SARFAESI Act 2002: Objectives, Process & Key Provisions

Published on 24 October 2025 by
SARFAESI Act 2002

The SARFAESI Act, 2002 (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act) is one of India’s most important financial legislations. It was introduced to empower banks and financial institutions to recover non-performing assets (NPAs) efficiently without the lengthy process of court intervention.

Before the introduction of this Act, banks often faced challenges in recovering loans from defaulters due to slow legal procedures. The SARFAESI Act 2002 changed this by giving lenders the legal right to seize and sell secured assets of defaulting borrowers to recover dues, ensuring faster and smoother recovery.

What is the SARFAESI Act, 2002?

The SARFAESI Act 2002 was enacted by the Government of India to regulate securitisation and asset reconstruction and to empower banks to enforce security interests. It allows banks and financial institutions to auction residential or commercial properties of borrowers who have defaulted on loans.

In simple terms, this Act enables banks to take possession of the borrower’s secured assets and sell them to recover the outstanding loan amount  without needing to go through traditional court proceedings.

The Act applies to all banks, financial institutions, and asset reconstruction companies (ARCs) registered with the Reserve Bank of India (RBI).

Attempt a free LIC AAO Mock test

Objectives of the SARFAESI Act 2002

The SARFAESI Act was introduced to strengthen the financial system and reduce the burden of non-performing assets on banks. Its main objectives are:

ObjectiveDescription
Efficient RecoveryTo empower banks and financial institutions to recover loan dues quickly and effectively.
Reduction of NPAsTo reduce non-performing assets (bad loans) and improve financial health.
Legal EmpowermentTo allow lenders to seize and sell assets without court involvement.
Asset ReconstructionTo enable securitisation and reconstruction of financial assets through ARCs.
Financial StabilityTo create a strong and transparent financial system by improving loan recovery mechanisms.

Key Provisions of the SARFAESI Act, 2002

The SARFAESI Act contains several important provisions that define how banks and financial institutions can act in case of loan defaults.

ProvisionDescription
SecuritisationAllows banks to convert bad loans into marketable securities and sell them to Asset Reconstruction Companies (ARCs).
Asset ReconstructionARCs can take over non-performing assets and manage or sell them to recover funds.
Enforcement of Security InterestBanks can seize and sell the borrower’s secured assets after a 60-day notice period.
Central Registry (CERSAI)A national database that records security interests created on properties to prevent multiple loans on the same asset.
Appeal MechanismBorrowers can appeal against bank actions before the Debt Recovery Tribunal (DRT) and Debt Recovery Appellate Tribunal (DRAT).

These provisions collectively ensure a structured and time-bound recovery process for financial institutions.

enrol in an expert-led lIC AAO Course for your preparation

Process of Recovery Under the SARFAESI Act

The Act provides a clear process that banks must follow before taking action against defaulting borrowers.

StepAction
1. Identification of DefaultThe borrower’s account is declared as a Non-Performing Asset (NPA).
2. Issue of Demand NoticeThe bank issues a 60-day notice demanding repayment of dues.
3. Borrower’s ResponseThe borrower can pay the amount or raise objections within this period.
4. Seizure of AssetsIf the borrower fails to respond or repay, the bank can take possession of the secured asset.
5. Sale of AssetThe seized asset is auctioned or sold to recover the outstanding amount.

Applicability of the SARFAESI Act

The SARFAESI Act 2002 ensures that the Act targets major loan defaults that can significantly affect the financial sector and  applies to:

ParticularDetails
Applicable ToBanks, financial institutions, and asset reconstruction companies (ARCs)
Administered ByReserve Bank of India (RBI)
Type of Loans CoveredSecured loans only (loans backed by collateral)
Minimum Default Amount₹1 lakh and above (as per current RBI norms)
Not Applicable ToUnsecured loans, agricultural land, and small loans below ₹1 lakh

Importance of the SARFAESI Act

The SARFAESI Act plays a crucial role in maintaining the stability of India’s banking system. It gives banks the legal authority to recover loans promptly, reducing the accumulation of bad debts.

Its importance can be summarized as follows:

  • It strengthens the recovery process for banks.
  • It helps in reducing non-performing assets (NPAs).
  • It encourages financial discipline among borrowers.
  • It protects depositors’ money by improving bank liquidity.
  • It promotes overall economic growth by maintaining credit flow.
solve previous year’s LIC AAO Papers

Limitations of the SARFAESI Act

While the Act has improved the recovery process, it also has some limitations:

  • It cannot be used for unsecured or agricultural loans.
  • Borrowers sometimes face asset seizure without sufficient time to respond.
  • The Debt Recovery Tribunals often face a backlog of appeals, delaying resolution.
  • Small borrowers may find the process intimidating.

Despite these challenges, the SARFAESI Act remains a vital tool for financial recovery and stability.

FAQs

Q1: What is the SARFAESI Act 2002?
A1: The SARFAESI Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002) is a law that allows banks and financial institutions to recover loans from defaulters by selling their secured assets without court intervention.

Q2: What is the main objective of the SARFAESI Act?
A2: The main objective is to empower banks to recover non-performing assets efficiently, reduce NPAs, and improve financial stability in the banking sector.

Q3: Which loans are covered under the SARFAESI Act?
A3: The Act applies only to secured loans, i.e., loans backed by collateral such as property or assets. It does not cover unsecured or agricultural loans.

Q4: What is the 60-day notice under the SARFAESI Act?
A4: Before taking possession of an asset, banks must issue a 60-day notice to the borrower to repay dues. If the borrower fails to pay within this period, the bank can seize and sell the property.

Q5: Can a borrower appeal against action under the SARFAESI Act?
A5: Yes, borrowers can file an appeal before the Debt Recovery Tribunal (DRT) within 45 days of the bank’s action. Further appeals can be made to the Debt Recovery Appellate Tribunal (DRAT).