SARFAESI Act stands for, ‘Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.’ 

SARFAESI Act –

• The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, more commonly known by its shorter name SARFAESI Act, is a legislation that allows banks and other financial organizations to recover bad loans effectively.
• The act can be utilized to tackle the problem of Non-Performing Assets (NPAs) through different procedures. However, this is possible only for secured loans. For unsecured loans, banks should move the court to file a civil case of defaulting.
• This act makes court’s intervention unnecessary in case of secured loans. The first asset reconstruction company (ARC) of India, ARCIL, was set up under this act.

Note on SARFAESI Act

Through the SARFAESI Act, secured creditors (banks or financial institutions) have many rights for enforcement of security interest under section 13 of this act. If the borrower of financial assistance makes any default in repayment of a loan or any instalment and his account is classified as Non-performing Asset by secured creditor, then secured creditor may require before expiry of period of limitation by written notice to the borrower for repayment of due in full within 60 days by clearly stating amount due and intention for enforcement.

Basically, the SARFAESI Act empowers financial institutions to ‘seize and desist’. They should give a notice to the defaulting borrower asking to repay the amount within 60 days. 

If the debtor doesn’t comply, the bank can resort to one of the three following measures:

1. Take the possession of the loan security.
2. Sell or lease or assign the right over the security.
3. Manage the asset or appoint someone to manage the same.

The Act also provides for the establishment of Asset Reconstruction Companies (ARCs) to acquire assets from banks and other financial institutions. ARCs are regulated by the RBI.