How SC ruling on Sarfaesi Act may benefit depositors of co-operative banks

Until recently, there was no clarity on whether co-operative banks could initiate action against borrowers under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Sarfaesi Act). The apex court has ruled that the Act will apply to co-operative banks as it does to commercial banks.

The Sarfaesi Act helps lenders to recover their dues faster. “It is applicable only to secured loans and allows lenders to auction the property that is mortgaged with them to recover dues from borrowers who have turned in non-performing assets (NPA),” said Satyam Kumar, CEO and co-founder of Loantap, an online loan platform, which also has a non-banking financial company (NBFC) license.

Kumar points out that Sarfaesi is applicable to home loans, loan against property and loan against collateral that micro small and medium enterprises (MSME) avail.

Under this Act, a lender can take possession of the property or mortgaged assets after giving the borrower a 60-day notice. Lenders can take over the physical possession or control the mortgaged asset and can sell or transfer them to a buyer without the intervention of any court or a third party. Once the property is auctioned, the lender deducts its dues and pays the rest of the funds, if any, to the property owner.

Before taking the physical possession, some lenders take symbolic possession of the property. It means that a bank or a financial institution does not have the key to the property. The borrower or the defaulter continues to occupy the property.

Earlier there was confusion whether co-operative banks could use it because in some states the high court had ruled that it does not apply to them and in some others, high courts had said that it’s applicable. The Supreme Court has now settled the dispute.

Some co-operative banks that were put under the RBI restrictions could not initiate recovery action under the Sarfaesi Act, which they can do now for faster recovery.

In the absence of Sarfaesi Act, lenders had to resort to filing a case in civil courts, which was a lengthy procedure.
Lenders also use other means to recover their dues from borrowers. They can approach a debt recovery tribunal (DRT) and get what is called a recovery certificate. It allows lenders to take possession of properties of borrowers anywhere in the country and sell them to recover dues.