Possession Notice From the Bank to the Borrower
If you have taken a loan against a property and used it as collateral but failed to repay it, you may receive a Possession Notice under the SARFAESI Act. This law applies to all types of secured loans, including business loans, overdrafts/cash credits, term loans, and other forms of secured lending. Both borrowers and lenders need to understand the procedures and rights under the SARFAESI Act to manage the legal complexities of loan recovery and protect their property. All parties involved should understand this Act’s applicability and scope.
Section 13(2) Notice under SARFAESI ACT
The SARFAESI (The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act empowers banks and Registered Non-Banking Financial Companies (RNBFCs) to take legal action against those who default on their loans without the need to approach a court of law provided that a property is pledged as collateral. This applies to various types of loans, except unsecured loans, which fall below a certain limit. It’s essential to note that this Act enables a Notice to be issued under Section 13(2) of the SARFAESI Act for taking action against the defaulter. Notice Under Section 13(2) of of SARFAESI Act.
If any loan account defaults with interest or principal that remains unpaid for over 90 days, it is categorized as a Non-Performing Asset (NPA). In such cases, the lender issues a notice to the borrower under Section 13(2) of the SARFAESI Act. This notice clearly states the outstanding loan amount, interest, penalties, and the total amount due. The borrower is given 60 days to settle the dues mentioned in the notice. Failure to comply with the notice will result in enforcement actions, including asset possession and auction.
Types of Possession Notices
1. Symbolic Possession Notice
The bank informs the borrower that it has control over the property until the loan is fully settled. This notification reminds the borrower that the bank has a vested interest in the property and is a precautionary measure to ensure that the loan is paid back in full.
2. Actual Possession Notice:
The bank takes possession of a property and becomes its legal owner, limiting the borrower’s rights to access, use or sell the property. This process involves the banker physically exerting control over the property, which may include changing the locks or fencing off the area, among other things. Additionally, the bank must publish a notice in newspapers to inform the public of the change in ownership and any legal implications that may arise.
3. Auction Notice:
The banker, to recover the dues that are currently outstanding, extends an invitation for bids to sell off the property in question. How the sale will take place depends on the situation’s specific circumstances. In some cases, it may be a direct auction notice, while in other instances, a magistrate’s order under Section 14 of the SARFAESI Act may be required. This legal provision grants the lender the ability to take possession of the property in question and sell it off to recover the outstanding dues.
The Mechanism of Actual Possession
When a borrower fails to repay their loan within the specified period after receiving a notice under Section 13(2) and subsequently under Section 13(4) of the SARFAESI Act, the lender (usually a bank or financial institution) can take physical possession of the collateral property. Such actions of the bank are known as actual possession under the Act. To officially declare their control over the property, the lender will affix a possession notice at the property site and publish it in two leading newspapers, one in English and the other in the local language.
Once the banker has taken physical possession of the property, they assume the role of its lawful owner until the loan is repaid or the property is sold to recover the dues. It’s important to note that once the banker has taken possession, the borrower loses any right to sell or lease the property, and any subsequent buyer of the property cannot claim any rights over it.
Auction Notices: The Path to Recovery
After taking possession of a property, the lender can sell it through an auction to recover the outstanding loan amount. There are two types of auction notices defined under the SARFAESI Act:
1. Direct Auction Notice
When a bank decides to sell a property, it may issue an auction notice and invite interested parties to bid. This process involves publishing the auction details, such as the sale date, time, and terms, in newspapers and possibly on the lender’s website. Interested parties can then review the information and decide whether or not they want to participate in the auction. Once the auction has taken place, the bank will generally sell the property to the highest bidder, subject to any reserve price or other conditions that may have been outlined in the auction notice. This approach can effectively allow banks to dispose of properties quickly and efficiently while obtaining a fair market price.
2. Application Before the Magistrate:
When a direct auction is not possible, or a more formal procedure is necessary, lenders can apply to the magistrate or district collector under Section 14 of the SARFAESI Act. This application serves as a request to sell the property and is subject to approval by the magistrate or district collector. Upon receiving the application, the borrower is issued a show-cause notice by the magistrate or district collector. This notice allows the borrower to present their case before making a final decision on whether to sell the property. The decision to sell the property is not taken lightly and is only made after all parties have had a chance to present their arguments and the magistrate or district collector has considered all relevant factors.
Borrower’s Rights and Remedies
The SARFAESI Act, 2002 is a legal framework that empowers Banks and Financial Institutions to recover Non-Performing Assets (NPAs) by enforcing the security interest without court intervention. However, borrowers still have legal options, albeit limited.
- Under Section 13(2) of the Act, borrowers can only approach the Debt Recovery Tribunal (DRT) once the security interest has been enforced.
- However, once the security interest has been enforced, the borrower can appeal to Section 13(4) of the Act, which offers a chance to challenge the lender’s actions, provided the borrower presents a valid defence or settlement plan.
- The borrower can also approach the DRT if the lender violates any provision of the SARFAESI Act.
It is worth noting that the SARFAESI Act’s jurisdiction spans various regions, and the Act has set up several Debt Recovery Tribunals across the country to serve as adjudicating authorities for disputes under the Act. In Tamil Nadu, notable DRTs are Chennai, Madurai, and Coimbatore. These tribunals have the power to hear and dispose of applications filed by borrowers against the actions of the lenders, and they also have the authority to determine the amount of compensation payable to the borrower, if any.
In summary, while the SARFAESI Act heavily favours lenders in recovering NPAs, borrowers still have legal options to challenge the lender’s actions or violations of the Act. The borrower must present a valid defence or settlement plan and can approach the DRT if the lender violates any provision of the SARFAESI Act. The Act’s jurisdiction spans various regions, and the borrower can approach the DRTs located in their respective regions to seek redressal.
Conclusion
The SARFAESI Act is an essential tool for banks and financial institutions to recover assets and manage Non-Performing Assets (NPA). To make the most of this Act, borrowers and lenders need to have a clear understanding of its provisions and their rights and responsibilities. In particular, borrowers should keep themselves updated and seek legal advice promptly to reduce the risks of losing their property to enforcement actions.
The SARFAESI Act balances lenders’ rights and borrowers’ protections in a financial system that prioritizes the swift recovery of bad loans. Understanding its nuances not only helps with effective financial planning but also ensures that the interests of all parties are safeguarded within the law’s ambit.
Frequently Asked Questions
1. What is the SARFAESI Act, and how does it affect borrowers and lenders?
The SARFAESI Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act) is a law in India that allows banks and registered non-banking financial companies (RNBFCs) to recover unpaid loans secured against a property, without having to go to court. This law means that if a borrower defaults on their loan, the lender can take possession of and sell the property used as collateral to recover the money owed.
2. What triggers the issuance of a possession notice under the SARFAESI Act?
When a borrower defaults on their loan repayment for over 90 days, the lender can issue a possession notice. This notice is sent under Section 13(2) of the SARFAESI Act and demands that the outstanding loan amount be repaid within 60 days.What are the types of possession notices?
- Symbolic Possession Notice: Indicates the lender’s control over the property without taking physical possession.
- Actual Possession Notice: The lender takes physical control of the property, thereby limiting the borrower’s rights over it.
- Auction Notice: The property is put up for auction to recover the outstanding dues.
3. How does actual possession work under the SARFAESI Act?
If a loan is not repaid within the given timeframe after receiving a Section 13(2) notice, the lender can take physical possession of the property that was put up as collateral. This will involve placing a notice at the property and publishing it in major newspapers, as per Section 13(4).What options do borrowers have after receiving a possession notice?
After a security interest is enforced, borrowers can:
- Challenge the lender’s actions under Section 13(4) by presenting a valid defense or settlement plan.
- Approach the Debt Recovery Tribunal (DRT) if the lender violates any provision of the SARFAESI Act.
4. Can a property be auctioned without the borrower’s consent?
When a lender takes actual possession of a property, they can sell it to recover the outstanding loan amount. The sale can be done through an auction, either directly or by making an application to the magistrate under Section 14 of the SARFAESI Act, depending on the situation.
5. What is the role of the Debt Recovery Tribunal (DRT) in the SARFAESI Act?
The DRT is an authority that resolves disputes under the SARFAESI Act. If a borrower disagrees with a lender’s actions, the borrower can file an application to the DRT. The DRT can then decide if compensation is due to the borrower and determine the amount.
6. How can borrowers protect their rights under the SARFAESI Act?
Borrowers should:
- Keep themselves informed about the Act’s provisions.
- Seek legal advice promptly upon receiving a possession notice.
- Present a valid defense or settlement plan when challenging a lender’s actions.
- Utilize the provisions to approach the DRT in case of any violations by the lender.
Understanding the SARFAESI Act and seeking timely legal advice can help borrowers navigate the complexities of loan recovery and safeguard their property rights.
