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SARFAESI ACT, 2002- Applicability, Objectives, Process, Documentation

By Mayashree Acharya

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Updated on: Aug 7th, 2025

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6 min read

The SARFAESI Act, 2002 empowers Indian banks and financial institutions to recover secured loan dues without court involvement. It is a key tool for managing non-performing assets (NPAs). 

This article will guide you through the Act’s meaning, objectives, recovery process, borrower rights, and latest amendments in a clear and actionable format.

SARFAESI Act Highlights

Feature

Details

Full Form

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act

Applicable To

Secured loans 

Applies When

A loan becomes an NPA and remains unpaid for 60+ days

Enables Banks To

Seize, manage, or sell secured assets without court

Not Applicable On

Agricultural land, loans below ₹1 lakh, partially repaid loans (80%+)

Appeal Process

Borrowers can approach Debt Recovery Tribunal (DRT) under Section 17

What is the SARFAESI Act, 2002?

The SARFAESI Act, or Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, empowers banks and financial institutions to recover non-performing assets (NPAs) without court intervention. If a borrower defaults on a secured loan, the lender can seize and auction residential or commercial properties pledged as security, except agricultural land, which is exempt.

The Act applies only to secured loans backed by assets such as mortgages, pledges, or hypothecation. For unsecured loans, banks must approach the civil courts to initiate recovery.

By streamlining the asset recovery process, SARFAESI helps reduce delays in handling defaults and improves overall credit discipline in the financial system.

Why was the SARFAESI Act Introduced?

The SARFAESI Act, 2002 was introduced to provide a legal framework for the securitization and reconstruction of financial assets, and for the enforcement of security interests by banks and financial institutions. It was designed to facilitate faster recovery of loans and reduce the burden of non-performing assets (NPAs). The Act extends to the entire country and covers all matters related to or incidental to its main objectives.

In 2016, the SARFAESI Act was amended through the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016. This amendment aimed to strengthen the recovery process and improve the legal framework for debt resolution.

The 2016 amendment impacted four key legislations:

  • The SARFAESI Act, 2002
  • The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI)
  • The Indian Stamp Act, 1899
  • The Depositories Act, 1996

These amendments were made to streamline asset recovery procedures and enhance the effectiveness of secured lending in India.

Objectives of SARFAESI Act, 2002

  • Efficient or rapid recovery of non-performing assets (NPAs) of the banks and FIs.
  • Allows banks and financial institutions to auction properties (say, commercial/residential) when the borrower fails to repay their loans.

Who Does the SARFAESI Act Apply To?

The SARFAESI Act, 2002 applies primarily to banks, financial institutions, and Asset Reconstruction Companies (ARCs). Below is a simplified overview of its scope:

1. Banks and Financial Institutions

  • Can enforce secured loans without court intervention.
  • Must classify borrower accounts as Non-Performing Assets (NPAs) as per RBI guidelines.
  • Can appeal to the Debts Recovery Tribunal (DRT) and Appellate Tribunal if challenged.

2. Asset Reconstruction Companies (ARCs)

  • Must be registered with the Reserve Bank of India (RBI).
  • Can acquire financial assets from banks and issue security receipts to qualified buyers.
  • Allowed to restructure assets, change management, or enforce security interests.
  • Recognized as Public Financial Institutions under this Act.

3. Central Government Powers

  • Can set up a Central Registry for transactions involving securitization or asset reconstruction.
  • May extend the Act’s provisions to Non-Banking Financial Companies (NBFCs) and other entities.

4. Scope Limitations
The Act does not apply to:

  • Agricultural land
  • Loans under ₹1 lakh
  • Cases where 80% of the loan has already been repaid

Role of SARFAESI Act, 2002

Roles of Sarfaesi act 2002

How SARFAESI Act, 2002 Works?

SARFAESI Act, 2002 provides power to a bank or financial institution to seize the property of a defaulting borrower. If the loan borrowers make any default in repayment of a loan or a loan installment, the financial institution can classify the account as Non-Performing Asset (NPA). 

The banks or financial institution can issue notices to the defaulting borrowers to discharge their liabilities within 60 days period. When the defaulting borrower fails to comply with the bank or financial institution notice, then the SARFAESI Act gives the following recourse to a bank:

  • Take possession of the loan security 
  • Lease, sell or assign the right to the security
  • Manage the same or appoint any person to manage the same.

The Act also provides for the establishment of ARCs, regulated by the RBI, to acquire assets from banks and other financial institutions.

The process of SARFAESI Act

Right of Borrower Under SARFAESI Act, 2002

The borrowers have the following rights:

  • Borrowers can remit the dues and avoid losing their securities before the sale is concluded.
  • Borrowers will get compensation for the default of an officer.
  • SARFAESI Act Section 17 provides that borrowers can approach the Debt Recovery Tribunal to rectify their grievances against the creditor or authorised officer.

Amendments to the SARFAESI Act, 2002

The Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2016 provided amendments for the SARFAESI Act, which are as follows:

  • The banks and Asset Reconstruction Companies (ARCs) should have the power to transfer any part of the debt of the defaulting company into equity. Such a translation would indicate that lenders or ARCs would become equity holders, instead of the creditor of the company.
  • Banks may request any immovable property set out for auction by themselves if they do not receive any request during the auction. In such a case, banks will be capable of adjusting the debt with the amount paid for this property. It allows the bank to secure the asset in partial fulfilment of the defaulted loan amount.
  • Banks can also sell this property to a new person by asking him/her to remit these debts entirely over a period of time. 

Methods of Recovery Under SARFAESI Act, 2002

The SARFAESI Act provides the following three methods of recovery of the Non-Performing Assets (NPAs):

Securitisation

  • Securitisation is the process of issuing marketable securities backed by a pool of existing assets such as home or auto loans. An asset can be sold after it is converted into a marketable security. 
  • A securitisation or asset reconstruction company can raise funds from only the Qualified Institutional Buyers (QIBs) by forming schemes for acquiring financial assets. 

Asset Reconstruction

  • Asset reconstruction empowers asset reconstruction companies. 
  • It can be done by managing the borrower’s business by selling or acquiring it or by rescheduling payments of debt payable by the borrower as per the provisions of the Act.

Enforcement of security without the interruption of the court

  • The Act empowers banks and financial institutions to issue notices to individuals who have obtained a secured asset from the borrower for paying the due amount and claim to a borrower’s debtor to pay the sum due to the borrower.

Assets Not Covered Under SARFAESI Act, 2002

The SARFAESI Act does not cover the following assets:

  • Money or security issued under the Sale of Goods Act, 1930 or Indian Contract Act, 1872.
  • Any lease, hire-purchase, conditional sale, or any other contract where no security interest has been created.
  • Any rights of the unpaid seller under Section 47 of the Sale of Goods Act, 1930.
  • Any properties which are not liable for sale or attachment under Section 60 of the Code of Civil Procedure, 1908..

Frequently Asked Questions

What assets are covered under the SARFAESI Act?

Any asset, i.e. movable or immovable, given as security by way of hypothecation, mortgage, or creation of a security interest in any other form except those excluded under Section 31 of the Act are covered under the SARFAESI Act.

Is SARFAESI Act applicable to NBFCs (Non-Banking Financial Companies)?

The Ministry of Finance, vide its notification dated 24th February 2020, notified that the NBFCs with asset size of Rs.100 crore or more are eligible NBFCs that are covered under the SARFAESI Act to enforce security interest on debts amounting to at least Rs.50 lakh.

Which loans are not covered under SARFAESI Act?

The provisions of this Act apply to outstanding loans above Rs.1 lakh, which are classified as NPAs. The SARFAESI Act isn’t applicable for:

  • The NPA loan accounts amounting to less than 20% of the principal and interest.
  • Money or security issued under the Indian Contract Act or the Sale of Goods Act, 1930.
  • Any rights of the unpaid seller under Section 47 of the Sale of Goods Act, 1930.
  • Any conditional hire-purchase, sale, lease or any other contract in which no security interest has been created.
  • Any properties that are not liable to attachment or sale under Section 60 of the Code of Civil Procedure, 1908.
What are the modes of recovery under the SARFAESI Act?

The Act provides for three methods of recovery of the NPAs, which includes:

  • Securitisation
  • Asset reconstruction
  • Enforcement of security without the interruption of the court
Do cooperative banks come under the SARFAESI Act?

Yes. The Supreme Court held that cooperative banks established under State law or multi-State level societies come within the ambit of the SARFAESI Act, 2002.

What is the minimum amount under SARFAESI Act?

The SARFAESI Act, 2002 applies to secured loans with a minimum outstanding amount of Rs. 1 lakh that are classified as Non-Performing Assets (NPAs). 

What are the SARFAESI Act 2002 rules?

SARFAESI Act, 2002 gives power to a bank or financial institution to seize the property of a defaulting borrower classified as Non-Performing Asset (NPA). The banks or financial institution can issue notices to the defaulting borrowers to discharge their liabilities within 60 days period. When the defaulting borrower fails to comply with the bank or financial institution notice, then they can take possession of the loan security, lease/ sell/ assign the right to the security or manage the same.

What is SARFAESI Act 2002 procedure?

The SARFAESI Act, 2002 allows banks and financial institutions to recover loans from borrowers without court intervention by seizing and selling secured assets. Where a loan is declared as a Non-Performing Asset (NPA), the bank or financial institution will send a notice to the borrower to discharge their liabilities within 60 days. If the borrower fails to repay the dues, the bank or financial institution can take possession of the secured asset (property) and can be sold or auctioned to recover the outstanding debt.

What is the SARFAESI Act primarily used for?

 The SARFAESI Act is used by banks and financial institutions to recover secured loans by enforcing security interests, such as mortgaged or hypothecated properties, without court involvement.

Who is eligible to act under the SARFAESI Act?

Scheduled commercial banks, financial institutions, and Asset Reconstruction Companies (ARCs) registered with the Reserve Bank of India (RBI) can take action under this Act.

Can borrowers defend themselves under the SARFAESI Act?

 Yes. Borrowers can file an appeal with the Debt Recovery Tribunal (DRT) within 45 days of receiving a notice under Section 13(2).

Is agricultural land protected under the SARFAESI Act?

 Yes. The Act does not permit the enforcement of security interests on agricultural land.

What happens during the 60-day notice period under SARFAESI?

 Borrowers have 60 days to repay their outstanding dues after receiving a notice. If repayment is made in full, no further recovery action is taken.

How does the SARFAESI Act help reduce NPAs?

 By allowing lenders to enforce security interests without lengthy court procedures, the Act helps speed up recovery and reduce the burden of non-performing assets (NPAs).

What are security receipts under SARFAESI?

 Security receipts are instruments issued by Asset Reconstruction Companies to qualified buyers, representing their investment in acquired financial assets.

Can actions under SARFAESI be challenged?

 Yes. If a borrower believes the lender’s actions are unjustified, they may approach the Debt Recovery Tribunal and, if necessary, the Appellate Tribunal.

About the Author
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Mayashree Acharya

Senior Content Writer
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I am an advocate by profession and have a keen interest in writing. I write articles in various categories, from legal, business, personal finance, and investments to government schemes. I put words in a simplified manner and write easy-to-understand articles. Read more

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