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In News- Recently, the five-judge Constitution Bench of the Supreme Court (SC) ruled that all co-operative banks in the country could make use of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI ) to make recovery against defaulting persons.

Background:

  •  An amendment in Banking Regulation Act of 1949, to include cooperative societies as financial institutions were declared as null and void by the Gujarat High Court in 2013.
  • The Delhi High Court, on the other hand, had ruled that the cooperative banks and societies were banks and financial institutions for all purposes and thus were allowed to use SARFAESI to make recoveries against the defaulters.

Issues Involved:

  • Whether the Co-operative banks can be called as Banks (financial Institutions) under the Banking Regulation Act of 1949 and if the Parliament has legislative competence to regulate financial assets of cooperative banks formed under different state laws.

Observation of the Apex Court:

  • The court has upheld the central government’s notification which brought co-operative societies within the purview of the SARFAESI Act and asserted that Co-operative banks come within the definition of “Banks” under the Banking Regulation Act, 1949 for the purposes of the SARFAESI Act, making them eligible for recovery procedure as in under the Act.
  • The recovery procedure under the Sarfaesi Act is also applicable to co-operative banks and there is no clash with the Banking Regulation Act, 1949.
  • The court also ruled that the Parliament has legislative competence to provide procedures for recovery of loans under the Sarfaesi Act with respect to cooperative banks.

What is the SARFAESI Act?

  • Banks utilize Sarfaesi Act as an effective tool for bad loans (Non-Performing Asset) recovery and is effective against secured loans.
  •  It promotes the setting up of asset reconstruction companies (ARCs) and asset securitization companies (SCs) to deal with NPAs accumulated with the banks and financial institutions.
  • It provides the bank with the power to take over and auction authority of residential or commercial properties, to recover the loan.
  • Under this, the first-ever asset reconstruction company of India, ARCIL, was constituted.

 Recovery Methods: 

The Act makes provisions for three methods of recovery of the NPAs (bad loans), which includes:

 

  • Securitisation
  • Asset Reconstruction
  • Enforcement of security without the interruption of the court

 

 

 

Source- IE

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