SARFAESI ACT 2002

Securitisation and reconstruction of financial asset and enforcement of security interest act 2002
it enables banks and other financial institution to auction the the properties against loans of the borrowers, if they fail to repay the loan. it helps in reducing NPA.

1. bank can buy the property if one else buys it in the auction.
2. difficult for borrowers to get stay order on sale of property.
3. bank can sell the property to asset reconstruction company ( ARC).

NOW IF BANKS CAN BUY THE PROPERTY IN AUCTION THEN WHAT IS THE NEED OF ARC?
If the land was in good urban area, SBI could open a new branch office there (or housing for its employees).
But if plot/factory/house is in some remote area= useless for SBI’s personal business. 
Under the Banking regulation Act, a bank cannot keep such immovable property beyond 7 years, (max 12 years with RBI’s permission). 



ARC buy bad loans from the banks and convert them in profit. they must be registered with RBI.
eg. ARCIL (India’s first and largest asset reconstruction company (ARC))
     Reliance Asset Reconstruction Company Limited by Anil Ambani


 arc arranges money from qualified institutional buyers.
 
now how ARC can convert bad loans into a profitable one?

1. Auction the assets fully or partially. (sell the machinary now, rent the building and wait for land prices to go up for two years and then sell it.)
2. Sell the property in combination with other NPA properties of other defaulter giving discount.
3. Change the Management of that asset, appoint its own directors/officers.
4. outsource or lease the business to a another company.
5.  ARC can convert the debt into equity.

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