In a recent headline-grabbing move, the Supreme Court ruled that co-operative banks, formed under state law or as multi-state co-operative societies, fall under the scope of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act of 2002. This came in response to multiple conflicting decisions by high courts regarding the qualification of co-operative banks as ‘Banks’ under the Banking Regulation Act of 1949 and the Parliament’s ability to regulate their financial assets.
Dissenting Voices Over Legislative Competence
The argument against the inclusion of co-operative banks in the Sarfaesi Act was predicated on the notion that state legislature and Parliament have distinct legislative fields, as clearly defined in Lists I and II of the 7th Schedule of the constitution. Critics argued that since a valid law already existed for co-operative banks under state legislation, there should not be an overlying parliamentary law on the same issue.
Supreme Court Verdict
The Supreme Court verdict upheld the central government notification from January 28, 2003, which brought co-operative societies within the scope of the Sarfaesi Act. The Court stated that for the purposes of the Sarfaesi Act, co-operative banks do indeed fall under the definition of “Banks” given in the Banking Regulation Act, 1949.
The ruling also declared that the recovery procedures outlined in the Sarfaesi Act are applicable to co-operative banks, with no conflict with the Banking Regulation Act, 1949. Furthermore, the Court found that Parliament does have the legislative competence to establish procedures for loan recovery under the Sarfaesi Act that apply to co-operative banks.
The Role and Importance of Sarfaesi Act
Banks utilize the Sarfaesi Act as an imperative tool for bad loan (Non-Performing Asset or NPA) recovery. It offers an effective legal framework for securitization activities, transfer of NPAs to asset reconstruction companies, and enforcement of security interest without court intervention.
The Act also grants power to banks and financial institutions to take over the immovable property pledged to enforce debt recovery. Notably, it encourages the establishment of asset reconstruction companies (ARCs) and asset securitization companies (SCs) to deal with NPAs accumulated with the banks and financial institutions.
Recovery Methods Under Sarfaesi Act
Below are the three alternative methods for recovery of non-performing assets under the Sarfaesi Act:
1. Securitisation: This refers to the practice of consolidating various types of debt instruments, such as mortgages and other consumer loans, and selling them as bonds to investors.
2. Asset Reconstruction: This involves converting a bad or non-performing asset into a performing one with the help of Asset Reconstruction Companies.
3. Enforcement of Security without Court Intervention: In case the borrower defaults, the bank may enforce security interests either by taking possession of the security, selling, leasing or assigning the right over the security, appointing a manager to oversee the security, or requiring any debtors of the borrower to pay any outstanding sum.
