Tuesday 24 May 2016

Banks can sell your house if you default in payments - S. Selvakumar, Advocate

                                    Banks  can  sell  your house  if  you

                                        - S. Selvakumar, Advocate


                                                             

It is not very easy to defraud the banks and financial institutions by the defaulting borrowers since various statutory protections are provided to the lending banks and financial institutions. The activities of borrowing and lending are inseparable activities and there is a   change from Savings based economy to credit based economy not only in individual's budget but also in the budget of a country.

When a person borrows money, a duty is cast on him not only to repay the money borrowed but also to pay interest in time at the agreed rate on the amount borrowed. Therefore, so long as the amount due is not repaid, there remains a liability on the borrower and this liability in other words is called the Debt of the borrower. Duty is cast on the lender as well to realize the money lent with interest. In spite of the fact that the lending institutions take precautions and take sufficient security for the money lent, some debts become bad and irrecoverable in the ordinary course of business. Bad debt or non-performing asset would mean an asset or account of a borrower which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset in accordance with the directions or guidelines relating to asset classifications issued by the Reserve Bank of India.

DRT Act, 1993 and SRFAESI Act, 2002

Recovery of  debts  has become a very difficult task for the banks and financial institutions and their bad debts or non-performing assets are on the rise. The process of realization or  recovery of non-performing assets (NPA) through the normal  process is time consuming. To hasten or speed up the recovery process and keeping in view the alarming  increase in  NPAs, the Government of India has enacted the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 popularly known as DRT Act. The DRT Act had some deficiencies inasmuch as it  did not provide for assignment of debts to securitization companies and the secured assets  could not be liquidated in time.  Therefore, the Union Government has brought in a legislation called the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 to remedy the deficiency. It is generally referred to as SRFAESI Act. The SRFAESI Act is not in derogation of the DRT Act. The object of the DRT Act as well as SRFAESI Act is recovery of debt through non-adjudicatory process and  to provide  cumulative remedies to the secured creditors.

The SRFAESI Act provides for setting up of asset reconstruction companies, special purpose vehicles, asset management companies etc. By removing all fetters on the rights of the secured creditor, he is given a right to choose one or more of the cumulative remedies. To give more teeth to the Act,  the SRFAESI Act, 2002, has been amended in the year 2004 under The Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2004, where under certain changes have been introduced in the Act by insertion of amendment or addition  to the existing sections. It is made specific in the preamble that the Act undertakes to regulate (1) securitization; (2) reconstruction of financial assets and (3) enforcement of security interest. All these three concepts are independent of each other.

Enforcement  of  Security  Interest

As far as the general public are concerned, Chapter III, Enforcement of Security Interest contained in Sections 13 to 19 are very important.   The following are the requirements for initiating action for enforcement of security interest under SRFAESI Act: 

[1] The account of the borrower should have been classified as Non-performing Asset, strictly in accordance with the guidelines of the Reserve Bank of India and such other authority;

[2] Assets should not be those which have been excepted under sec.31 of the SRFAESI Act and security interest can be enforced only in respect of assets which are specifically charged; 

[3] The action should be initiated well within the limitation period. If the limitation is due to expire shortly, then it will be proper to institute a suit in a civil court or DRT as per pecuniary limit applicable for such suits.

[4] Action can be initiated only where the N.P.A.is Rs.l lakh and above.

Notice

Section 13 of the Act empowers the secured creditor to enforce the security interest in case the borrower defaults in repayment of secured debts and whose accounts categorized as non-performing asset without the intervention of the court or tribunal. The secured creditor is required to give notice under sec.13(2) of the Act to the borrower to discharge all his liabilities in full, within 60 days from the date of notice. The notice should be comprehensive furnishing full details of the amount due and secured assets intended to be enforced. Upon receipt of the notice under sec.13(2) of the Act, no borrower shall transfer by way of sale, lease or otherwise any of his secured assets referred in the notice without prior written consent of the secured creditor. The notice may be served by delivering, or transmitting at a place where borrower or his agent is empowered to accept the notice or documents on behalf of the borrower.

It may also be delivered or transmitted where the borrower actually or voluntarily resides or carries on business or personally works for gain. The notice may be sent by registered post acknowledgment due, by speed post, by courier, or any other means of transmission of documents like fax message or electronic mail service. If it is found that the borrower is avoiding the service of the notice, or the demand notice, or the service cannot be made, a copy of the demand notice may be affixed on the outer door or some other conspicuous part of the house or building of the borrower or his authorized agent. The demand notice may also be published in two leading newspapers having good circulation in the area, out of which one shall be in local language.

If the borrower is a corporate body, the demand notice shall be served on the registered office or any of the branches. In case of more than one borrower, the notice has to be served on each of the borrowers. The notice has to be served on guarantors and on persons who have given security for due repayment of the loan

Under Section 13(3A), if, on receipt of the notice under sub-sec.(2), the borrower makes any representation or raises objection, the secured creditor shall consider such representation or objection and if the secured creditor comes to the conclusion that such representation or objection is not acceptable or tenable, he shall communicate within one week of receipt of such representation or objection the reasons for non-acceptance of the representation or objection to the borrower, provided that the reasons so communicated or the likely action of the secured creditor at the stage of communication of reasons shall not confer any right upon the borrower to prefer an application to the Debt Recovery Tribunal under sec.17 or the Court of District Judge under sec.17A.

Similarly, Sec.19 of the principal Act, has been substituted with the following:

19. Right of borrower to receive compensation and costs in certain cases: If the Debt Recovery Tribunal or the Court of District Judge, on an application made under sec.17 or sec.17A or the Appellate Tribunal or the High Court on an appeal preferred under sec.18 or sec.18A, holds that the possession of secured assets by the secured creditor is not in accordance with the provisions of the Act and rules and directs the secured creditor to return such secured assets to the concerned borrowers, such borrower shall be entitled to the payment of such compensation and costs as may be determined by such Tribunal or Court of District Judge or Appellate Tribunal or High Court referred to in sec.18B.

If the borrower / guarantor pays the dues in full, no further action under the Act is necessary.  If dues are paid only partly and the borrower/guarantor seeks further time, the authority may decide further action with due consideration of law of limitation and the borrower or guarantor intimated accordingly. If the borrower/guarantor fails to meet their liabilities in full within 60 days from the date of the notice, the bank / financial institution can initiate action to enforce the security rights conferred on it by the Act.

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