**Executive Summary:**
This document is the Indian government's response to questions regarding the misuse of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 by banks and NBFCs. It addresses concerns about wrongful NPA classifications, violations of borrower rights, coercive recovery measures, and the need for stronger safeguards. The response outlines existing regulations, guidelines, and safeguards under the SARFAESI Act and RBI directives aimed at ensuring fair enforcement and regulatory oversight.
**Key Points / Main Content:**
* **SARFAESI Act Administration and Thresholds:**
* The Central Government administers the SARFAESI Act, enabling banks and financial institutions to recover dues by enforcing security interests without court intervention.
* Specified threshold for banks is Rs. 1 lakh and for NBFCs (with assets of Rs. 100 crore & above), the threshold is Rs. 20 lakh.
* **Loan Recovery Policies and Borrower Rights:**
* Banks and NBFCs must have Board-approved loan recovery policies, guided by RBI guidelines. The government is not involved in these decisions.
* Sections 17 and 18 of the SARFAESI Act allows individuals/MSMEs to file a securitization application (SA) in a Debt Recovery Tribunal (DRT) against actions by a secured creditor.
* DRT decisions can be challenged in the Debts Recovery Appellate Tribunal (DRAT).
* **NPA Classification and Compliance:**
* Banks and NBFCs must follow RBI's Prudential norms on Income Recognition, Asset Classification and Provisioning when classifying loans as Non-Performing Assets (NPAs).
* RBI examines compliance with SARFAESI Act provisions during supervisory assessments, addressing non-compliance with concerned institutions.
* **Fair Practices Code for NBFCs:**
* NBFCs must furnish borrowers with a copy of the loan agreement and enclosures at the time of loan sanction/disbursement, as per RBI's Master Directions on Fair Practices Code (1.7.2015).
* Regulated entities, including NBFCs, must not resort to intimidation, harassment, or other inappropriate debt collection methods.
* **Possession of Secured Assets:**
* Under Section 14 of SARFAESI Act, banks/financial institutions apply to the Chief Metropolitan Magistrate (CMM) or District Magistrate (DM) for asset possession.
* The Authorized Officer must furnish a duly affirmed affidavit to CMM/DM, including details on the loan, security interest, default, compliance with SARFAESI Act, and responses to borrower objections.
* **One-Time Settlement (OTS) Options:**
* Regulated Entities (REs) must have a Board-approved policy for compromise settlements, per RBI guidelines dated 8.6.2023.
* The objective is to maximize recovery from distressed borrowers at minimum expense, in the best interest of the RE.
* **Safeguards and Regulatory Oversight:**
* The SARFAESI Act and associated rules provide safeguards for fair enforcement and regulatory oversight.
* Section 19 of the SARFAESI Act allows borrowers to receive compensation and costs if a court/tribunal determines possession of secured assets was not in accordance with the Act.
**Impact Analysis:**
* **Banks and Financial Institutions/NBFCs:**
* *Impact:* Required to adhere to SARFAESI Act provisions, RBI guidelines, and Board-approved policies for loan recovery and NPA classification.
* *Action Required:* Ensure compliance with fair practices in debt recovery, proper documentation, and implementation of OTS policies.
* **Borrowers (including MSMEs):**
* *Impact:* Protected by safeguards under SARFAESI Act, including the right to appeal to DRT/DRAT and receive compensation for wrongful asset possession.
* *Action Required:* Be aware of their rights, understand loan terms, and utilize available legal recourse if necessary.
* **Reserve Bank of India (RBI):**
* *Impact:* Responsible for supervising compliance with SARFAESI Act provisions and guidelines by banks and NBFCs.
* *Action Required:* Continue monitoring and enforcing regulations, conducting supervisory assessments, and addressing non-compliance issues.
* **District Magistrates (DMs) / Chief Metropolitan Magistrates (CMMs):**
* *Impact:* Play a role in the process of taking possession of secured assets under Section 14 of the SARFAESI Act.
* *Action Required:* Scrutinize affidavits submitted by authorized officers to ensure compliance with the provisions of the Act.
Key Entities Referenced
SARFAESI Act, 2002: Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, a law enabling banks and financial institutions to recover dues by enforcing security interests.
Reserve Bank of India RBI: The central bank of India, responsible for regulating banks and NBFCs.
MSMEs: Micro, Small and Medium Enterprises, a sector of the Indian economy.
NBFCs: Non-Banking Financial Companies, financial institutions that provide banking services without holding a banking license.
District Magistrate: An administrative officer responsible for a district, tasked with verifying compliance before granting possession under Section 14 of the SARFAESI Act.
One-Time Settlement OTS: A compromise settlement option offered to borrowers before initiating recovery proceedings.
Debt Recovery Tribunal DRT: A tribunal where a person, including an MSME, may file a securitization application against an action of a secured creditor under the SARFAESI Act.
Non Performing Assets NPA: Loans or advances where principal or interest payments are overdue for a specified period.
GOVERNMENT OF INDIA
MINISTRY OF FINANCE
DEPARTMENT OF FINANCIAL SERVICES
LOK SABHA
UNSTARRED QUESTION NO- 2329
ANSWERED ON MONDAY, AUGUST 4, 2025/ SRAVANA 13, 1947 (SAKA)
MISUSE OF SARFAESI ACT
2329. SHRI MANISH TEWARI:
ADV K. FRANCIS GEORGE:
Will the Minister of FINANCE be pleased to state:-
(a) whether the Government is aware of instances of misuse of the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act,
2002 by banks and NBFCs, particularly against MSMEs, including wrongful classification of
NPAs and violations of borrower rights;
(b) whether complaints have been received regarding NBFCs bypassing RBI and SARFAESI
guidelines while sanctioning property loans and resorting to coercive recovery measures and
if so, the details thereof;
(c) whether the Government proposes to mandate District Magistrates to verify compliance
with RBI norms and examine loan sanction documents before granting possession under
Section 14 of the Act;
(d) whether the Government intends to strengthen safeguards to ensure that borrowers are
offered a One-Time Settlement (OTS) option before initiation of recovery proceedings; and
(e) if so, the details of the measures being taken to ensure fair enforcement and regulatory
oversight under the SARFAESI Act?
ANSWER
THE MINISTER OF STATE IN THE MINISTRY OF FINANCE
(SHRI PANKAJ CHAUDHARY)
(a): Central Government administers the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security interest Act, 2002, (SARFAESI Act), which provides an
enabling legal framework for banks and financial institutions to recover their dues above a
specified threshold by enforcing their security interests without the intervention of the
court/tribunals. In case of banks, the specified threshold is Rs. 1 lakh and in case of NBFCs
having assets size of Rs. 100 crore and above, the threshold stands at Rs. 20 lakh. In terms of
Reserve Bank of India (RBI) guidelines, all banks and NBFCs are required to have in place a
Board-approved loan recovery policy and they are guided by the same for initiating any loan
recovery action. The Government is not involved in such decisions. Further, to safeguard
borrowers’ rights and to address their concerns, Sections 17 and 18 of the SARFAESI Actprovide that a person, including an MSME, may file a securitisation application (SA) in a
Debt Recovery Tribunal (DRT) against an action of a secured creditor under the SARFAESI
Act. Also, any decision of DRT can be challenged before the Debts Recovery Appellate
Tribunal (DRAT).
Furthermore, banks and NBFCs for classifying a loan account as Non Performing Assets
(NPA), are required to follow the RBI’s Prudential norms on Income Recognition, Asset
Classification and Provisioning pertaining to Advances.
Also, compliance to provisions of the SARFAESI Act by lenders is examined on sample
basis by RBI during the supervisory assessment, and any non-compliance observed are taken
up with the concerned Financial Institution/Bank/NBFC for rectification apart from
initiating supervisory/enforcement action.
(b): As per RBI’s Master Directions on Fair Practices Code dated 1.7.2015, NBFCs are
advised to furnish a copy of the loan agreement as understood by the borrower along with a
copy each of all enclosures quoted in the loan agreement to all the borrowers at the time of
sanction / disbursement of loans. Further, RBI has advised all regulated entities, including
NBFCs, to strictly ensure that they or their agents do not resort to intimidation or
harassment of any kind, either verbal or physical, against any person in their debt collection
efforts, including acts intended to humiliate publicly or intrude upon the privacy of the
debtors' family members, referees and friends, sending inappropriate messages either on
mobile or through social media, making threatening and/ or anonymous calls, persistently
calling the borrower and/ or calling the borrower before 8:00 a.m. and after 7:00 p.m. for
recovery of overdue loans and making false and misleading representations.
(c): In terms of the Section 14 of the SARFAESI Act, banks and financial institutions are
required to make application to the Chief Metropolitan Magistrate (CMM) or the District
Magistrate (DM) for taking possession of the secured assets. While making such application,
Authorised Officer of the secured creditor furnish a duly affirmed affidavit to CMM/DM.
Such affidavit includes declaration, inter alia, regarding loan amount, creation of security
interest, default in repayment, compliance with the provisions of the SARFAESI Act,
objection/representation received from the borrower and reasons for non-acceptance of the
same.
(d): In terms of RBI’s guidelines dated 8.6.2023, regulated entities (REs) are required to have
in place a Board-approved policy for undertaking any compromise settlement. The
guidelines also provide that the objective of compromise settlements is to maximise the
possible recovery from a distressed borrower at minimum expense, in the best interest of the
RE. REs take decision regarding compromise settlements based on the said policy.
(e): As mentioned at part (a) to (c), adequate safeguards have been provided under the
provisions of the SARFAESI Act and rules made thereunder, to ensure fair enforcement and
regulatory oversight. In addition, Section 19 of the SARFAESI Act provides for rights of a
borrower to receive compensation and cost, in case a court or tribunal holds that possession
of the secured assets is not in accordance with the provisions of the Act.
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