Securitization Act 2002

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest act extends to the whole of India

Under section 69 of Transfer of Property Act, mortgagee can take possession of mortgaged property and sale the same without intervention of Court only in case of English mortgage. (English Mortgage is where mortgagor binds himself to repay the mortgaged money on a certain date, and transfers the mortgaged property absolutely to the mortgagee, but subject to a proviso that he will re-transfer the property to the mortgagor upon payment of the mortgage money as agreed). In addition mortgagee can take possession of mortgaged property where there is a specific provision in mortgage deed and the mortgaged property is situated in towns of Kolkata, Chennai or Mumbai. In other cases possession can be taken only with the intervention of court.

Therefore till now Banks/Financial Institutions had to enforce their security through court. This was a very slow and time-consuming process. There was also no provision in any of the present law in respect of hypothecation, though hypothecation is one of the major security interest taken by the Bank/Financial Institution.

Keeping in mind the above factors among many other the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act was enacted with effect from 21.6. 2002.

The Act deals with three aspects.

1. Enforcement of Security Interest by secured creditor (Banks/Financial Institutions)

2. Transfer of non- performing assets to asset reconstruction company, which will then dispose of those assets and realize the proceeds.

3. To provide a legal framework for securitisation of assets.

What is security interest, property, hypothecation

Security Interest means right, title and interest of any kind whatsoever upon property, created in favor of any secured creditor and includes any charge, hypothecation, assignment other than those specified below.

Property means

1. Immovable property
2. Movable property
3. Any debt or any right to receive payment of money, whether secured or unsecured
4. Receivables, whether existing or future
5. Intangible assets, being know-how, patent, trade mark, licence, franchise or any other business or commercial right of similar nature.

Hypothecation means a charge in or upon any movable property, existing or future, created by a borrower in favor of a secured creditor without delivery of possession of the movable property to such creditor, as a security for financial assistance, and includes floating charge and crystallization into fixed charge on movable property.

Exclusions from 'security interest'

Exclusions from 'Security interest' - Provision of the Act shall not apply to the following :

1. A lien on any goods , money or security given by or under the Indian Contract Act, 1872 or the Sale of Goods Act, or any other law for the time being in force.
2. A pledge of movables within the meaning of section 172 of Indian Contract Act,
3. Creation of any security in any aircraft as defined u/s 2(1) of Aircraft Act,
4. Creation of any security interest in any vessel as defined in section 3 (35) of Merchant Shipping Act.
5. Any conditional sale, hire -purchase or lease or any other contract in which no security interest has been created.
6. Any right of unpaid seller u/s 47 of Sale of Goods Act.
7. Any properties not liable to attachment or sale under first provision to section 60(1) of Code of Civil Procedures.
8. Any security interest for securing repayment of any financial asset not exceeding one lakh Rupees.
9. Any security interest creating in agricultural land.
10. Any case in which the amount due to less than 20% of the principal amount and interest thereon (i.e. where borrower has repaid more than 80% of principal amount and interest. )

Who is a secured creditor & when can security be enforced

A secured creditor means any bank or financial institution or any consortium or groups of banks or financial institutions and includes -

1. Debenture trustee appointed by bank or financial institution
2. Securitisation company or reconstruction company
3. Any other trustee holding securities in whose favor security interest is created for due repayment by any borrower of any financial assistance.

When can security be enforced

Any security interest can be enforced by a secured creditor without intervention of Court or Tribunal in accordance with the provisions of the Act.

Such action can only be taken any borrower, who is under liability to a secured creditor under a security agreement, makes any default in repayment of secured debt or any installment thereof and the account is classified as NPA. (Non Performing Asset by the secured creditor)

No action can be taken if:

1. It is agricultural land
2. When amount due is less than Rs. one Lakh
3. When amount due is less than 20% of the principal amount and interest thereon, i.e. the borrower has repaid more than 80% of the principle amount and interest.

No action can be taken if the debt is time barred under the Limitation Act.

What is a NPA (non performing asset) Action for enforcement of security interest can be initiated only if the secured asset is classified as Non Performing Asset. Non Performing Asset means an asset or account of borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the directions or guidelines relating to asset classification issued by RBI. An amount due under any credit facility is treated as "past due" when it has not been paid within 30 days from the due date. Due to the improvement in the payment and settlement systems, recovery climate, upgradation of technology in the banking system, etc., it was decided to dispense with 'past due' concept, with effect from March 31, 2001. Accordingly, as from that date, a Non performing asset (NPA) shell be an advance where interest and /or installment of principal remain overdue for a period of more than 180 days in respect of a Term Loan, the account remains 'out of order' for a period of more than 180 days, in respect of an overdraft/ cash Credit(OD/CC), the bill remains overdue for a period of more than 180 days in the case of bills purchased and discounted, interest and/ or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purpose, and any amount to be received remains overdue for a period of more than 180 days in respect of other accounts. With a view to moving towards international best practices and to ensure greater transparency, it has been decided to adopt the '90 days overdue' norm for identification of NPAs, form the year ending March 31, 2004. Accordingly, with effect form March 31, 2004, a non-performing asset (NPA) shell be a loan or an advance where; interest and /or installment of principal remain overdue for a period of more than 90 days in respect of a Term Loan, the account remains 'out of order' for a period of more than 90 days, inrespect of an overdraft/ cash Credit(OD/CC), the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted, interest and/ or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purpose, and any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.