The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) lets banks and notified financial institutions recover secured dues by enforcing their security without first going to court.
What a secured creditor can do
After a loan becomes a non-performing asset (NPA) and a demand notice under Section 13(2) is issued, the secured creditor can act under Section 13(4). It can:
- take possession of the secured asset, including the right to transfer it by lease, assignment or sale;
- take over the management of the business of the borrower;
- appoint a manager over the secured asset; or
- require a person who holds money due to the borrower to pay it to the creditor.
Who is a borrower under the Act
The borrower is any person who has been granted financial assistance by a bank or financial institution. Guarantors, mortgagors and others who have created a security interest are also affected.
What is excluded
Section 31 lists exceptions. Common ones are security over agricultural land, a lien on goods, pledges of movables under the Indian Contract Act, and financial assets of less than one lakh rupees. Whether your loan falls inside the Act is the first question we check.
Why it matters
Because there is no prior court hearing, the borrower's protection is procedural. The notice, the timelines, the valuation and the sale must follow the Act and the Security Interest (Enforcement) Rules, 2002. Departures from them are the main ground for challenge before the Debts Recovery Tribunal.
The Supreme Court upheld the Act's constitutional validity in Mardia Chemicals Ltd. v. Union of India (2004) 4 SCC 311, while striking down the original requirement to deposit 75% of the claimed amount before appealing. Parliament re-enacted a reduced pre-deposit condition in 2004.
General information only, not legal advice. Law may have changed after the date of publication.