Enforcement of Security Interests: trends under the SARFAESI and DRT framework

The twin pillars of creditor remedy in India namely the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”) and the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (“DRT Act”) under which the Debt Recovery Tribunals (DRTs)/ Debt Recovery Appellate Tribunal (DRATs) and the DRT framework is established continue to evolve in response to the changing practice, jurisprudence and institutional reforms. This article surveys the current trends in enforcement of security interests in India, considering the constant developments under both frameworks.

Background of the SARFAESI and DRT Act

The SARFAESI Act empowers banks and financial institutions (and now qualifying non-banking financial companies (NBFCs) or asset reconstruction companies (ARCs)) to enforce security interests without resorting to civil courts by issuing termination or demand notices under Section 13(2) of the SARFAESI Act and taking possession of secured assets under Section 13(4) of the SARFAESI Act and effecting sale, subject to statutory safeguards. In contrast, the DRT Act sets up the DRTs to adjudicate claims instituted by banks and/or financial institutions for the recovery of debts through original applications and to hear appeals pursuant to Section 17 of the SARFAESI Act arising from adverse measures undertaken under the SARFAESI Act.

Accordingly, this dual framework provides: (a) a non-judicial, creditor driven mechanism under the SARFAESI Act and (b) a quasi-judicial adjudicatory forum for debt recovery under the DRT Act. The interaction and synergy between these two mechanisms warrant an examination of the prevailing trends.

Key Recent Trends

1. Expanded Scope of SARFAESI Enforcement

A notable trend is the broadening of the scope of entities eligible to invoke the SARFAESI Act. For instance, the February 24, 2020 notification lowered the asset-size threshold for NBFCs eligible under SARFAESI Act from Rs. 500 crores to Rs. 100 crores and the secured debt threshold from Rs. 1 crore to Rs. 50 lakhs. Consequently, a larger number of NBFCs and smaller financial institutions are now eligible to use the SARFAESI framework as part of their debt recovery mechanisms.

2. Judicial Scrutiny and Legislative Review

The Supreme Court of India has recently highlighted that certain provisions of the SARFAESI Act, such as Section 13(8) and corresponding rules have given rise to interpretative ambiguities, leading to extensive litigations that burden the DRT and DRAT system which in

S.O. 856(E)- Notification issued on 24 February 2020 by the Ministry of Finance (Department of Financial Services)

turn has prompted the Ministry of Finance to advocate for a review of the statute to streamline enforcement and address procedural gaps.

3. Digitalisation of the DRT processes and procedural efficiency

The DRT framework has undergone procedural reforms, including the gradual adoption of electronic case filing, listing, and virtual hearings, which have contributed to reducing delays in hearings and disposal of cases. On the debt recovery front, practices under the SARFAESI Act have evolved to include a higher number of auctions, increased use of online sales for secured assets, and faster turnaround in certain jurisdictions.

4. Enhanced Borrower Safeguards and Procedural Litigation

While creditors enjoy stronger enforcement rights now, there has also been a noticeable rise in borrower initiated litigation such as challenges to Section 13(2) notices under the SARFAESI Act, disputes over valuations and sale processes, and objections on jurisdiction (i.e., whether matters should go before civil courts or DRTs). Courts have clarified, for instance, that DRTs cannot decide purely civil disputes like partition or specific performance that fall outside the SARFAESI framework. As a result, borrowers increasingly file Section 17 appeals and stay applications to delay or resist enforcement, adding further procedural complexity.

5. Practical Challenges in Recovery

Despite legislative and procedural improvements, empirical evidence suggests that enforcement is not seamless. The ratio of recovery to the amount involved under both the SARFAESI and DRT framework has remained modest. Additional challenges include delays arising on account of asset valuation, limited demand at auctions, issues with asset title and active resistance by borrowers.

Intersection and Complementarity of the SARFAESI Act and DRT Act

In practice, the enforcement of a secured loan generally proceeds as follows: the creditor issues a notice under Section 13(2) of the SARFAESI Act, specifying the amount due and providing a 60 days’ period for repayment. If the borrower fails to comply, the creditor may take possession of the asset under Section 13(4) of the SARFAESI Act, determine its value, issue an auction notice, and complete the sale. At any stage, the borrower or guarantor may file an appeal under Section 17 before the DRT, challenging the notice, valuation, or sale process. Alternatively, if the creditor chooses not to proceed under SARFAESI, an original application (OA) can be filed directly before the DRT for recovery under the DRT Act.

The prevailing trend is for creditors to strategically combine both mechanisms i.e. initiating SARFAESI proceedings for swift, non-judicial enforcement while simultaneously filing an OA under the DRT Act to recover any remaining deficiency or monetary claims. This dual approach facilitates both asset liquidation and final settlement of the claim.

The Evolving Landscape and Emerging Risks

As the recovery ecosystem evolves, several emerging challenges demand our attention:

(a) Judicial overload and backlog: the Supreme Court has recently observed that ambiguities in the SARFAESI Act generate extensive litigation, adding to the burden on DRTs and DRATs;

(b) Asset quality deterioration: in a stressed macro-economic environment, rising NPAs are likely to trigger more SARFAESI and DRT proceedings, increasing the strain on timely asset realisation;

(c) Digitisation and online auctions: as DRTs continue to digitise their processes, and as auction platforms proliferate, the mechanics of recovery are changing and requires legal professionals to adapt;

(d) Statutory and regulatory reform: in light of the Supreme Court’s observations, amendments to the SARFAESI Act may be forthcoming, making it essential for legal practitioners to track legislative developments and updates from the RBI, SEBI, and the Ministry of Finance, in this regard.

Conclusion

On one hand, creditors have gained quicker access to asset-based recovery, while on the other, borrowers enjoy expanded opportunities to challenge and defend. Effective enforcement hinges on maintaining procedural discipline, strategically coordinating SARFAESI and DRT pathways, and staying attuned to evolving jurisprudence and regulatory changes. As the system increasingly embraces digital processes and legislative review looms, both creditors and borrowers stand to benefit from proactive measures i.e. the creditors aligning internal policies and documentation, and borrowers remaining vigilant regarding notice procedures and available avenues for challenge.