SARFAESI Act, 2002: Basics

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) is an Act of the Parliament of India that was enacted in 2002. The Act has three main objectives:

• To regulate securitisation and reconstruction of financial assets.
• To provide for the enforcement of security interest.
• To provide for a Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI). 

Securitisation

If we go by words, then Securitisation literally means creation of securities, means any process by which tradeable, marketable securities or instruments are created. 

But in modern day it has limited its scope now we know it as "Securitisation is a financial process that involves pooling together illiquid assets, such as loans or receivables, and then issuing securities backed by those assets". The securities are then sold to investors, who receive payments based on the cash flows generated by the underlying assets.

Securitization was originally used to create securities from financial assets, such as mortgage loans, auto loans, and credit card receivables. However, it has since been extended to cover non-financial assets, such as aircraft and buildings. Additionally, securitization has been used to securitize risk, such as insurance risk and weather risk.

Securitisation can be a useful tool for Banks, NBFCs and other financial institutions to manage their risk and raise capital. It can also help to provide liquidity to the market for illiquid assets.

Asset Reconstruction

Asset reconstruction is the process of acquiring non-performing assets (NPAs) from banks and other financial institutions and then restructuring them so that they can be sold to investors. The goal of asset reconstruction is to recover as much value as possible from the NPAs.

Asset reconstruction can be a complex and time-consuming process, but it can be a valuable tool for improving the financial health of banks and other financial institutions. It can also help to reduce the amount of bad debt in the economy.

Enforcement of security interest 

The enforcement of security interest is a key provision of the SARFAESI Act. It allows banks and other financial institutions to take possession of assets that have been pledged as security for a loan, if the borrower defaults on the loan. This provision helps to improve the recovery rates of non-performing assets (NPAs) and can help to protect the financial health of banks and other financial institutions.

CERSAI

The Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) is a government-owned company that was established in 2011. CERSAI's main function is to maintain a registry of all securitisation transactions and asset reconstruction transactions that take place in India. Also a complete registry encompassing security interest of immovable, movable, intangible properties and assignment of receivables.

CERSAI's registry provides a number of benefits, including:

It helps to improve transparency in the securitisation and asset reconstruction markets.

It helps to reduce the risk of fraud and abuse.

It makes it easier for investors to track the performance of securitisation and asset reconstruction transactions.

It provides facility to search the encumbrance on assets by paying just a nominal fee.

It provides asset based search and debtors search options also.

It helps in preventing frauds in loans involving multiple lending from different banks on the same immovable property.

The Need for Securitisation and Asset Reconstruction and Enforcement of Security Interest

The need for securitisation and asset reconstruction and enforcement of security interest provision arose out of the high levels of Non-Performing Assets (NPAs) that accumulated in the Indian banking system in the early 2000s. These NPAs posed a serious threat to the financial stability of the banking system.

Securitisation and asset reconstruction can help to address the problem of NPAs by providing a way to transfer these assets from banks to other entities that are better able to manage them. This can help to free up capital for banks to lend to other borrowers, and it can also help to reduce the risk of default on these assets. The enforcement of security interest provision helped to address this problem by providing a way for banks and other financial institutions to recover their loans from borrowers who had defaulted, without intervention of the court.

How Securitisation and Asset Reconstruction and Enforcement of Security Interest Help Society and Economy

Securitisation and asset reconstruction and enforcement of security interest provision can help society and economy in a number of ways. First, they can help to improve the financial health of banks, NBFCs and other financial institutions. This can lead to a more stable financial system, which is beneficial for everyone.

Second, securitisation and asset reconstruction and enforcement of security interest can help to reduce the amount of bad debt in the economy. This can free up capital for businesses to invest and grow, which can create jobs and boost economic growth.

Third, securitisation and asset reconstruction and enforcement of security interest can help to improve transparency in the financial markets. This can help to protect investors and consumers from fraud and abuse. Further,  By making it easier for banks and other financial institutions to recover their loans, the enforcement of security interest provision helps to reduce the risk of default on loans.

What is the difference between securitisation and asset reconstruction

Securitization and asset reconstruction are two financial tools that can be used to manage non-performing assets (NPAs). However, there are some key differences between the two.

Securitization is the process of pooling together illiquid assets, such as loans or receivables, and then issuing securities backed by those assets. The securities are then sold to investors, who receive payments based on the cash flows generated by the underlying assets.

Asset reconstruction is the process of acquiring NPAs from banks and other financial institutions and then restructuring them so that they can be sold to investors. The goal of asset reconstruction is to recover as much value as possible from the NPAs. 

Here is a table that summarizes the key differences between securitization and asset reconstruction:

In general, securitization is a more complex process than asset reconstruction. However, securitization can be a more effective way to raise capital, while asset reconstruction can be a more effective way to recover value from NPAs.

The choice of whether to use securitization or asset reconstruction will depend on the specific circumstances of the NPAs in question.

Compliances Under CERSAI

The following are the compliances under CERSAI:

Registration of securitisation transactions

Registration of asset reconstruction transactions

Registration of security interests

Filing of changes in security interests

Satisfaction of security interests

Conclusion

Securitisation, asset reconstruction, and CERSAI are all important tools that can help to improve the financial health of the Indian economy. By providing a way to transfer NPAs from banks to other entities, these tools can help to free up capital for lending, reduce the amount of bad debt in the economy, and improve transparency in the financial markets.