Context: Recently, the Supreme Court held that Co-operative banks established under a State law and multi-State level co-operative societies come within the ambit of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act of 2002.
Issue

• Whether the Co-operative banks can be called ‘Banks (financial Institution)’ under the Banking Regulation Act of 1949 or,
• Whether the Parliament has legislative competence to regulate financial assets of cooperative banks formed under state law.
• The argument was that under Lists I and II of the 7th Schedule, the Constitution provides for distinct fields of legislative entries for the state legislature and Parliament and once there is already a valid law made by the state referring to its own field, there should not be a parallel parliamentary law on the same topic.

About Verdict of the Supreme Court

• The court has upheld the central government’s notification which brought co-operative societies within the purview of the Sarfaesi Act.
• The Supreme court said Co-operative banks come within the definition of “Banks” under the Banking Regulation Act, 1949 for the purposes of the Sarfaesi Act.
• The recovery procedure under the Sarfaesi Act is also applicable to co-operative banks and there is no clash with the Banking Regulation Act, 1949.
• The court also ruled that the Parliament has legislative competence to provide procedures for recovery of loans under the Sarfaesi Act with respect to cooperative banks.
• The court was of the opinion that recovery of dues would be an essential function of any financial institution and co-operative banks cannot carry on any activity without compliance of provisions of the banking Act and any other legislation applicable to such banks and the RBI Act.

About SARFAESI Act, 2002

• The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) empowers banks/financial Institutions to recover their non-performing assets without the intervention of the Court.The Act extends to the entire India.

Objectives:

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

The Act was circulated to:

• To regulate securitization and reconstruction of financial assets
•  Enforcement of the security interest for matters connected there with.

Methods for recovery of NPAs

• Securitization: It refers to the process of converting loans and other financial assets into marketable securities worth selling to the investors.
• Asset Reconstruction: It refers to conversion of non-performing assets into performing assets.
• Enforcement of Security without the intervention of the Court.

Key Features:

• 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.
• The Act also provides for the establishment of Asset Reconstruction Companies (ARCs) regulated by RBI to acquire assets from banks and financial institutions.
• The Act provides for sale of financial assets by banks and financial institutions to asset reconstruction companies (ARCs).
• RBI has issued guidelines to banks on the process to be followed for sales of financial assets to ARCs.

The Act empowers the Bank:

• To issue demand notice to the defaulting borrower and guarantor, calling upon them to discharge their dues in full within 60 days from the date of the notice.
• To give notice to any person who has acquired any of the secured assets from the borrower to surrender the same to the Bank.
• If the borrower fails to comply with the notice, the Bank may take recourse to one or more of the following measures:
• Take possession of the security
• Sale or lease or assign the right over the security
• Manage the same or appoint any person to manage the same.