In one sentence
The SARFAESI Act, 2002 — the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act — lets banks and notified financial institutions enforce security for a non-performing secured loan without going to court: a 60-day demand notice under Section 13(2), possession under Section 13(4), a magistrate's order under Section 14 where needed, and sale, with the borrower's challenge going to the Debt Recovery Tribunal under Section 17.
Key takeaways
- SARFAESI stands for the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
- It applies only to secured debts of accounts classified as non-performing assets, and not to agricultural land, debts below ₹1 lakh, or cases where less than 20% of the principal and interest is outstanding.
- Enforcement starts with a Section 13(2) notice giving the borrower 60 days to pay. Possession under Section 13(4) follows, then sale.
- The borrower can object to the notice, redeem the asset by paying in full before the auction notice is published, and challenge any measure before the Debt Recovery Tribunal within 45 days.
- The lender's authorised officer takes every step. Civil courts cannot hear disputes the Tribunal can decide (Section 34).
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What is the SARFAESI Act?
SARFAESI stands for the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. It does three things: it lets banks sell loans to asset reconstruction companies, it regulates those companies, and, in the part most people mean, it lets a secured lender enforce its security without first going to court. Before it, a lender had to sue and wait for a decree. The Supreme Court upheld the Act in Mardia Chemicals v. Union of India (2004), and in doing so gave the borrower the right to object to the demand, which the Act now contains in Section 13(3A).
Who can use it, and when?
Banks, including co-operative banks, financial institutions notified by the government, housing finance companies and asset reconstruction companies. A non-banking finance company can use it if it has assets of ₹100 crore or more, and only for secured debts of ₹20 lakh or more, under the Ministry of Finance notifications of 2020 and 2021.
The account must be classified as a non-performing asset under the Reserve Bank of India's rules, and the debt must be secured. Section 31 excludes agricultural land, debts below ₹1 lakh, and cases where the amount due is less than 20% of the principal and interest.
Section 13(2): the demand notice
Enforcement starts with a written notice from the lender's authorised officer requiring the borrower to pay the full dues within 60 days. It must state the amount and identify the secured assets. The rules require it to be served by hand, post, courier, email or, where the borrower cannot be found, by affixing it on the property and publishing it in newspapers.
The borrower can object in writing (Section 13(3A)). If the lender does not accept the objection, it must reply within 15 days with its reasons. The reply does not give the borrower a separate right of appeal at that stage.
Section 13(4): taking possession
If the borrower does not pay within 60 days, the lender can take possession of the secured asset, take over the management of the business, appoint a manager, or require people who owe the borrower money to pay the lender instead. Possession is usually taken first as symbolic possession: the authorised officer delivers a possession notice, affixes it on the property and publishes it in two leading newspapers, one in the local language (Rule 8).
Section 14: the magistrate's order
If the borrower will not hand over the property, the lender applies to the Chief Metropolitan Magistrate or District Magistrate, with an affidavit from its authorised officer. The magistrate is to pass the order within 30 days, extendable to 60 days in total for reasons recorded in writing, and may appoint an officer or an advocate commissioner to take physical possession, with police assistance where needed.
The sale
The authorised officer has the property valued by an approved valuer, fixes a reserve price and sells it by public auction, tender or private treaty. The borrower must be given 30 days' notice of the sale (Rules 8(6) and 9(1)). The authorised officer confirms the sale and issues a sale certificate to the buyer. Anything left after the lender's dues and costs belongs to the borrower.
Section 13(8): the borrower's right to redeem
The borrower can stop the sale by paying the full dues with costs and charges at any time before the notice of public auction or tender is published. After that, the right to redeem the asset is lost.
Sections 17 and 18: appeals
Anyone aggrieved by a measure under Section 13(4), including the borrower or a guarantor, can apply to the Debt Recovery Tribunal within 45 days of the measure (Section 17). An appeal from the Tribunal goes to the Debt Recovery Appellate Tribunal (Section 18), and the borrower must first deposit 50% of the debt, which the appellate tribunal may reduce to 25%.
Section 34: no civil court
Civil courts cannot hear matters the Debt Recovery Tribunal can decide under the Act, and cannot grant injunctions against action taken under it. A challenge to a SARFAESI measure goes to the Tribunal.
Where Kenstone Capital fits
Kenstone Capital is empanelled with 31 banks and financial institutions and supports their authorised officers through the whole process: serving the demand notice, possession notices and publication, the Section 14 application with the lender's advocate, physical possession, the sale notice, and the sale through Kenstone Auctiondunia. Every step is tracked on our case management platform. The authorised officer takes every statutory decision, and borrowers pay the lender directly. The group's enforcement work began in 2004 with KC Agency. See SARFAESI enforcement services.
Sources and regulation
| Instrument | What it does | Source |
|---|---|---|
| SARFAESI Act, 2002 — Sections 2, 13 and 31 | Definitions; enforcement of security interest; exclusions | indiacode.nic.in |
| SARFAESI Act — Section 14 | Assistance of the Chief Metropolitan Magistrate or District Magistrate; 30 and 60 days | indiacode.nic.in |
| SARFAESI Act — Sections 17, 18 and 34 | Application to the DRT; appeal to the DRAT and pre-deposit; bar on civil courts | indiacode.nic.in |
| Security Interest (Enforcement) Rules, 2002 — Rules 3, 8 and 9 | Service of notices; possession notice; valuation, sale notice and sale | indiacode.nic.in |
| Ministry of Finance notifications S.O. 856(E) (2020) and S.O. 652(E) (2021) | NBFCs with assets of ₹100 crore or more, for debts of ₹20 lakh or more | egazette.gov.in |
| Mardia Chemicals v. Union of India (Supreme Court, 2004) | The Act upheld; the borrower's right to object | sci.gov.in |
| Pandurang Ganpati Chaugule v. Vishwasrao Patil Murgud Sahakari Bank (Supreme Court, 2020) | Co-operative banks may use the Act | sci.gov.in |
This guide describes the Act and the rules as generally understood at the time of writing. It is not legal advice; a borrower or lender with a specific case should take advice from an advocate.
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