Empowering Financial Recovery through SARFAESI Act

In the dynamic landscape of the financial sector, Finsaga Pvt Ltd stands as a beacon of innovation and efficiency, leveraging the power of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) to redefine how Banks and Financial Institutions manage non-performing assets (NPAs).

The SARFAESI Act serves as the cornerstone of Finsaga’s strategy for NPA recovery, providing three alternative methods – Securitisation, Asset Reconstruction, and Enforcement of Security – all without the need for court intervention. This proactive approach allows Finsaga to swiftly address the challenges posed by NPAs, fostering a more resilient financial ecosystem.

Finsaga strictly adheres to the provisions of the SARFAESI Act, with a focus on loans above Rs. 1.00 lac, ensuring that NPA accounts meeting specific criteria are eligible for the Act’s application. Importantly, the Act mandates that NPAs must be backed by securities, such as hypothecation, mortgage, or assignment,
reinforcing the responsibility of borrowers to secure their debts.

The empowerment of banks is a pivotal aspect of the SARFAESI Act, granting them the authority to issue demand notices, request the surrender of secured assets, and instruct debtors to settle outstanding amounts. The Act ensures a fair and transparent process, allowing borrowers to raise objections or representations, with a responsive Authorised Officer addressing concerns within one week.

Finsaga recognizes the need for a balanced approach and acknowledges that borrowers or guarantors dissatisfied with the Bank’s actions have recourse through appeals to the Debt Recovery Tribunal (DRT) and Debt Recovery Appellate Tribunal (DRAT). However, the Act mandates a responsible approach, requiring a 50%
deposit of dues before an appeal with DRAT.

In cases where borrowers fail to comply with notices, Finsaga has the authority to take various measures, including the possession, sale, lease, or assignment of secured assets. These actions, guided by the SARFAESI Act, enable efficient recovery while maintaining a commitment to fairness.

Background: Finsaga’sadoption of the SARFAESI Act aligns with the broader evolution of India’s financial landscape. The Act emerged as a response to the challenges faced by banks and financial institutions in managing NPAs. Preceding the Act, ad-hoc measures like nationalization of banks and relief measures were insufficient to address the mounting levels of NPAs.

Various measures, such as the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA), the Recoveries of Debts due to Banks and Financial Institutions (RDDBFI) Act, 1993, and the Corporate Debt Restructuring (CDR) System, aimed to tackle financial distress in different ways. However, the need for a more streamlined and efficient process led to the formulation of the SARFAESI Act in 2002.

Provisions of the SARFAESI Act: Finsaga’s adherence to the SARFAESI Act’s provisions is comprehensive, encompassing registration and regulation of securitisation companies, asset reconstruction, and enforcement of security. The Act outlines three primary methods for NPA recovery: Securitization, Asset Reconstruction, and Enforcement of Security.

Securitisation: Finsaga employs this method by issuing security receipts or funds through securitisation companies or reconstruction companies. The Act allows for the creation of schemes for acquiring financial assets, promoting transparency and efficient management of assets.

Asset Reconstruction: Finsaga recognizes the importance of proper management, sale or lease of business, rescheduling of debts, enforcement of security, settlement of dues, and possession of secured assets for effective asset reconstruction.

Enforcement of Security without Court Intervention: Finsaga leverages the Act’s provision to enforce security without court intervention, streamlining the process and expediting recovery. 

Guidelines for SCs/ARCs: Finsaga, as a responsible financial entity, adheres to the guidelines set by the Reserve
Bank of India (RBI) for Securitisation Companies (SCs) and Asset Reconstruction Companies (ARCs). These guidelines cover aspects such as acting as an agent for banks or financial institutions, acting as a manager, and functioning as a receiver, ensuring that Finsaga’s activities are in line with regulatory standards.

Defining NPAs and Registration: Finsaga meticulously follows the definition of Non-Performing Assets (NPAs) outlined in the Act, ensuring compliance with the 180-day overdue criterion. The company duly applies for registration with the RBI, obtaining a certificate to undertake both securitisation and asset reconstruction activities.

Net Worth and Permissible Business: Finsaga maintains a robust net worth, meeting the minimum Owned Fund requirement of Rs.20 million, ensuring financial stability. The company strictly adheres to permissible business activities, focusing solely on securitisation and asset reconstruction activities without engaging in deposit-raising practices.

Asset Reconstruction Guidelines: Finsaga’s approach to asset reconstruction includes formulating a comprehensive ‘Financial Asset Acquisition Policy,’ addressing norms, valuation procedures, and plans for asset realisation. The Board exercises powers to approve policy changes and ensures that the acquisition process aligns with the company’s goals.

Securitisation Guidelines: In the realm of securitisation, Finsaga issues security receipts through trusts, facilitating transparent dealings with Qualified Institutional Buyers (QIBs). The company deploys surplus funds judiciously, either through partnerships or investments in Government Securities (G-Sec) or deposits in Scheduled
Commercial Banks (SCBs).

Risk Management in Securitisation: Finsaga recognizes the multifaceted risks associated with securitisation and implements robust risk management practices.

Credit Risk: Finsaga conducts thorough analyses of underlying asset pools to mitigate credit risk, ensuring diversification to reduce the likelihood of simultaneous default.

Sovereign Risk: In cross-border transactions, Finsaga addresses sovereign risk by exploring options such as foreign guarantors or structuring Special Purpose Vehicles (SPVs) in offshore locations.

Collateral Deterioration Risk: Finsaga remains vigilant against collateral deterioration risks, learning from global examples like the sub-prime crisis, and adjusting strategies accordingly.

Legal Risk: The company prioritizes the ‘bankruptcy remoteness’ of SPVs, ensuring a sound legal structure to uphold rights over underlying assets in case of obligor bankruptcy.

Prepayment Risk: Finsaga mitigates prepayment risks by structuring tranches to allocate prepayments to short-term bonds, minimizing the impact on long-term bondholders.

Servicer Performance Risk: Finsaga recognizes the critical role of servicers and ensures their consistent performance to safeguard investor interests.

Swap Counterparty Risk: Finsaga addresses swap counterparty risks in structured transactions, ensuring stability in cash flows and protecting investor interests.

Financial Guarantor Risk: Finsaga acknowledges the potential impact of guarantor failure and implements measures to ensure stability in cash flows to investors.

Finsaga’s commitment to adherence, innovation, and risk management positions it as a trailblazer in the financial sector, navigating the complexities of NPAs with a strategic and compliant approach under the SARFAESI Act.