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Recently, the Supreme Court held that Co-operative banks established under a State law and multi-State level co-operative societies come within the ambit of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act of 2002.

Key Points

• Conflicting decisions by high courts: The judgment came in view of several conflicting decisions by high courts on the issues of
  
  • Whether the Co-operative banks can be called ‘Banks (financial Institution)’ under the Banking Regulation Act of 1949 or,
  • Whether the Parliament has legislative competence to regulate financial assets of cooperative banks formed under state law.
    
    • The argument was that under Lists I and II of the 7 th Schedule, the Constitution provides for distinct fields of legislative entries for the state legislature and Parliament and once there is already a valid law made by the state referring to its own field, there should not be a parallel parliamentary law on the same topic.
    • Upholding the central government notification of January 28, 2003 which brought co-operative societies within the purview of the Sarfaesi Act, the Supreme court said 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 and there is no clash with the Banking Regulation Act, 1949.

      Sarfaesi Act

      • Banks utilize Sarfaesi Act as an effective tool for bad loans (Non Performing Asset) recovery.
      • The Sarfaesi Act is effective only against secured loans where banks can enforce the underlying security.
      • Following are the main objectives of the Sarfaesi Act.
        
        • Provides the legal framework for securitization activities in India.
        • It gives the procedures for the transfer of NPAs to asset reconstruction companies for the reconstruction of the assets.
        • Enforces the security interest without Court’s intervention.
        • Gives powers to banks and financial institutions to take over the immovable property that is pledged to enforce the recovery of debt.
        • Securitisation
          
          • Securitization is the practice of pooling together various types of debt instruments (assets) such as mortgages and other consumer loans and selling them as bonds to investors.
          • Asset reconstruction is the activity of converting a bad or non-performing asset into performing asset with the help of Asset reconstruction companies.
          • If the borrower defaults, the bank may enforce security interests by:
            
            • Take possession of the security;
            • Sale or lease or assign the right over the security;
            • Appoint Manager to manage the security;
            • Ask any debtors of the borrower to pay any sum due to the borrower.