The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

What it does

The Act (Act No. 54 of 2002) has three purposes. It allows banks and financial institutions to enforce a security interest without the intervention of a court or tribunal. It regulates the securitisation and reconstruction of financial assets, by providing for asset reconstruction companies registered with the Reserve Bank of India. And it provides for a central registry in which security interests are recorded.

The enforcement route is the one most used. A secured creditor classifies a loan as a non-performing asset, issues a demand notice to the borrower giving sixty days to pay, and, if the borrower does not pay, may take possession of the secured asset, take over the management of the business, appoint a manager, or require the debtors of the borrower to pay it directly. It may then sell the asset. The creditor may ask the District Magistrate or the Chief Metropolitan Magistrate to help it take possession.

A borrower who objects to the measures taken may apply to the Debts Recovery Tribunal. The application must be made within the time the Act provides, which is forty-five days from the date of the measure, and a further appeal lies to the Appellate Tribunal within thirty days of the Tribunal's order, on a deposit of part of the amount claimed by the creditor.

Who it binds

Borrowers and guarantors of secured loans, and the banks, financial institutions and other secured creditors the Act recognises. It does not apply to every loan. The Act lists exclusions, which include security interests in agricultural land and cases where the amount due is below a stated share of the principal and interest, and a lender that proceeds in an excluded case acts outside the Act.

What has changed, and when

The Act was challenged soon after it was made. In Mardia Chemicals Ltd. v. Union of India (2004), the Supreme Court upheld the Act's main scheme but struck down the requirement that a borrower deposit seventy-five per cent of the claim before appealing. Parliament amended the Act in 2004 (Act 30 of 2004) so that a borrower applies to the Debts Recovery Tribunal without a deposit, and an appeal to the Appellate Tribunal needs a deposit of fifty per cent of the debt, which that Tribunal may reduce to twenty-five per cent. Further amendments came by Act 1 of 2013 and Act 44 of 2016, which revised the procedure.

What turns on it in practice

The Act is a lender's tool and a borrower's problem, and the procedure decides the result. A demand notice that does not meet the Act's requirements, a possession taken without the order where one is required, or a sale conducted without the notice and the valuation can each be challenged before the Tribunal. A lender that is careful with the steps sells with confidence, and a borrower that acts within the forty-five days can raise a defect that would be lost afterwards. The site's note on the SARFAESI clock in 2026 sets out what each stage of enforcement costs while it runs.

The second point is the interaction with insolvency. Once an application for insolvency of the borrower company is admitted under the Insolvency and Bankruptcy Code, 2016, the moratorium bars enforcement of the security under this Act, and the secured creditor's rights are exercised through the process under that Code. The firm's banking practice and its insolvency practice both therefore work under this Act, and a lender has to decide whether to enforce or to file for insolvency.

The third is the asset reconstruction route. A bank can sell a non-performing asset to an asset reconstruction company, which then holds the rights under this Act, and a purchaser of a distressed asset needs to check that the assignment was made in the form the Act requires.