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SC brings Co-operative Banks within the ambit of Sarfaesi Act

  • IASbaba
  • May 7, 2020
  • 0
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SC brings Co-operative Banks within the ambit of Sarfaesi Act

Part of: GS Prelims and GS-III – Banking Sector 

In News:

  • Recently, the Supreme Court held that Co-operative banks and co-operative societies shall come within the ambit of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act of 2002.

Key takeaways from the verdict:

  • 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. 
  • The Parliament has legislative competence to provide procedures for recovery of loans under the Sarfaesi Act with respect to cooperative banks.

Important value additions:

Sarfaesi Act

  • It allows banks and other financial institutions to auction residential or commercial properties to recover loans.
  • The first asset reconstruction company of India, ARCIL, was set up under this act.
  • Banks utilize Sarfaesi Act as an effective tool for bad loans (Non-Performing Asset) recovery.
  • It is effective only against secured loans.
  • It promotes the setting up of asset reconstruction companies (ARCs) and asset securitization companies (SCs) to deal with NPAs. 
  • Objectives of the Act are:
    • To provide the legal framework for securitization activities in India.
    • To give the procedures for the transfer of NPAs to asset reconstruction companies. 
    • To give powers to banks and financial institutions to take over the immovable property that is pledged to enforce the recovery of debt.
  • NPAs can be recovered through:
    • Securitisation: Practice of pooling together various types of debt instruments (assets) and selling them as bonds. 
    • Asset Reconstruction: Activity of converting NPA into performing assets. 
    • Enforcement of Security without the intervention of the Court.

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