The objective of the SARFAESI Act was to regulate securitization and to provide reconstruction of financial assets thereby which, the Banks and financial institutions can enforce expeditiously their security interests without being required to move to a court or the tribunal.
An insight into SARFAESI 2002
The objective of the SARFAESI Act was to regulate securitization and to provide reconstruction of financial assets thereby which, the Banks and financial institutions can enforce expeditiously their security interests without being required to move to a court or the tribunal. The Act was enacted to provide all the banks and financial institution a chance to realize term assets, manage glitches of liquidity, asset liability discrepancies and improve recovery from their NPAs. Under this Act the Banks are able to exercise powers by taking possession of securities, selling them and thereby reducing non- performing assets, by resorting to measures for recovery or reconstruction under the Act. The main intention of the Act was to cover up all the dealings of loan already entered into, subject to the provisions and within the period of limitation and the failure in making repayment and the debts already grouped as non-performing assets and such future contingencies too.
The most imperative section under the Sarfaesi Act is section 13(2), as it postulates that a borrower under a liability to a secured creditor and thereafter, marks any default in repayment of the said secured debt, thereby classifying his account as a non-performing asset, then the secured creditor can give the borrower a notice in writing to clear his liability within sixty days from the date of notice with an warning that if he fails to pay the loan, the secured creditor can exercise all or any of its rights in terms of section 13(4) of the Act, in terms of taking possession over the secured asset.
Position as regards Co-operative banks
Prior to May 2020, the position was really never clear, as to whether co-operative banks could commence action against borrowers under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Before the landmark judgment of May this year, Co-operative Banks had to initiate Civil Court recovery suits for .their NPAs. The subject was referred to the Supreme Court Constitution Bench in 2016, about the question of law on the applicability of the 2002 Act in the co-operative banking sector. The said reference has been answered this year in May 2020.
The subject case was referred to the Constitution Bench after differing decisions on this issue emerged in the cases of Greater Bombay Coop. Bank Ltd. v. United Yarn Tex (P) Ltd and Union of India and Anr. v. Delhi High Court Bar Association. After a lot of debate, in May 2020, a five Judge Constitution Bench headed by Justice Arun Mishra ruled that SARFAESI 2002 applies even to Co-operative Banks. The Judgement spelt out that co-operative banks come under the category of banks under section 2(!) (c) of the SARFAESI Act and the recovery procedure mandated under the said Act would be applicable to these banks too. The argument advanced that the 2013 amendment to the SARFAESI Act adding mutli-state co-operative banks to Section 2(1)(c)(iva) was a "colourable exercise of power" was dismissed by the Bench, in finally ruling in favour of the Co-operative Banks.
The said judgment was of very significant and substantial and gained a lot of importance, especially if the said co-operative bank was not multi-state. The judgment also states that co-operative banks registered under state-specific acts and multi-state level cooperative societies registered under the Multi State Cooperative Societies Act, 2002 concerning 'banking' are governed by the legislation relatable to Entry 45 of List I of the 7th Schedule. The Judgment set out that “ the cooperative banks involved in the activities related to banking are covered within the meaning of 'Banking Company' defined under Section 5(c) read with Section 56(a) of the Banking Regulation Act, 1949, which is a legislation relatable to Entry 45 of List I. It governs the aspect of 'banking' of cooperative banks run by the cooperative societies. The cooperative banks cannot carry on any activity without compliance of the provisions of the Banking Regulation Act, 1949 and any other legislation applicable to such banks relatable to 'Banking' in Entry 45 of List I and the RBI Act relatable to Entry 38 of List I of the Seventh Schedule of the Constitution of India”.
Thus with this landmark ruling the SARFAESI Act was made applicable to co-operative banks and they can also pursue recoveries of long pending dues and reduce the non-performing assets (NPAs). In the wake of this judgment, state and multi-state cooperative banking societies can now confiscate and sell assets to recover their long pending dues.
The Judgment has curbed the problems and difficulties faced by these banks because of unwarranted delay in recovery of dues through civil courts and co-operative tribunals, that have very cumbersome and long drawn procedures for recovery. Hence, this judgment declaring that the co-operative banks are under the purview of the SARFAESI Act, will catapult the recovery of loans by these banks.