DECLARATION

I, Miss Puja Nandkishor Pilankar student of B.Com (Banking and Insurance) Semester V (2011-2012) hereby declare that I have completed the project on Study of SARFAESI Act, 2002 and its Implementation in Nationalized Banks. I further state that the information submitted is true and original to the best of my knowledge.

Signature of Student

ACKNOWLEDGEMENT
By writing this note I grab the opportunity of thanking all those important people without whom this project would have not been completed. Firstly, I thank our Principal Dr. Mrs. Diwanji madam for her worthy tips. Further, I also express my gratitude towards Mrs. Shilpa Thakur for her constant support and encouragement for completing the Project successfully. Moreover, I am highly indebted to Mrs. Anuradha Ganesh for her valuable inputs, sincere efforts and precious time. I am immensely thankful to her for helping me in raising the standards of the project in all. I am thankful to Mr. Vinay Gudi as well for his prompt and timely help. Also, I am grateful for the co-operation and concern of the non-teaching staff, library and the computer laboratory staff and the Managers of the banks of Canara Bank, Corporation Bank, Syndicate Bank, Bank of Maharashtra and Union Bank and also to the customers whom I inquired.
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Last but not the least; I thank my friends, pier group members and my parents for laying their inputs and guiding me in whichever way possible. Thus, by worshipping the Lord, I present this project on Study of SARFAESI Act and its Implementation in Nationalized banks and hope that it proves to be an insight of knowledge to the people who aspire for it!

INDEX
SR. NO. CHAPTER PAGE NO.

Design of study. 1. 2. 3. 4. 5. Executive summary. Objectives. Scope. Methodology. Limitations of the project.

05 06 06 07 07
3

Secondary Data. 1. 2. Introduction. Need of the Act and its Establishment. - Need. - Establishment. 3. 4. 5. Provisions. Applicability of the Provisions. Meaning of various important terms.

08 09

11 13 14

SR. NO.

CHAPTER

PAGE NO.

6.

Securitization of Financial Assets. - Parties. - Process.

- Advantages

16 17 19
21

7.

Asset Reconstruction

23
4

8.

Enforcement of Security Interest. - Procedure

26 27 30 30 32

9. 10.

How are they inter-related? Conditions for successful securitization.

Case Study. Primary Data. 1. 2. 3. General Statistics. Questionnaire for Banks (Analysis). Questionnaire for Customers (Analysis).

45 51 62 65 69 73

Students View. Annexure Bibliography

DESIGN OF STUDY
EXECUTIVE SUMMARY:
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The Project is concerned with the study of the Securitization and ReConstruction of Financial Assets and Enforcement of Security Interest Act, popularly known as Securitization Act or SARFAESI Act and its implementation. The study is narrowed to that of Nationalized Banks only. Thus, how the Act has been implemented in these banks, whether the employees and management face any problem in its implementation or whether the parties opposite of that of the banks are in anyway benefited by the Acts implementation is been studied. Apart from this, there has been an attempt to find out if the general public and the companies know that such an Act can be applied on them i.e. to know if there is awareness amongst the public about it. This information is primarily found out through the Primary data Analysis. For ease of understanding and clarity of information, the data is divided or classified into various heads. Thus, the jurisdiction for applicability of the Act, need for the act, establishment, its limitations, the various provisions and amendments, their inter-relation and the conditions for successful implementation are studied. At the end of the Primary data, a report or note on the students (my) personal views about the Acts implementation and its effect has been stated. These views are completely my independent views irrespective of any external influences.

OBJECTIVES:
1.

To find out how the Securitization and Reconstruction of Financial

6

Assets and Enforcement of Security Interest Act helps the financial institutions to actually recover the debt. 2. 3. 4.
5.

To recognize till what extent is it beneficial. To understand the process. To study the legal requirements. To find out how much effective it had been. To determine whether the general public is aware about it. To ascertain its suitability. To find out the scope for amendments. To detect limitations, if any.

6.
7.

8.
9.

SCOPE:
The project deals with the study of SARFAESI Act and the method and process of its implementation. It mainly focuses on the implementation in Nationalized Banks. Detailed study of implementation in five major Nationalized Banks has been done. These Banks are: 1. 2. 3. 4. 5. Bank of Maharashtra. Canara Bank. Corporation Bank. Syndicate Bank. Union Bank of India.

Along with the implementation, a small survey of whether the general public, companies and various institutions know about such an Act has also been conducted.

METHODOLOGY:
The Project is informative type of a project. The topic is such that the data is already there and the provisions are already made. Therefore it cannot be modified. The facts are presented the way they are mentioned in the various books. A sample size of five Banks and 30 customers is selected for the primary data purpose. They were questioned and the required primary data found out. For the secondary data, the facts in various reference books and articles were proved to be beneficial.

LIMITATIONS OF THE PROJECT:

The Act and the provisions and various amendments in it are too vast for study. Thus the topic had to be narrowed down to its study and implementation and not focusing very much on the amendments and the numerous provisions.

SECONDARY DATA
INTRODUCTION:
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The main objective of any bank is to accept deposits and provide advances. The loans provided are to be recovered for maintaining the liquidity and working capital requirements of the banks. This recovery of loans given is through various ways as mentioned below

This project specifically deals with the SARFAESI Act and its implementation in banks and financial institutions.

NEED OF THE ACT AND ITS ESTABLISHMENT.

NEED :-

While the banking industry in India is progressively complying with the international prudential norms and accounting practices, there are certain areas in which the banking and financial sector do not have a level playing field as compared to other participants in the financial markets in the world.
1.

There is no legal provision for facilitating securitization of financial assets of banks and financial institutions. Also, unlike international banks, the banks and financial institutions in India also do not have power to take possession of securities and sell them.
9

2.

3.

The existing legal framework relating to commercial transactions has not kept pace with the changing commercial practices and financial sector reforms.

This has resulted in slow pace of recovery of defaulting loans and mounting levels of non performing assets of banks and financial institutions.

ESTABLISHMENT :-

Narasimham Committee 1 and 2 and Andhyarujina Committee constituted by the Central Government for the purpose of examining banking sector reforms have considered the changes in the legal system in respect of the areas of recovery of debts.

Suggestions:The committees mentioned above suggested enactment of a new legislation for securitization and enabling banks and financial institutions to take possession of the securities to sell them without the intervention of the court.

Action:Acting on the suggestions given, the Securitization and Re-construction of Financial Assets and Enforcement of Security Interest Ordinance, 2002 was promulgated on 21st June, 2002.

Impact of the Ordinance:The provisions of the Ordinance would enable banks and financial institutions to do the following:
10

(1) To realize long-term assets (2) To manage problem of liquidity (3) To manage problem of asset liability mismatches
(4)

To improve recovery by exercising powers to take possession of securities, sell them and reduce non-performing assets by adopting measures for recovery or re-construction.These invariably form the objects of the Act.

THE PROVISIONS:1.

Registration

and

regulation

of

securitization

companies or

reconstruction companies by the Reserve Bank of India;

2.

Facilitating securitization of financial assets of banks and financial institutions with or without the benefit of underlying securities; Facilitating easy transferability of financial assets by the securitization company or reconstruction company to acquire financial assets of banks and financial institutions by issue of debentures or bonds or any other security in the nature of debenture;

3.

4.

Empowering securitization companies or reconstruction companies to raise funds by issue of security receipts to qualified institutional buyers;
11

5.

Facilitating reconstruction of financial assets acquired by exercising powers of enforcement of securities or change of management or other powers which are proposed to be conferred on the banks and financial institutions;

6.

Declaration of any securitization company or reconstruction company registered with the Reserve Bank of India as public financial institution for the purpose of section 4A of the Companies Act,1956;

7.

Defining security interest as any type of security including mortgage and change on immovable properties given for due repayment of any financial assistance given by any bank or financial institution;

8.

Empowering banks and financial institutions to take possession of securities given for financial assistance and sell or lease the same or take over management in the event of default, i.e. classification of the borrowers account as non-performing asset in accordance with the directions given or under guidelines issued by the Reserve Bank of India from time to time.

9.

The rights of a secured creditor to be exercised by one or more of its officers authorized in this behalf in accordance with the rules made by the Central Government;

10.

An appeal against the action of any bank or financial institution to the concerned Debts Recovery Tribunal and a second appeal to the Appellate Debts Recovery Tribunals;

11. Setting up or causing to be set up a Central Registry by the Central Government for the purpose of registration of transactions relating to securitization, asset reconstruction and creation of security interest;

12

12. Non Application of the proposed legislation to security interests in agricultural lands, loans not exceeding rupees one lakh and cases where 80% of the loans are repaid by the borrower.

APPLICABILITY OF THE PROVISIONS:The provision of the Act would be applicable where the amount of debt due to any bank or financial institution is more than 10 lac rupees or such amount, being more than one lac rupees as the Central Government as specify. The provisions of this Act are applicable only for NPA loans with outstanding above Rs. 1.00 lac. NPA loan accounts where the amount is less than 20% of the principal and interest are not eligible to be dealt with under this Act.

13

Non-performing assets should be backed by securities charged to the Bank by way of hypothecation or mortgage or assignment. Security Interest by way of Lien, pledge, hire purchase and lease not liable for attachment under sec.60 of CPC, are not covered under this Act.

MEANING OF VARIOUS IMPORTANT TERMS: Property:Property means: (a) Immovable property; (b) Movable property; (c) Any debt or any right to receive payment of money, whether secured or unsecured; (d) Receivables, whether existing or future;
14

(e) Intangible assets, being know-how, patent, copyright, trademark, license, franchise or any other business or commercial right of similar nature.

Hypothecation:movable property.

(a) Hypothecation means a charge in or upon any existing or future (b) It is created by a borrower in favor of a secured creditor without delivery of possession of the movable property to such creditor. (c) It is a security for financial assistance provided by the bank. (d) It includes floating charge and crystallization of such charge into fixed charge on movable property.

Default :Default means non-payment of: (a) Any principal debt or (b) Interest thereon or (c) Any other amount Payable by the borrower to any secured creditor. Due to non-payment of such amount, account of the borrower is classified as non-performing asset in the books of account of the secured creditor. This is done in accordance to the directions or guidelines issued by the Reserve Bank of India.

Non-performing assets:Non-performing asset means an asset or account of a borrower, which has been classified by a bank or financial institution as:
15

(a) Sub-standard (b) Doubtful or (c) Loss asset, In accordance with the directions or guidelines relating to assets classifications issued by the Reserve Bank.

SECURITIZATION OF FINANCIAL ASSETS:

Meaning:-

Securitization is a method of converting existing receivables or future cash flows into tradable securities. It is a process wherein the pools of individual loans or receivables are packaged, underwritten and distributed to investors in the form of securities.
16

Securitization can be in two ways

Securitization of existing receivables, also called as asset backed security securitization or Securitization of receivables to arise in future, called as future flows securitization i.e. securitization of receivables.

Thus, it is a process by which cash flows or claims against third parties of an entity, either existing or future are identified, consolidated and separated from the original entity and then transferred into securities to be offered to investors.

Main Objectives of Securitization:-

To shore up capital adequacy requirements under the regulation To generate fresh liquidity To undertake expansion.

Parties To A Securitization Transaction:-

The parties involved in the securitization process and the roles are as under:

Originator:
Originator is the entity in whose books the assets to be securitized exist. It sells the assets on its books and receives the funds generated from such sale. They are generally banks or consumer finance companies.
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For e.g. ABC bank gives loan to customers. In this case ABC is the originator.

Special Purpose Vehicle (SPV):

A Special Purpose Vehicle is an entity specially created for doing the securitization deal. These can be a trust, corporation or form of partnership or any other legal entity.

Steps taken:
1. 2.
3.

Invites investment from investors Uses the invested funds to acquire receivables of the originator Uses the realizations from the receivables transferred to it to pay the investors, thereby giving them a reasonable return.

Investors/Qualified Institutional Buyer:

The investors may be in the form of individuals, institutional investors, financial institutions, mutual funds, provident funds, pension funds and so on. They buy a participating interest in the total pool or receivables and receive their payments in the form of interest and principal as agreed upon between them. The security receipts are issued to the qualified institutional buyer which serves as a proof of the fact that they have undivided interest in the property.

Rating Agency:
An external credit rating agency plays an important role as the investors take on the risk of the asset pool rather than the originator. The rating
18

agency assesses the strength of the cash flow and the mechanism designed to ensure full and timely payment by the process of selection of loans of appropriate credit quality, the extent of credit and the liquidity support provided and the strength of legal framework.

Administrator:
It collects the payment due from the obligor and passes it to the SPV. It follows up with the borrowers and pursues legal remedies available against the defaulting borrowers.

Agent and Trustee:

It accepts the responsibility for overseeing that all the parties to the securitization deal perform in accordance with the securitization trust agreement.

Obligor:
The obligors are the originators debtors. Eg. ABC bank gives loan to Mr. X. in this case Mr. X is the obligor. The amount outstanding from an obligor is the asset that is transferred to Special Purpose Vehicle.

Underwriter:
Underwriters are usually investment banks- they serve as intermediary between issuer (SPV or the trust) and investors. Underwriters assume the risk associated with buying an issue of bonds in its entirety and reselling it to the investors.

19

Note: - It is not necessary that all the above parties are there in every transaction. The parties to the securitization transaction depend upon how complex.

Securitization Process:The originator determines which assets he wants to securitize for raising funds. The Special Purpose Vehicle is formed. The SPV is funded by investors and it issues securities to the investors. The SPV acquires the receivables under an agreement at their discounted value. The service provider for the transaction is appointed, normally the originator. The debtors may or may not be notified depending on the legal requirements.

1. 2. 3. 4. 5.

6. 7. 8. 9.

The servicer collects the receivables and pays off the collection to the SPV. The SPV either passes the collection to the investors, or re invests the same to pay off to investors at stated intervals. In case of default, the servicer takes action against the debtors as SPVs agent. When only a small amount of outstanding receivables are left to be collected, the originator may clean up the transaction by buying back the outstanding receivables.

10.

At the end of the transaction, the originators profit, if retained and subject to any losses to the extent agreed by the originator, in the transaction is paid off.

Receivables
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Obligor (s)
Receivables

Goods/Services Cash

Origina tor

Liquidity support

Credit Enhance-me

SPV

Cash

Rated Securities

INVESTO RS Advantages of Securitization:Securitization is advantageous for both the issuers and the investors.

Advantages for the issuer are as follows:

21

Advantages for the Investors are as follows:

The Indian Securitization market has been mostly an asset backed market with a variety of assets being securitized. E.g. Two wheeler loans, car loans, commercial vehicle loans, residential mortgages.

ASSET RECONSTRUCTION: Meaning:

Asset Reconstruction can be defined as the acquisition of the specific rights of a bank or a financial institution, by a company in its process of extJending financial assistance for the successful operations of the bank or the financial institutions. SARFAESI Act contains provisions with respect to establishment of Asset Reconstruction Companies.

What is its work?

22

This company takes care of the debt collection and recovery of the assets on behalf of the bank or the financial institutions due to specifically given rights. Those companies involved in the process are called as Asset Reconstruction Companies. Asset Reconstruction Companies are empowered to manage and recover illiquid or non-performing assets from financial institutions. This relieves the banks of burden of NPAs.

Main aim:
The main aim of Asset Reconstruction Companies is

To minimize costs and To maximize the recovery value.

Reconstruction company and securitization company:

Reconstruction Company means a company formed and registered under the Companies Act, 1956 for the purpose of asset reconstruction. In SARFAESI Act Asset Reconstruction and securitization have been used as synonyms. Therefore, a company formed for asset Reconstruction is also by definition formed for securitization.

Measures taken:Section 9 of the Act states that a securitization company or Reconstruction company may, for the purposes of asset reconstruction, can take any one or more of the following measures:

It can change in or takeover the business management of the borrower.

23

 Change implies bringing in some new management to manage borrowers business.

Takeover implies the Reconstruction company itself takeover the entire management of the company;

Sale or lease a part or whole of the business of the borrower; Rescheduling of payment of debts payable by the borrower. It should be noted the no rescheduling which increases the liability or makes the agreement more difficult for the borrower can be done unilaterally; Enforcement of security interest in accordance with the provisions of SARFAESI Act; Settlement of dues payable by the borrower Taking possession of secured assets in accordance with the provisions of this Act.

Powers of The Reserve Bank of India:

Reserve Bank can give directions to securitization companies or Reconstruction companies in respect to the following matters: Income recognition, Accounting standards, Making provisions for bad and doubtful debts, Capital adequacy based on risk weights for assets and Deployment of funds by the securitization company or reconstruction company as the case may be,

24

 The type of financial asset of a bank or financial institutions which can be acquired and procedure for acquisition of such assets and valuation thereof, The aggregate value of financial assets which may be acquired by any securitization company or Reconstruction company.

ENFORCEMENT OF SECURITY INTEREST:

The provisions related to enforcement of security interest are very significant as this is the one which gives powers of enforcement of security to secured lenders.

Meaning of Security interest:

25

Security interest means right, title and interest of any kind whatsoever upon property created in favour of any secured creditor and includes any of the following: Mortgage, Charge, Hypothecation, Assignment.

Enforcement of Security interest:

Any security interest created in favor of any secured creditor may be enforced, without the intervention of the court or tribunal, by such creditor in accordance with the provisions of this Act. Here, since the intervention of the court or tribunal is not required, it is less time consuming and might even turn out to be a cheaper process comparatively.

Procedure for enforcement of security interest:

In case of default in repayment by the borrower of secured debt or any installment, the secured creditor may ask the borrower by notice in writing to discharge in full his liabilities to the secured creditor within 60 days from the date of notice failing which the secured creditor is entitled to exercise all or any of the rights stated below:

26

 The notice shall give details of the amount payable by the borrower and the secured assets intended to be enforced by the secured creditor in the event of non payment of the secured debts by the borrower. In case the borrower fails to discharge the liability in full within 60 days as mentioned above, the secured creditor may take recourse to one or more of the following measures to recover his secured debt, namely:
(a)

Take possession of the secured assets of the borrower including the right to Transfer by way of Lease Sale for realizing the secured asset;

Assignment

(a) Takeover the management of the secured assets (b) Appoint any person (hereafter referred to as a manager),to manage the secured assets the possession of which has been taken over by the secured creditor;
(c)

Require at anytime by notice in writing, any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due to the borrower, to pay the secured creditor, so much of the money as is sufficient to pay the secured debt.

Any payment made by any person referred to in clause (d) to the secured creditor shall discharge that person, as if he has made payment to the borrower. Secured creditor or the manager can transfer any secured asset after taking possession thereof or takeover of management. In such case the transferee is vested with all rights

27

in, or in relation to, the secured asset transferred as if the transfer has been made by the owner of such secured asset.

Where any action has been taken against a borrower, all costs, charges and expenses which, in the opinion of the secured creditor, have been properly incurred by him or any expenses incidental thereto, shall be recovered from the borrower.

The money which is received by the secured creditor shall, in the absence of any contract to the contrary, be held by him. It is to be applied, firstly, in payment of such costs, charges and expenses and secondly, in discharge of the dues of the secured creditor and the residue of the money so received shall be paid to the person entitled thereto in accordance with his rights and interests. The secured assets shall not be sold or transferred by the secured creditor, if his dues together with all costs, charges and expenses incurred by him are given to the secured creditor at any time before the date fixed for sale or transfer.

If the financing of a financial asset is done by more than one secured creditors or joint financing of a financial asset by secured creditors, the secured creditor is entitled to exercise any or all of the rights conferred on him.

In the case of a company in liquidation, the amount realized from the sale of secured assets shall be distributed in accordance with the provisions of the companies act, 1956. If the dues of the secured creditor are not fully satisfied with the sale proceeds of the secured assets, the secured creditor may file an application before the Debts Recovery Tribunal having jurisdiction or a competent court as the case may be, for the recovery of the balance amount from the borrower.
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Secured creditor shall be entitled to proceed against the guarantors or sell the pledged assets without first taking any of the measures stated in relation to the secured assets under this Act.

The rights of a secured creditor under this Act may be exercised by one or more of his officers authorized in this behalf. After the receipt of notice, no borrower can transfer by way of sale, lease or otherwise any of his secured assets referred to in the notice, without prior written consent of the secured creditor. Disclosure Requirements (Clause: 6) Banks/ FIs, which sell their financial assets to an SC/ RC, shall be required to make the following disclosures in the Notes on Accounts to their Balance sheets: Details of financial assets sold during the year to SC/RC for Asset Reconstruction No. of accounts Aggregate value (net of provisions) of accounts sold to SC / RC Aggregate consideration Additional consideration realized in respect of accounts transferred in earlier years Aggregate gain / loss over net book value.

HOW ARE THEY INTER RELATED?

Securitization of assets, Re-construction of those financial assets and enforcement of security interest are inter related and inter dependant as well. Enforcement of security interest is not possible unless the assets are properly securitized. Moreover the re-construction companies depend
29

upon the banks providing and supplying them the securities or assets to be re-constructed.

CONDITIONS FOR SUCCESSFUL SECURITIZATION:

If securitization of debt has to be successful, the following conditions must have been fulfilled:

The success of Securitization depends upon the ability of the original borrower to repay his loan. Therefore, selection of assets to be secured requires utmost care. The assets should be ranked and selected on the basis of least losses and to provide for maximum protection to the investor.

The credit rating is an integral part of Securitization. Hence credit rating must be done by credit rating agencies on a scientific basis and the ratings should be unquestionable. Then only, the prospective investors confidence can be built. The credit rating agencies should take into account the various types of risks such as credit risk, interest risk, liquidity risk, etc. along with other usual factors.

The SPV should be a separate organization from that of the originator. It should be completely insulated from the parent corporate entity so that SPV could be protected from the danger of bankruptcy.

The pass through certificates or any other similar instruments arising out of securitization must be listed in stock exchanges so that they may be readily acceptable to investors. It would provide instant liquidity and moreover, its price could also be easily ascertained.

There must be standardized loan documentation for similar loans so that there may be uniformity between different financial institutions.
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It must carry a right to assign debts to third parties, so that, it could be sold or transferred to the SPV.

There should be a proper accounting treatment for the various transactions involved in asset securitization. The accounting system should provide for the removal of the securitized assets from the balance sheet of the originator. Only then, the real benefit will go to the originator.

Above all, there should be proper and adequate guidelines given by the regulatory authorities dealing with the various aspects of the process of securitization.

CASE STUDY
VERSUS
COMPLAINANT Abdul Rahiman, Dakshina Kannada OPPOSITE PARTY The Branch Manager, Authorized Officer, Oriental Bank of Commerce,
31

Mangalore 575 001.

The facts of the CASE:

This complaint is filed under Section 12 of the Consumer Protection Act alleging deficiency in service against the Opposite Party claiming certain reliefs.

It is submitted that, the Complainant was running a textile shop under the name and style Apsara Super Bazar at Golden complex, Vittal, Mangalore.

It is stated that he was running the said business in two premises of the said complex. Out of the said two premises possessed by the Complainant one is possessing under ownership basis and the other one is holding on tenancy basis under one Mr.Ramla. It is submitted that the Complainant has availed loan from the Opposite Party bank for the purchase of premises which is under the ownership of the Complainant and he has created charge too. It is submitted that for the non- payment of the amount due to the Opposite Party bank, the Opposite Party bank has taken recovery proceedings against the Complainant under SARFAESI Act (Securitization Act 2002).

What exactly happened?

It is submitted that, the Complainant initially was paying the installments due to the Opposite Party bank and subsequently during the off season in the textile business the Complainant was not able to pay the loan installments.
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Action taken by the Opposite Party Bank:

Immediately thereafter the Opposite Party bank initiated recovery proceedings on 6.8.2008 behind the back of the Complainant, the Opposite Party bank has unauthorized seized the textile materials worth over Rs.15,00,000/-

Thereby the Opposite Party bank has literally restrained the Complainant of dealing with/disposing off the textile materials at an appropriate time.

Apart from seizing textile materials the Opposite Party bank has also seized furnitures, interiors, and electrical fittings belonging to the Complainant. It is submitted that the textile materials are not the subject matter of public auction and no notice was ever given to the Complainant regarding seizing of the textile materials, furnitures, interiors, electrical fittings. Those were seized in the absence of the Complainant. It is submitted the Opposite Party bank in the guise of the recovery proceedings has acted in bad faith beyond its jurisdiction and thereby imposed harassment and hardship to the Complainant.

It is further alleged that the Opposite Party bank has not taken any fair steps; no opportunity was given to lift the textile materials and other items at an earliest point of time. The Opposite Party bank caused extensive damage to the Complainants business. The acts of the Opposite Party bank in the recovery proceedings are clearly beyond the powers contemplated under law. The Opposite Party bank has also unauthorized and admittedly locked the rented premises belonging to the Complainant.

33

It is submitted that the unauthorized acts and irregular recovery proceedings caused extensive damage to the Complainant and the Opposite Party bank found guilty of providing deficiency in service and hence the Complainant issued a legal notice to the Opposite Party bank and filed the above complaint before this Hon'ble Forum under Section 12 of the Consumer Protection Act 1986 (herein after referred to as the Act) seeking direction from this Hon'ble Forum to the Opposite Party to pay compensation of Rs.19,90,000/towards the loss of business and salability nature of the textile materials, illegal, unauthorized holding of furnitures, interiors, electrical fittings and also claimed cost of the proceedings.

Opposite partys reaction:

Opposite Party denied the entire allegations alleged in the complaint and submitted that the seizure of the movable and immovable property are in accordance with the law and the authorized officer of the Opposite Party bank initiated action against the Complainant for recovery under the Securitization Act and intimated the Complainant by way of notice and thereafter seized the properties mortgaged in favor of the bank.

Explanation provided:
The authorized officer had issued notice dated 23.1.2006 under Section 13(2) of the Securitization Act to the Complainant as well as to the guarantor, who have duly acknowledged the receipt and thereafter
34

authorized officer took possession on 18.12.2006 and the possession notice was published in English and Kannada Daily newspaper dated 5.4.2007. It is submitted that the Complainant from time to time requesting the bank to defer the taking of further action pursuant to the notice dated 21.3.2006 with promise to settle the dues but the Complainant failed to keep up his commitment to settle the dues. The Opposite Party bank on 6.8.2008 was constrained to take physical possession of the mortgaged securities in terms of Securitization Act. On 6.8.2008 the Panchanama and inventory of immovables were drawn, the representative/ brother of the Complainant and the mortgagor and the guarantor were present during the proceedings. Thereafter the copy of the panchanama and inventory delivered to the Complainant personally on 7.8.2008 at 6 p.m. and it is denied that the goods worth more than Rs.15, 00,000/- were seized or unauthorized seized from the shop premises. Further it is stated that the premises held by the Complainant on rent also under mortgaged to the Opposite Party bank by the owner thereof for the amount due by him and pursuant to the notice dated 17.11.2007 issued by the Opposite Party bank under Securitization Act to one Mr.Ramla. The said premises also have taken possession on 16.12.2008. The furniture, electrical fittings and interiors found in the premises have not been sold and they are in as it is condition. The removal of the electrical fittings and render the materials useless therefore Opposite Party bank have not got the fittings removed so far. Further it is submitted that after seizure of the premises which have been sold by public auction on 10.12.2008 and the possession of which is yet
35

to be delivered and sale certificate is yet to be issued/executed in favour of the successful bidder. It is submitted that there is no deficiency and the seizure of the properties are in accordance with the provisions laid under the Securitization Act and prayed for dismissal of the complaint.

In view of the above said facts, the points now that arise for our consideration in this case is as under: (i) Whether the Complainant proves that the Opposite Party bank committed deficiency in service? (ii) If so, whether the Complainant is entitled for the reliefs claimed? (iii) What order?

Claimants response:

In support of the complaint, Mr.Abdul Rahiman (CW1) filed affidavit reiterating what has been stated in the complaint and answered the interrogatories served on him. Ex C1 and C2 were marked for the Complainant as listed in the annexure. One Mr.Mathew Moraes (RW1), Chief Manager and Authorized Officer of the Opposite Party Bank filed counter affidavit and answered the interrogatories served on him. Ex R1 to R38 were marked for the Opposite Party as listed in the annexure. The Complainant produced notes of arguments along with Securitization Act. We have considered the notes/oral arguments submitted by the learned counsels and also considered the materials that was placed before the Hon'ble Forum and answer the points are as follows:

The facts which are not in dispute before the FORA is that,
36

Accepted Facts:
LOAN:

The Complainant Abdul Rahiman was sanctioned term loan of Rs.8.00 lakhs on 22.9.2004 for acquiring the shop premises and the loan was disbursed on 23.9.2004 (as per Ex R36). The Complainant also availed Rs.6.43 lakhs from out of term loan of Rs.8.00 lakhs sanctioned. The Complainant was also sanctioned cash credit limit of Rs.5.00 lakhs on 22.9.2004 for the purpose of textile business and the Complainant availed credit cash limit on 27.9.2004. It is also undisputed fact that the Complainant along with Ayesha was also sanctioned housing loan of Rs.6.80 lakhs on 14.7.2004 and the housing loan was availed by him on 16.7.2004.

Tenant- Mr. Ramla.

It is admitted that one Mr.Ramla, the owner of the shop premises held by the Complainant on lease, stood as guarantor for the credit facilities i.e., term loan of Rs.8,00,000/- and Credit Cash limit of Rs.5,00,000/extended by the Opposite Party bank to the Complainant. The said Mr.Ramla, besides standing guarantor for the credit facilities extended to the Complainant, created/extended the mortgage of immovable property including the shop premises held by the Complainant on lease from Mr.Ramla in favour of the Opposite Party bank to secure credit facility extended to Ramla. The said Ramla availed credit facility against the mortgage of immovable property on which the building comprising of shops/premises, including the shop premises purchased by the Complainant from Mr.Ramla and the shop premises held by the Complainant on lease from
37

Mr.Ramla. It is further not disputed that the loans/cash credit facilities availed by the Complainant became non-performing assets on 5.11.2005 due to non-payment of installments in the term loan and housing loan accounts.

Point in dispute between the parties:

Now the point in dispute between the parties are that though admitted by the Complainant that he was irregular in payment and there was a due on the loans/cash credit facilities availed by him, he is contended that the seizure of the properties by the Opposite Party bank is not in accordance with the provisions of the Securitization Act, the seizure is illegal.

Documents and Evidence:

On going through the evidence led by the parties and the documents produced by the Complainant as well as the Opposite Parties, we find that, the Complainant admitted that he had availed term loan of Rs.8,00,000/- and cash credit limit of Rs.5,00,000/- and housing loan of Rs.6.80 lakhs and also admitted that initially the Complainant was paying the installments due to the Opposite Party bank towards the loan account and subsequently during the off season in the textile business the Complainant was not able to pay the loan installments due to the Opposite Party bank. Under such circumstances, no doubt the Opposite Party bank has initiated the recovery proceedings against the Complainant in this case. Now the point for consideration is that whether the Opposite Party bank unauthorizedly and without following the statutory procedure laid under the Securitization Act seized the properties and caused loss to the
38

Complainant? The answer is No. Because in the given case, the documents reveals that the loans/cash credit facilities availed by the Complainant became non-performing assets on 5.11.2005 due to non-payment of the installments in the term loan and housing loan accounts and irregular transactions/non-satisfactory operation of Cash Credit Account. It could be seen that the authorized officer of the Opposite Party bank issued recall notice dated 23.1.2006 under Section 13(2) of the Securitization Act to the Complainant, who availed the term loan and cash credit facilities in the name of M/s.Apsara Super Bazar as its proprietor (as per Ex R1).

Notice: (actual fact about when which notices were given)

As could be seen from the endorsement made by the Complainant in the copy of the notice, the said notice was received by the Complainant on 24.1.2006. It is further seen that on the same day i.e., on 23.1.2006 the Opposite Party bank issued recall notice dated 23.1.2006 under Section 13(2) of the Securitization Act in respect of the housing loan availed by the Complainant and the said notice was also received by the Complainant on 24.1.2006 as could be seen from the endorsement made by the Complainant in the copy of the notice. Similarly one Mr.N. Ramla, who guaranteed the cash credit and term loan limits granted to the Complainant, was issued with the recall notice dated 23.1.2006 under Section 13(2) of the Securitization Act in respect of shop No.5.

As the Complainant and the guarantor failed to comply with the section 13(2) notices the authorized officer of the Opposite Party
39

bank took possession of the mortgaged security on 18.12.2006 and possession notice dated 18.12.2006 was issued by the Opposite Party bank to Mr.Abdul Rahiman i.e., the Complainant. Similarly, the possession notice dated 18.12.2006 was issued by the authorized officer of the Opposite Party bank to the Complainant and Ayesha. It could be seen that the Complainant thereafter addressed a letter dated 9.3.2007 (i.e., Ex R11) to the Opposite Party bank undertaking to clear the dues in respect of cash credit facilities, term loan and housing loan accounts, undertaking to pay Rs.4.75 lakhs in cash into his Cash Credit account before 20.03.2007 to clear the dues. It is further seen that the Complainant also undertook to pay Rs.2.75 lakhs into term loan and housing loan accounts before 27.3.2007 for regularizing the account, which have become NPA because it could be seen that the cheque for Rs.7.50 lakhs on Vijaya Bank, Vittal branch with the request not to present the same and that he would pay Rs.4.75 lakhs by cash by 20.3.2007 and Rs.2.75 lakhs in cash by 27.3.2007 in lieu of the cheque to clear the bank dues.

He also stated in his letter that otherwise you can initiate legal action and proceed further action under Securitization Act as per bank norms. However, it could be seen that the Complainant was totally failed to comply with his own commitment in the matter of payment is proved (as per Ex R11). In the given case, it is made us very clear that the Opposite Party bank deferred taking further action for enforcement of security on the representation given by the Complainant as discussed in the preceding paras. Since the Complainant failed to pay the dues no doubt the Opposite Party bank initiated recovery proceedings is proved. Further it
40

could be seen that before seizing the properties the authorized officer of the Opposite Party bank obtained necessary orders under Section 14 of the Securitization Act from Deputy Commissioner, D.K. Mangalore for taking actual possession (as per Ex R12 to R15). In the meantime, the Complainant issued a cheque dated 20.6.2008 for Rs.20,00,000/- towards the dues but the same was dishonoured for insufficiency of funds.

The content of complainant rejected:

Under such circumstances the contention of the Complainant that the property is seized in his absence cannot be accepted. Further we have noticed that a letter dated 18.8.2008 (i.e., Ex R19) addressed by the Opposite Party bank to M/s.Apsara Super bazaar of the Complainant to get the goods released by finding a suitable buyer or else bank would be constrained to take steps for sale of hypothecated goods in as-is-where-is condition at the risk and costs of the Complainant. The said notice was served on 19.8.2008 (i.e., Ex R20) on the Complainant. The postal acknowledgement i.e., Ex R20 confirms the same. However, it is significant to note that the Complainant failed to take steps to pay the dues or to get the goods released. It could be seen that the Opposite Party bank waited till 19.12.2008 (i.e., Ex R27) and issued a letter dated 19.12.2008 again informing the Complainant that Opposite Party bank cannot further defer the sale of hypothecated stocks.

Final analysis and judgment:

The above documentary evidence in volume made crystal clear that the Opposite Party bank took all the necessary procedure in accordance with
41

the Securitization Act and we do not find any lapse on the part of the Opposite Party bank. On the other hand, the Complainant himself being a defaulter failed to take proper steps either to settle the dues or to get the goods released. Under such circumstances, the Complainant cannot allege that the Opposite Party bank unauthorizedly seized the immovable properties. There is no credible available on record in order to substantiate the same. No Apart from the above, we have noticed in this case that the immovable secured assets belonging to the Complainant and guarantor Mr.Ramla were sold on 10.12.2008 in public auction (as per Ex R25 and R26). Meanwhile the Complainant filed appeal in ASA.400/2008 before the Debts Recovery Tribunal Bangalore under Section 17(1) of the Securitization Act to set aside the auction sale dated 10.12.2008 and also obtained an interim order dated 23.12.2008 (as per Ex R28) which reads thus: Interim stay of confirmation of sale, issuance of sale certificate etc. until further orders. The appellant is directed to deposit a sum of Rs.3.00 lakhs on or before 30.1.2009. The Opposite Party bank has been directed to appear before DRT on 31.1.2009. In view of the interim order of stay the Opposite Party bank has not taken further steps for executing sale certificate in respect of the immovable secured assets already sold and for the sale of immovable secured assets, the possession of which was taken by the Opposite Party bank.

Allegations proved wrong:

Under such circumstances, it is better for the Complainant to approach the Debts Recovery Tribunal Bangalore because the
42

subject matter is involved with regard to the recovery proceedings and the Complainant can very well put forward his grievances before the Debts Recovery Tribunal if the Opposite Party bank unauthorizedly seized the properties and which can be released by getting suitable order. But on the available record placed before us, nowhere reveals that the Opposite Party bank committed deficiency while seizing the movable or immovable properties. It cannot be contended that the textile materials that were lying in the shop premises continues to lye in the premises, consequent to taking possession of the hypothecated movables/stock in trade the Opposite Party bank made the textile materials un-saleable. Because immediately after taking possession of the movable/stock in trade the Complainant was informed by furnishing the copy of the inventories. The Complainant ought to have taken steps for releasing the goods either by paying the goods or by getting suitable buyers for the same. As the Complainant failed to take steps to get the movables released the Opposite Party bank issued notice dated 19.12.2008 (as per Ex R27) calling upon the Complainant to get the hypothecated stocks/movables. We do not find any lapses on the part of the Opposite Party bank.

In view of the aforesaid discussions, we are of the considered opinion that whatever the movables and the immovables seized by the Opposite Party bank is
43

hypothecated/mortgaged to the Opposite Party bank under the above loans which could be seen in Ex R35, R36 i.e., the agreement of hypothecation of assets and agreement of term loan. Under the above documents the Complainant mortgaged all the movables, immovable and stock in trade recovered by the Opposite Party bank. There is no lapse on the part of the Opposite Party bank. On overall discussion of the above points, we hold that the Opposite Party bank conducted the recovery proceedings under Section 13(2) of the Securitization Act is in accordance with the provisions contemplated under the above Act. We do not find any deficiency on the part of the Opposite Party bank officials while dealing with the recovery proceedings. The Opposite Party bank has justified before us that the recovery proceedings initiated by the bank as per the statutory procedure contemplated under the SARFAESI Act.

Primary data

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STATISTICS OF THE RECOVERY BY THE DEBT RECOVERY TRIBUNAL:-

A total number of 37 pending cases under the Securitization Act were taken up.

Those 37 cases had appeals filed under Sarfaesi Act involving a claim amount of about Rs 62 crore.

Out of the amount settled (amt. recovered & Payable) Inception of the Act and its status

45

5.43 crore is payable by defaulters

Rs 4.12 crore was recovered

Questionnaire for Banks

Q. 1: Is SARFAESI Act applied in your bank?

46

Q. 2: On which type of Defaulters is this Act more imposed on?

For Bank of Maharashtra, Corporation Bank, Union Bank:

For Syndicate Bank and Canara Bank:

Q.

2.2 If Companies, then which type of companies?

Bank of Maharashtra

Manufacturin

Canara Bank

Industrial

Corporation Bank, Syndicate Bank,

Irrespective of the type of the Company

47

Irrespective of the type of the

Q. 3. Did u take any steps for reducing the defaulters? All the banks take steps for reducing the number of defaulters.

Q. 4. Approximately how many cases are there in a year?

Q. 5.How much amount has been recovered in the last 5 years?

48

Q. 6. What is the time duration required for the recovery of dues through SARFAESI?

Q. 7. What is the level of risk involved in its implementation?

VERY LOW

MODERATE

HIGH

VERY HIGH

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Bank of Maharash

Canara Bank, Corporation Bank Syndicate Bank Union Bank

Q. 8. Has your Bank used any other method of recovery? All the banks have used other methods of recovery.

Q. 8.1 If yes then which one is preffered more ?

50

Recover y through

Debt Recovery

Civil Courts

Others

Q. 9. Do you keep any percentage of reserve for such recovery procedure ?

Corporation Bank : YES Bank of Maharashtra, Canara Bank, Corporation Bank, Syndicate Bank, : No.

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Q. 10. How much amount do you spend on such recovery ?

Q. 11. How do you manage the amount which is not recovered ?

Bank of Maharashtra, Corporation Bank, Syndicate Bank, Union Bank : Write-off. Canara Bank : Other. Corporation Bank : Already reserves are maintained.
52

Q. 12. How do you find the process to be ?

Corporat ion Bank

Canara Bank Union Bank

Routi

Syndicat e Bank

Tediou

Bank of Maharashtra

Simpl
Q. 13. Do you do any planning or preparation before implementing the Act in a particular instance?

14. 15. 16.

17.Q. 14. Is there any Government intervention?

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YE

X NO

Bank of Maharashtra Canara Bank Corporation Bank Syndicate Bank Union Bank
18. 19. 20. 21.
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22.Q. 15. Has this Acts implementation been successful in your

Bank? The Acts Implementation has been successful in all the banks.

23.Q. 16. Do you think there should be any amendments or

changes in the Act for your benefit?

Sr No. 1. 2. 3. 4. 5.

Name of the Bank Bank of Maharashtra Canara Bank Corporation Bank Syndicate Bank Union Bank

Yes / No NO YES NO YES YES

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QUESTIONNAIRE FOR CUSTOMERS:

1. Are you : An individual Sole proprietor Partnership concern Company Other. 2. Have you availed of any loan facility?

Individual

Sole Proprietor

Partnership Concern

Company

Other

All the people have availed of the loan facility.

3. Which type of loan? Individual:

Sole Proprietor:
Housing Loan

Partnership Concern:

Car Loan Personal Loans

Company:
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 Other:

Other

1. Did you provide for any security? 90% answered as yes. However those who didnt answer as Yes, they are just not aware that they must have indeed provided for some security. 2. What will the bank do in case of default in payments?

3. Do you know under which provision or Act can the Bank take away your secured assets?

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SARFAESI ACT, 2002 : In favor of Banks largely, than the borrowers!

Securitization is a kind of agreement between Securitization Company / Reconstruction Company with the Originator (Banks/ Financial Institutions) where in Originator transfer the Financial Assets (FA: Loans given/ Debtors) to the S Co./ R Co aka SPV. These S Co. / R Co. Sell these FA as security to the investors. After the transfer of the FA to the S Co. / R Co. the Originator sends Notice to the Obligor (in the simple words Debtors of the bank who has taken loan etc) and after this the Obligor have to pay the installments etc to the S Co./ R Co. instead of the Bank/ Fin. Institute. Enforcement of Security Interest is more with which a common person may be affected.

My View :
This Act has been enacted keeping in mind the interest of Banks/ Financial Institutions. This Act gives immense power to the secured creditors. Practically, this may be harsh from Borrowers point of view.

Reason, why I feel so:

If the banks have classified the account as NPA (i.e. is installments overdue for 90 days or more) Bank will serve Demand Notice to the borrower to pay full amount within 60 Days. If the borrower doesn't pay, then Secured Creditor can proceed to take Possession of Secured Asset.
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Moreover if the borrower is running a company/business then Secured Creditor can acquire the Company also.

The Right to make representation/ Objection is given to the Borrower But it is Kind of Formality. As per the act the power to decide whether the objection is tenable. Do you think Bank will listen the Objection? Also, the bank's action is taken by the executives (may be Loan/ Credit manager who are under tremendous pressure to meet the target of recovery/ grant of loan) my question is how effective this right of representation is? Practical difficulties faced by borrower, specifically by Individuals who have taken Home loans and have hypothecated/ mortgaged the Flat with Bank- the bank thus becomes secured creditor : In order to meet the Loan Target, the Loan manager miscalculate/ incorrectly assesses the value of property or worthiness or Ability of borrower to Repay and gives him loan over his requirement, keeping in mind the Enforcement of Security Interest in case borrower does not pay the three Installments (after which an Account is classified as NPA by Bank).

Non-payment may be due to any Reason (take an instance, where the borrower has gone Abroad for 6 months or more and the bank from where he was paying the installments freeze the account because there is new guideline from the RBI or other authority like KYC which the customer has to confirm else the accounts operation will be frozen whereas the account holder is not in India he tried but could not restore the account in 2-3 months due to which he is declared defaulter by the Secured Creditor). Then Bank has all right to serve Demand Notice and ask to pay full amount in 60
59

days (almost 2 months) failure to pay will lead to possession of property.

The Bank has right to Take the Possession and Recover the amount and not only this But if in the opinion of the bank there are some cost incurred and allied/ incidental expenses then those can also be Recovered may be by disposal of secured assets or by demanding from Borrower. If Borrower is not able to Pay then the guarantor has to pay it.

The only thing is if Borrower pays the Entire money even at the Last moment of Auction/ Sale of property, which in the "opinion" Bank satisfies, its claim, his property must be returned to him. Act Says Borrower can make appeal to the DRT: But BEFORE that he has to DEPOSIT at least 3/4th of the outstanding amount. This is discouraging section from Borrowers point of view. Because it may so happen that borrower has so much of amount but he will receive that amount say after 60 day or He arranged the amount of 75% outstanding on the 50th day from the order of enforcement of security by bank then on 50th day he has 75% of amount but can not appeal as the time to appeal is 45 days.

Ultimately, Securitization is one of the key reasons for the Recent Financial Turmoil/ Recession. Granting of loan on overpriced security then later on those Loans were transferred to Securitization Company (SPV/ SPE) who sold it further by way of Security. Whereas the Borrowers / Obligors were not able to pay the loan and since the secured assets were overpriced the SPV/SPE could not realize money from the Sale of secured Asset causing Huge Loss and this happened in
60

such a large Volume that it landed many bank to Bankruptcy.

ANNEXURE:
Questionnaire: (Banks)
1. Is SARFAESI Act procedure applied in your Bank? Yes No 2. (1) on which type of Defaulters is this Act more imposed on? Proprietary concern Individuals Partnership firms Private businessmen Companies (2) What are the Defaulter companies? Industrial Cosmetic Manufacturing Irrespective of the type of company. 3. Do you take any steps for reducing the defaulters? Yes No 4. Approximately how many cases are there in a year?
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 1-5 6-10 11-15 More than 15. 5. What is the level of risk involved in its implementation? Very low Moderate High

Very high

6. How much amount is recovered in the last five years? 1lakh-5lakh 6lakh-10lakh 11lakh-15lakh More than 15lakh. 7. (1) has your bank used any other method of recovery? Yes No (2) If yes which one is preferred more?

Recovery through debt recovery tribunals. Application under SARFAESI Act. Recovery through Civil Courts.

Criminal Proceedings. Other. 8. Do you keep any percentage of reserve for such recovery procedure?
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 Yes No

9. How much amount do you spend on such recovery? Less than 1lakh More than 1lakh 10. What is the time duration required for the recovery of dues through SARFAESI? Less than 1 year 1-3 years 4-6 years More than 6 years. 11. How do you manage the amount which is not recovered? Write-off Already reserves are maintained Other 12. How do you find the process to be? Tedious Simple Routine 13. Do you do any planning or preparation before implementing the Act in a particular instance?
63

 Yes No 14. Is there any Government intervention? Yes No 15. Has this Acts implementation been successful? Yes No 16. Do you think there should be certain amendments or changes to the Act for your benefit? Yes No

Questionnaire: (Customer)
1. You are: An individual. Sole Proprietor. Partnership concern. Company. Other. 1. Have you availed any loan facility from the Bank? Yes. No.
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1. Which type of loan? Housing loans. Car loans. Personal loans. Other.

1. Did you provide for any security for the loan? Yes. No (1)If yes, Then what security have you provided for? Ans. ___________________________________

1. What will the bank do in case of default in payments? The Bank concerned has the right to take away my secured assets. It will give me an extension period. The bank has no right to do anything against me. Other.

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1. Do you know under which provision or Act can the Bank take away your secured assets?

Yes, it is under __________________________Act.

No, I dont know. Not sure.

BIBLIOGRAPHY:
1)

Law Relating To Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. (Along with Allied Acts and Rules). Author: - Joshi.

2)

Corporate Laws and Laws Governing Capital Markets. Author: - Suman kalani.

3) Financial Services Management. Author: - Dipak Abhyankar. 4) The Reserve Bank of India website. 5) Maharashtra Law Journal. (for Case Study)

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