India is a developing nation where people are adopting the skills of becoming an entrepreneur and are trying hard to strategize their financials to reach a perfect score. In order to engage in any business activity, capital is very important. This need for capital at the initial stage is taken care of by the debt securitisation market, where people take the help of financial institutions and avail the loan service facility. In the formal sector of securitisation market, various financial institutions (including bank) offer loan packages by taking collateral or security against the loan so that they can take possession and realise the amount of the loan in case debtor fails to repay the loan within due time. This process of debt securitisation hence basically is about changing assets into security and further security into the liquidity. This process is not as smooth as it appears, and there are various problems which are encountered by both creditors as well as debtors. The Indian Government in order to tackle these problems has passed various laws in past, one of which is "The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002" (hereinafter as 'SARFAESI Act'). In this article, however, we try to discuss the problems which are faced specifically by the borrowers and how they can be solved.
WORKING OF THE SARFAESI ACT
This Act allows the financial institutions and banks in particular to sell the properties belonging to the debtor (both residential and commercial property) by conducting auction if they fail in repaying the loan amount. In other words, SARFAESI Act empowers the bank to mitigate their 'Non-Performing Assets' (NPAs) by taking such coercive actions of recovery and restoration. This Act empowers the creditor to take over the property of debtor without going to the court, with the exception being that of agricultural land. The pertinent thing to note here is that the Act is applicable only in situations of secured loans, where financial institutions have the luxury to enforce the securities in terms of mortgage, pledge, etc. The court is kept outside the purview at the first stage in order to swift the whole process, and the court usually tend not to interfere unless it is a fraudulent or invalid transaction. While on the other hand, in case of unsecured assets the financial institutions have to move to court by filing civil suits or taking recourse of other remedies available under the law.
In order to understand the plight of the borrowers, one needs to first understand the working of the SARFAESI Act. The defaulting debtor is given notice by the financial institution to absolve his liability within a time period of 60 days.[1] If the debtor falls short of adhering to the said notice, then bank can take any of the following three recourses available to them[2]-
Firstly, it can take possession of the security in lieu of the loan.
Secondly, it can sale, or lease or even assign the right to security to any other person.
Thirdly, it can also appoint a manager for that property, who will look after the property on behalf of the bank.
Apart from these coercive steps, the Act even has provisions for the establishment of Asset Reconstruction Companies[3] (hereinafter ‘ARC’) whose primary function is to get hold of assets from the financial institutions. As per the Act, these financial institutions shall sell the properties of the defaulting borrower to these ARC. The guidelines regarding this process are issued by the Reserve Bank of India.
PROBLEMS FACED BY THE BORROWERS:
The coercive actions can be taken by the bank only when the other party has been termed as 'wilful defaulter'. A borrower becomes wilful defaulter when he fails to repay the loan amount, or the asset which he has given in the security has been sold or mis-utilized to the detriment of the bank’s interest, or there is a fraudulent misrepresentation on the part of the borrower for securing loan amount.
There is no doubt in this fact that this Act has enhanced the process of recovering the loans from the defaulting borrowers, which is the need of the hour. But, in the garb of this, the right of the borrowers shouldn’t be jeopardized. For any Act in order to be successful in its implementation, it needs to maintain the balance between the relevant stakeholders, and thus the rights of the borrowers should not be infringed by the lenders unilaterally, after all, right to property is a constitutional right.[4]
One of the major rights available to the borrower is that in case he feels that the step taken by the bank is not valid in the eyes of law, then he can appeal against the notice issued by the bank under Section 13 to take symbolic possession of the security under the Section 17 of the Act against the arbitrary actions of the bank in the Debts Recovery Tribunal (hereinafter, DRT).[5]
There is a prescribed time limit of 45 days for making an appeal under Section 17 of SARFAESI Act. The borrower is even allowed to appeal after the prescribed time limit, but for that he has to give a reasonable explanation for the delay. The defaulting borrower can either appeal for the wrongful possession of the property by the bank or the wrongful sale notice put up by the bank. If the borrower challenges the sale notice of the bank and omits to question the possession taken by the bank after notice given under Section 13(4), then the borrower first needs to satisfy the DRT as to why he failed to challenge the first step of the bank, i.e., taking possession of the property. This is done because of the fact that if the borrower is challenging the sale notice put up by the bank, then he must show that the possession taken by the bank at first place itself was not legal. If the borrower fails to give a satisfactory explanation to the possession notice, then the other claims pursued by him are liable to be dismissed. This resulted into the hardship faced by the borrowers, as they in order to prove the illegality of the bank’s later action needed to prove that the earlier action taken by the bank was also against the spirit of the Act.
The aforementioned scenario describes the approach adopted by the banks earlier, however, the DRTs have now resorted to a more moderate approach, where the defaulting borrower can challenge each and every action of the bank under the Act. However, the right of a borrower to approach the civil court is restricted, and can only go to the civil court when there is some contention with respect to the title of the property which was given as security. The borrower can again have the right to go to the High Court under article 226 of the Indian Constitution, however, the High Court again are reluctant to hear the matter if the borrower has not approached the DRT first because of the settled law by the Hon’ble Apex Court that writ jurisdiction cannot be exercised if the party has an alternate remedy available with them.[6]
The SARFAESI Act though helped the banks to recover the loan amount more swiftly; but, it is noteworthy to mention that this entire process involved is very intricate in nature, and the borrowers’ claim often goes unheard. This is coupled with the multiple factors of fairness and technicalities, and the banks often go for the extreme step of taking possession and selling the property without taking recourse of the other processes.[7]
An appeal under Section 17 by a borrower can be accepted or rejected by the DRT, and it depends on the discretion of DRT. If the DRT accepts the appeal petition before it, then it can order the bank to give back the possession to the borrower in case the bank has failed to take possession under the provision of the SARFAESI Act. However, the power of the DRT is limited to this stage only, and it can’t further give any directions to the banks, which creates problems for the borrower. This can be understood by way of an example. If the RBI has issued some sort of new guidelines and owing to which the loan taken by the borrower can be restructured, and the borrower has asked the bank to do the same. The bank can very well deny the request of the borrower, making him remediless in such a scenario, as he cannot approach DRT to direct the bank to allow restructuring of his loan pursuant to the guidelines issued by RBI. However, the doors of the Constitutional Court i.e., the High Court under Article 226 are always open for him, but during this whole process, the borrower is harassed by the bank and faces many hardships.
The problem for the borrower doesn’t end here. Suppose the borrower is not able to return the loan amount taken from the bank, and in lieu of it the bank gets the right to take over the possession of the security asset, auction the same and recover the loan amount. The value of that security asset of the borrower is usually valued less than the prevailing market price. As a result, the bank officials auction that security asset to someone known to them at a very low price, and hence indulge in unfair practices. In order to curb such practices, it should be compulsory on the part of banks to clearly reveal the market value of that security asset in its reply when the borrower appeals the same under section 17 to the DRT. It would result in the process being more transparent and hence prevent the undervaluation of property.
In some cases, the auction process is hurriedly completed and it would be extremely difficult for the borrowers to get the transaction set-aside, though, the DRT is empowered to do so under Section 17. It is the responsibility of the Bank to ensure that they get the maximum possible price for the property in Public Auction as they are the trustees of the property and the balance sale consideration, after adjustments, goes to the borrower. There is lot of complication in this process and it is very difficult for the borrowers at times to fight with the Banks and it has something to do with the issue of lack of proper understanding of procedures and law under SARFAESI Act, 2002. Also, at times while auctioning the properties under SARFAESI Act, 2002, when more than one properties are available for auction, the Bank exercises an enormous amount of discretion, and more often than not the property chosen by the bank is disposed of off rather than the one chosen by the borrower to clear the debt.
For banks to classify any borrower as a wilful defaulter and their assets as NPAs, so that they can apply SARFAESI Act, they have to issue a notice to the borrower and a time period for the same has been given in the Act. The bank needs to undertake the valuation of the property[8] and the same has to be informed to the borrower before any public notice for auction sale is issued. Also, the bank has to give 30 days notice to the defaulter before proceeding with the sale of the security assets given by him.[9] But, these time periods and guidelines are hardly followed by the banks. There have been numerous instances where the bank has sold the security assets kept them with the ARCs without disclosing it to the borrower. They club together properties which have been given the status of NPAs, and sell them at discounted price. The bank within the rules of RBI, can entertain the request of the defaulters for one-time settlement (hereinafter OTS), though they prefer transferring it to the ARC at much discounted rate. If the intention of the bank is to recover as much money as possible, then technically they should resort to OTS rather than selling it at a discounted rate to ARC. But, due to some personal interest of the bank officials, they usually don’t indulge in OTS. The bank usually cancels the OTS by saying that it was not as per the protocols and nitpicking the procedural mistakes by the borrowers to defeat their claim.[10]
CONCLUSION:
There is no denial in this fact that many borrowers are being harassed by the Bank officials unreasonably in the garb of the provisions of SARFAESI Act, 2002. They claim that they are not 'willful defaulters' and even if there is some kind of default, they are willing to correct the same and honor the commitments agreed upon. While in some cases, the Bank Officials rightly show some kind of generosity in helping the borrowers within the legal frame-work, in other cases, the Bank Officials act unreasonably and invoke the provisions of SARFAESI Act, 2002 by classifying the account as ‘Non-performing Asset’ even if there is a possibility of regularizing the loan account.
Normally, the issue of classification of the account as ‘Non-performing Asset’ is not dealt with by the Tribunal or the Courts and they tend to support the classification of any loan account as NPA if there is a default in payments as agreed. But, the guidelines issued by the Reserve Bank of India with regard to Asset Classification are not one-sided and it all depends upon the interpretation of those guidelines in respect of a particular “loan account” or borrower.
The Act was brought to decide the cases summarily, but the provisions of the Act have been such that it is heavily tilted in the favour of the bank. In such cases, the borrowers are harassed by the bank and feel powerless, as they don’t have an effective remedy. The discretion lies with the bank at many stages, which is often misused by them. This should be balanced so that the borrowers are not intimidated by this Act.
[1] Section 13(2), SARFAESI Act, 2002.
[2] Section 13(4), SARFAESI Act, 2002, read with Rule 8 of The Security Interest (Enforcement) Rules, 2002.
[3] Section 2(ba), SARFAESI Act, 2002.
[4] Karnataka State Financial Corporation Vs. N.Narasimahaiah (2008 (5) SCC 176).
[5] Section 17, SARFAESI Act.
[6] UBI v. Satyawati Tandon and Ors. (2010) 8 SCC 110.
[7] VD Rao, “SARFAESI Act & sorrow of borrowers” (Indian Company Law Blog, 25 Feb 2013) <http://indiancorporatelaws.blogspot.com/2013/02/sarfaesi-act-sorrows-of-borrower.html> accessed on 29 Sep 2020.
[8] Rule 8(5) of The Security Interest (Enforcement) Rules, 2002.
[9] Rule 8(6) of The Security Interest (Enforcement) Rules, 2002.
[10] Richard, “How Banks Misuse SARFAESI ACT Provisions For The Loan Recovery?” (Business Day, April 2020) < https://www.businessday.in/sarfaesi-act/> accessed on 28 Sep 2020 (This article is authored by Mr. Abhishek Kumar, Intern at S&D Legal Associates)
(Image Source: Outlook India)
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