BANKS CAN
SELL YOUR HOUSE IF YOU DEFAULT IN PAYMENTS
It
is not very easy to defraud the banks and financial institutions by the
defaulting borrowers since various statutory protections are provided to the
lending banks and financial institutions. The activities of borrowing and
lending are inseparable activities and there is a change from Savings based
economy to credit based economy not only in individual's budget but also in the
budget of a country.
When
a person borrows money, a duty is cast on him not only to repay the money
borrowed but also to pay interest in time at the agreed rate on the amount
borrowed. Therefore, so long as the amount due is not repaid, there remains a
liability on the borrower and this liability in other words is called the Debt
of the borrower.
Duty is cast on the lender as well to realize the money lent
with interest. In spite of the fact that the lending institutions take
precautions and take sufficient security for the money lent, some debts become
bad and irrecoverable in the ordinary course of business. Bad debt or
non-performing asset would mean an asset or account of a borrower which has
been classified by a bank or financial institution as sub-standard, doubtful or
loss asset in accordance with the directions or guidelines relating to asset
classifications issued by the Reserve Bank of India.
Recovery
of debts has become a very difficult task for the banks and financial
institutions and their bad debts or non-performing assets are on the rise. The
process of realization or recovery of non-performing assets (NPA) through the normal
process is time consuming. To hasten or speed up the recovery process and
keeping in view the alarming increase in NPAs, the Government of India has
enacted the Recovery of Debts Due to Banks and Financial Institutions Act, 1993
popularly known as DRT Act.
The DRT Act had some deficiencies inasmuch as it
did not provide for assignment of debts to securitization companies and the
secured assets could not be liquidated in time. Therefore, the Union Government
has brought in a legislation called the Securitization and Reconstruction of
Financial Assets and Enforcement of Security Interest Act 2002 to remedy the
deficiency. It is generally referred to as SRFAESI Act. The SRFAESI Act is not
in derogation of the DRT Act. The object of the DRT Act as well as SRFAESI Act
is recovery of debt through non-adjudicatory process and to provide cumulative
remedies to the secured creditors.
The
SRFAESI Act provides for setting up of asset reconstruction companies, special
purpose vehicles, and asset management companies etc. By removing all fetters
on the rights of the secured creditor, he is given a right to choose one or
more of the cumulative remedies. To give more teeth to the Act, the SRFAESI Act, 2002, has been amended in
the year 2004 under The Enforcement of Security Interest and Recovery of Debts
Laws (Amendment) Act, 2004, where under certain changes have been introduced in
the Act by insertion of amendment or addition
to the existing sections. It is made specific in the preamble that the
Act undertakes to regulate
(1)
Securitization;
(2)
Reconstruction of financial assets and
(3)
Enforcement of security interest.
All
these three concepts are independent of each other.
As
far as the general public are concerned, Chapter III, Enforcement of Security
Interest contained in Sections 13 to 19 are very important. The following are the requirements for
initiating action for enforcement of security interest under SRFAESI Act:
[1] The account of the
borrower should have been classified as Non-performing Asset, strictly in
accordance with the guidelines of the Reserve Bank of India and such other
authority;
[2] Assets should not
be those which have been accepted under sec.31 of the SRFAESI Act and security
interest can be enforced only in respect of assets which are specifically
charged;
[3] The action should
be initiated well within the limitation period. If the limitation is due to
expire shortly, and then it will be proper to institute a suit in a civil court
or DRT as per pecuniary limit applicable for such suits.
[4] Action can be
initiated only where the N.P.A.is Rs.1lakh and above.
Section
13 of the Act empowers the secured creditor to enforce the security interest in
case the borrower defaults in repayment of secured debts and whose accounts
categorized as non-performing asset without the intervention of the court or
tribunal. The secured creditor is required to give notice under sec.13 (2) of
the Act to the borrower to discharge all his liabilities in full, within 60
days from the date of notice. The notice should be comprehensive furnishing
full details of the amount due and secured assets intended to be enforced. Upon
receipt of the notice under sec.13 (2) of the Act, no borrower shall transfer
by way of sale, lease or otherwise any of his secured assets referred in the
notice without prior written consent of the secured creditor. The notice may be
served by delivering, or transmitting at a place where borrower or his agent is
empowered to accept the notice or documents on behalf of the borrower.
It
may also be delivered or transmitted where the borrower actually or voluntarily
resides or carries on business or personally works for gain. The notice may be
sent by registered post acknowledgment due, by speed post, by courier, or any
other means of transmission of documents like fax message or electronic mail
service. If it is found that the borrower is avoiding the service of the
notice, or the demand notice, or the service cannot be made, a copy of the
demand notice may be affixed on the outer door or some other conspicuous part
of the house or building of the borrower or his authorized agent. The demand
notice may also be published in two leading newspapers having good circulation
in the area, out of which one shall be in local language.
If
the borrower is a corporate body, the demand notice shall be served on the
registered office or any of the branches. In case of more than one borrower,
the notice has to be served on each of the borrowers. The notice has to be
served on guarantors and on persons who have given security for due repayment
of the loan
Under
Section 13(3A), if, on receipt of the notice under sub-sec.(2), the borrower
makes any representation or raises objection, the secured creditor shall
consider such representation or objection and if the secured creditor comes to
the conclusion that such representation or objection is not acceptable or
tenable, he shall communicate within one week of receipt of such representation
or objection the reasons for non-acceptance of the representation or objection
to the borrower, provided that the reasons so communicated or the likely action
of the secured creditor at the stage of communication of reasons shall not
confer any right upon the borrower to prefer an application to the Debt
Recovery Tribunal under sec.17 or the Court of District Judge under sec.17A.
19.
Right of borrower to receive compensation and costs in certain cases: If the
Debt Recovery Tribunal or the Court of District Judge, on an application made
under sec.17 or sec.17A or the Appellate Tribunal or the High Court on an
appeal preferred under sec.18 or sec.18A, holds that the possession of secured
assets by the secured creditor is not in accordance with the provisions of the
Act and rules and directs the secured creditor to return such secured assets to
the concerned borrowers, such borrower shall be entitled to the payment of such
compensation and costs as may be determined by such Tribunal or Court of
District Judge or Appellate Tribunal or High Court referred to in sec.18B.
If
the borrower/guarantor pays the dues in full, no further action under the Act
is necessary. If dues are paid only
partly and the borrower/guarantor seeks further time, the authority may decide
further action with due consideration of law of limitation and the borrower or
guarantor intimated accordingly. If the borrower/guarantor fails to meet their
liabilities in full within 60 days from the date of the notice, the bank/financial
institution can initiate action to enforce the security rights conferred on it
by the Act.
The
secured creditor or his authorized officer may take recourse to one or more of
the measures provided in sec.13(4) of the Act to recover his secured debt who
has the following options: He may take possession of the secured assets of the
borrower including the rights to transfer by way of lease, assignment or sale.
He may take over the management of the secured assets of the borrower,
including the right of transfer of lease, assignment, and sale. He may appoint
any person as the manager to manage the secured assets, the possession of which
has been taken over.
The secured creditor may require by notice any person who
has acquired any secured assets from the
borrower and from whom any money is due
or may become due to the borrower to pay to the secured creditor so much of the
money as is sufficient to cover the
secured debt.
Both
in the case of movable and immovable properties, it is obligatory to serve a
notice of thirty days to the borrower about the sale. The notice of sale shall
also be published in two leading widely circulated newspapers, of which one
shall be of the local language. The public notice shall contain important
details of the property, the debt, reserve price, time and place of public
auction, earnest money to be deposited etc.
The notice shall be affixed on the
conspicuous part of the immovable property and may also be put on Website. Sale
by any other modes than public auction / tender shall be on terms settled
between the parties. After confirmation and completion of sale process, the
authorized officer shall issue a sale certificate in favor of the purchaser in
the prescribed format.
If
the secured assets are movable properties, the authorized officer shall take
the possession in the presence of two witnesses and ensure that panchanama is
drawn and signed by the said two witnesses. The panchanama shall conform to the
prescribed format. After taking possession, the authorized officer, shall
prepare an inventory of the property as per the format prescribed and shall
deliver a copy of such inventory to the borrower or his authorized agent.
If
the property is subject to speedy or natural decay or expenses for keeping such
property is likely to exceed the value of the property the authorized officer
may sell it at once. It is the duty of the authorized officer to take proper
care and take steps for preservation and protection of the assets. If
necessary, the assets may be insured until they are sold or disposed of.
While
taking possession or sale of the secured asset, the secured creditor may
request the help of Chief Metropolitan Magistrate or District Magistrate in
whose jurisdictions the secured assets fall.
Under
sec.17 of the Act, the person aggrieved by the actions of the secured creditor,
as provided in sec.13(4) may make an application to the Debt Recovery Tribunal,
having jurisdiction within 45 days from the date on which action has been
taken. Similarly, any person aggrieved by the order made by DRT under section
17 may prefer an appeal to the Appellate Tribunal within 30 days from the date
of the order. The party preferring appeal shall deposit 50% of the amount of
debt, with a discretion given to the Appellate Tribunal to reduce the amount to
not less than 25% of the debt.
The following
transactions are excluded from the provisions of the SRFAESI Act:
a] A lien on any
goods, money or security given by or under the Indian Contract Act, Sale of
Goods Act or any other law for the time being in force;
b] Pledge of movables
within the meaning of sec.172 of the Indian Contract Act,
c] Any conditional
sale, hire purchase or lease or any other contract in which no security
interest has been created;
d] Any property not
liable to attachment;
e] Any security
interest created in agricultural land;
f] Any security interest
for securing repayment of any financial asset not exceeding rupees one lakh;
g] Any case in which
the amount due is less than twenty per cent of the principal amount and
interest thereon;
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