| Counterclaims | Limited | Not allowed (unless related to recovery) | Allowed |
| Specialization | Corporate and insolvency issues | Debt recovery cases | General civil matters |
🗂️ Key Sections of SARFAESI Act
Think of the SARFAESI Act as a special toolkit a bank gets when a loan turns into an NPA. Here are the most important tools (sections) in that kit.
Part 1: The Main Tools the Bank Uses
These sections are about how the bank takes action.
| Section Number | What it Means | Key Exam Pointer |
| Section 13 (The “Power On” Switch) | This is the main button the bank presses to start the whole process. It gives the bank the right to seize and sell the asset without going to court. | This is the most important section. It includes the famous 60-DAY NOTICE to the borrower. |
| Section 14 (The “Official Backup”) | If the borrower refuses to leave the house, the bank can’t use force itself. This section lets the bank show a letter to the District Magistrate (DM), who then provides official/police help to evict the borrower. | The DM’s job is only to provide ASSISTANCE, not to hear the case. It’s an enforcement role. |
Part 2: The Borrower’s Tools to Fight Back
These sections ensure the borrower has a chance to be heard.
| Section Number | What it Means | Key Exam Pointer |
| Section 17 (The “It’s Unfair!” Plea) | This is the borrower’s first and most important right. If the borrower feels the bank is acting unfairly, they can file a case against the bank. This case is filed at a special court. | Appeal is made to the Debt Recovery Tribunal (DRT). Time limit is 45 DAYS from when the bank takes action. |
| Section 18 (The “Higher Appeal”) | If either the bank or the borrower is unhappy with the DRT’s decision, they can appeal to a higher authority. It’s the “Round 2” of the legal fight. | Appeal is made to the Debt Recovery Appellate Tribunal (DRAT). |
Part 3: The Rulebook & Other Players
These sections define the rules of the game and other important players.
| Section Number | What it Means | Key Exam Pointer |
| Section 2 (The “Dictionary”) | This section is like the glossary at the back of a book. It defines all the important terms like “Borrower,” “NPA,” “Secured Asset,” “ARC,” etc. | You don’t need to memorize it, but know that all official definitions are here. |
| Section 3 (The “Bad Loan Buyer’s License”) | This section allows for the creation of special companies whose only job is to buy bad loans from banks. These companies are called Asset Reconstruction Companies (ARCs). | This section enables the formation of ARCs (like the government’s “Bad Bank”). |
| Section 9 (The “ARC’s Power”) | Once an ARC buys a bad loan, this section gives the ARC all the same powers as the bank. The ARC can now use the entire SARFAESI toolkit (like Section 13) to recover the money. | An ARC “steps into the shoes of the bank” and gets all its recovery rights. |
| Section 31 (The “Not Allowed” List) | This is a very important list of exceptions. It clearly states where this powerful toolkit CANNOT be used. | MUST REMEMBER: Not for Agricultural Land, not for loans below ₹1 Lakh, and not for Unsecured Loans. |
Summary for Quick Revision
| For This Action… | Use This Section… |
| Bank starts the process | Section 13 (60-day notice) |
| Bank needs police help | Section 14 (Help from DM) |
| Borrower files first appeal | Section 17 (Appeal to DRT) |
| Anyone files second appeal | Section 18 (Appeal to DRAT) |
| Listing the exceptions | Section 31 (No Agri Land, etc.) |
| Creating an ARC | Section 3 |
| Section | Purpose | Example |
|---|---|---|
| 📖 Section 2 | Defines terms like NPA, ARC, and Secured Creditor. | “NPA = Loan unpaid for 90+ days.” |
| ⏳ Section 13 | Allows banks to issue 60-day demand notices, seize assets, and auction them. | Bank sends notice: “Repay ₹10L or lose your factory!” |
| 👮 Section 14 | Banks can seek CMM/DM help to take possession if borrower resists. | Police assist in seizing a defaulted property. |
| 💼 Section 15 | Lets banks take over management of defaulting companies. | Bank appoints CEO to revive a bankrupt business. |
| ⚖️ Section 17 | Borrowers can appeal to DRT within 45 days of asset seizure. | Borrower challenges unfair seizure in tribunal. |
| 📑 Section 18 | Appeal to DRAT (but deposit 50% dues first). | Borrower pays ₹5L to appeal a ₹10L case. |
| 🔍 Section 20 | Establishes CERSAI to track property loans and prevent fraud. | Bank checks CERSAI before approving a home loan. |
| 🚫 Section 34 | Civil courts can’t interfere in SARFAESI cases. | Case goes to DRT, not local court. |
| ⌛ Section 36 | Banks must act within 12 years of default. | Can’t recover a 15-year-old loan. |
🧠 Structure for Easy Memorization
- Notice Period: Section 13 (60 days).
- Police Help: Section 14 (CMM/DM).
- Appeals: Section 17 (DRT) → Section 18 (DRAT).
- No Civil Courts: Section 34.
- Fraud Check: Section 20 (CERSAI).
🚫 Exceptions & Limits
- No SARFAESI for:
- Loans < ₹1 lakh or dues < 20% of principal.
- Agricultural land.
- 2016 Amendments:
- NBFCs can now use SARFAESI.
- Cooperative banks included.
MCQ
1. What is the primary purpose of NCLT?
a) Resolving criminal disputes in companies
b) Handling insolvency and company disputes
c) Recovering debts for banks
d) Managing mergers in public sector banks
Answer: b) Handling insolvency and company disputes
2. Under which act was NCLT established?
a) Companies Act, 2013
b) SARFAESI Act, 2002
c) Insolvency and Bankruptcy Code, 2016
d) RDBA, 1993
Answer: a) Companies Act, 2013
3. Who appoints the Interim Resolution Professional (IRP) under NCLT proceedings?
a) Ministry of Finance
b) Reserve Bank of India
c) NCLT
d) High Court
Answer: c) NCLT
4. Which of the following cases can NCLT handle?
a) Recovery of small personal loans
b) Insolvency of companies and LLPs
c) Disputes involving agricultural loans
d) Criminal cases related to companies
Answer: b) Insolvency of companies and LLPs
5. What is the minimum loan amount required to initiate action under SARFAESI?
a) Rs. 50,000
b) Rs. 1 Lakh
c) Rs. 5 Lakhs
d) Rs. 10 Lakhs
Answer: b) Rs. 1 Lakh
6. What is the time period given to borrowers to respond to a demand notice under SARFAESI?
a) 30 days
b) 45 days
c) 60 days
d) 90 days
Answer: c) 60 days
7. Which type of property is exempt under SARFAESI?
a) Residential property
b) Agricultural land
c) Commercial property
d) Industrial equipment
Answer: b) Agricultural land
8. What is the role of CERSAI in SARFAESI?
a) Auctioning secured assets
b) Filing cases against defaulters
c) Registering security interests created by banks
d) Managing the repayment schedules of borrowers
Answer: c) Registering security interests created by banks
9. What is the minimum debt amount required for a case to be filed in DRT?
a) Rs. 5 Lakhs
b) Rs. 10 Lakhs
c) Rs. 15 Lakhs
d) Rs. 20 Lakhs
Answer: d) Rs. 20 Lakhs
10. DRT primarily deals with cases related to:
a) Consumer disputes
b) Corporate insolvency
c) Debt recovery by banks
d) Labor laws
Answer: c) Debt recovery by banks
11. Who can file a case in DRT?
a) Borrowers against banks
b) Banks and financial institutions
c) Government agencies
d) Private individuals
Answer: b) Banks and financial institutions
12. Appeals against DRT decisions are made to which authority?
a) Civil Court
b) Supreme Court
c) Debt Recovery Appellate Tribunal (DRAT)
d) High Court
Answer: c) Debt Recovery Appellate Tribunal (DRAT)
13. In which court are civil suits filed?
a) Criminal Court
b) Civil Court of competent jurisdiction
c) NCLT
d) DRT
Answer: b) Civil Court of competent jurisdiction
14. Which type of disputes can be resolved through civil suits?
a) Property disputes
b) Insolvency cases
c) Debt recovery for banks
d) Company law disputes
Answer: a) Property disputes
15. What is the primary drawback of civil suits?
a) High litigation costs and delays
b) Limited jurisdiction
c) Lack of legal representation
d) No provision for appeals
Answer: a) High litigation costs and delays
16. Which tribunal is specialized for recovering bank loans under SARFAESI?
a) DRT
b) NCLT
c) Civil Court
d) High Court
Answer: a) DRT
17. Which act governs the resolution of insolvency for companies in India?
a) RDBA, 1993
b) SARFAESI Act, 2002
c) Insolvency and Bankruptcy Code, 2016
d) Companies Act, 2013
Answer: c) Insolvency and Bankruptcy Code, 2016
18. Under SARFAESI, if a borrower disagrees with the proceedings, they can appeal to:
a) Civil Court
b) DRT
c) DRAT
d) High Court
Answer: b) DRT
19. What is the key distinction between DRT and civil suits?
a) DRT handles criminal cases; civil suits do not.
b) DRT focuses on debt recovery for banks; civil suits cover broader disputes.
c) Civil suits are faster than DRT proceedings.
d) DRT cannot issue recovery certificates.
Answer: b) DRT focuses on debt recovery for banks; civil suits cover broader disputes.
20. NCLT handles insolvency cases for:
a) Individuals only
b) Companies and LLPs only
c) Individuals and companies
d) Government agencies
Answer: b) Companies and LLPs only