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The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest

(SARFAESI) Act, 2002 is a legislation that helps financial institutions to ensure asset quality in

multiple ways. This means that the Act was framed to address the problem of NPAs (Non-Performing Assets)

or bad assets through different processes and mechanisms.

The SARFAESI Act gives detailed provisions for the formation and activities of Asset Securitization Companies

(SCs)and Reconstruction Companies (RCs). Scope of their activities, capital requirements, funding etc. are given by the Act. RBI is the regulator for these institutions.

As a legal mechanism to insulate assets, the Act addresses the interests of secured creditors (like banks). Several provisions of the Act give directives and powers to various institutions to manage the bad asset problem. Following are the main objectives of the SARFAESI Act.

The Act provides the legal framework for securitization activities in India

It gives the procedures for the transfer of NPAs to asset reconstruction companies for the reconstruction of the assets.

The Act enforces the security interest without Court’s intervention

The Act give powers to banks and financial institutions to take over the immovable property that is hypothecated or charged to enforce the recovery of debt.

 Major feature of SARFAESI is that it promotes the setting up of asset reconstruction (RCs) and asset securitization companies (SCs) to deal with NPAs accumulated with the banks and financial institutions. The Act provides three methods for recovery of NPAs, viz:

(i) Securitization;

(ii) Asset Reconstruction; and

(iii) Enforcement of Security without the intervention of the Court.

The Act, thus brings three important tools/powers into asset management of financial banks and institutions – securitization of assets, reconstruction of assets and powers for enforcement of security interests (means asset security interests). To understand the SARFAESI Act, we should know the meaning of these terms as well.

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