HOUSING FINANCE

SARFAESI ACT,2002

WHAT IS LOAN AGAINST PROPERTY ?

WHAT IS DRT ?WHAT IS NPA ?

Prepared By:

Vishu Kushwaha

INTRODUCTION

There are various types of loans that are available in the market; one of

them is loan against property. Each of the loans has distinct conditions

applicable to its operation. The best option for a borrower is to ensure that

a loan, whether it is a home loan, personal loan or loan against property, is

available easily, i.e., without much administrative efforts and also at a low

interest rate.

One of the conditions that will help in easing the procedure and interest

rate on a loan is the presence of a security on the loan. This also increases

the confidence of the lender and will lead to a situation where the interest

rate charged is lower than several other options with no adequate

amount of security.

REAL ESTATE FUNDING SOURCES

EQUITY SIDE

GDR’S/ADR

IPO DEBT SIDE

QIP EXTERNAL COMMERCIAL BORROWING

ASSET SALE BANK LOANS

PRE SALES OR SALES BONDS AND DEBENTURES

REIT

FDI

DOMESTIC FUNDS

MEANING OF TERM

The term ‘loan against property’ refers to a situation in which the borrower

takes a loan from a bank or financial institution where the security for the

loan is a property that is owned by the borrower.

The nature of the property will determine the amount of the loan that is

possible and the extent of the amount of the loan that is actually available

at a certain point of time.

The interest rate is lower than other loan interest rates because the

property element makes it a type of secured loan.

STEPS INVOLVED IN HOME LOAN

PROCESS

1. Finding the property.

2. Knowing the loan eligibility.

3. Deciding the lender after evaluation.

4. Applying for the home loan.

5. Submission of documents.

6. Checking the credit report.

7. Sanctioning of loan amount.

8. Acceptance copy to the bank

9. Checking the legal documents

10. Signing of loan agreement.

FEES/CHARGES ASSOCIATED WITH HOME

LOAN

BEFORE

Processing fee

Legal & technical charge

Stamp duty

AFTER

Foreclosure charges

Duplicate loan statement charges

Delayed EMI payment and cheque bounce charges

SARFAESI ACT, 2002

The Securitization and Reconstruction of Financial Assets and Enforcement

of Security Interest Act (SARFAESI) Act,2002

One of the key purposes of the Act was to give more teeth to specified

categories of lending institutions, in recovering the money from defaulting

borrowers, who have borrowed loans against a security, more popularly a

mortgage.

Housing finance companies, that are regulated by the National Housing

Bank do not automatically get the benefits of SARFAESI against defaulting

borrowers.

LEGAL ASPECTS OF MORTGAGE/LOAN

AGREEMENT

A mortgage is the transfer of an interest in specific immoveable property

for the purpose of securing the payment of money advanced or to be

advanced by way of loan, an existing or future debt, or the performance

of an engagement which may give rise to a pecuniary liability.

The transferor is called a mortgagor, the transferee a mortgagee; the

principal money and interest of which payment is secured for the time

being are called the mortgage-money, and the instrument (if any) by

which the transfer is effected is called a mortgage-deed.

NHB (Amendment) Bill,2012

It was passed in Lok Sabha , containing an very important amendment

that read as below:

“ It is proposed to amend the said Act (SARFAESI Act), as to make a provision

to cover all the Housing Finance Institutions (HFCs), which are companies

registered under the NHB Act for the purposes of the said Act to provide them

level playing field.”

• Sarfaesi Act gives powers to seize and desist to

the banks.

• under which the banks need to send a notice

in writing to the defaulting borrower requiring it

to discharge its liabilities within 60 days.

• In case the borrower fails to comply with the

notice, the bank can take either take possession

of the security for the loan, sell or lease or

assign the right over the security or appoint any

person to manage the same

WHAT IS NPA?

Bank gives loan to a person.

Person fails to make regular payments.

Bank gives him notice to correct his behavior. But he doesn’t.

Bank declares that loan as Non-Performing Asset (NPA) (=Bad Loan)

Currently Indian banks have NPAs worth more than Rs. 1 lakh crores.

WHAT IS DEBT RECOVERY TRIBUNALS?

Prior to 90s, banks had very hard time recovering bad loans.

Because often, borrowers (loan takers) would file frivolous cases in civil courts, then …taarikh pe taarikh, taarikh pe taarikh….. proceeding would go on for years.

So 1993, Government established Debt Recovery Tribunals to deal with NPA matters.

Now borrower cannot approach civil court, they’ve to goto special Debt Recovery Tribunal (DRT).

This led to some relief, but then DRTs clogged down by truckload of cases. (Even now, more than 60,000 cases pending with DRTs)

In 2002, Government came up with new Act, named “SARFAESI Act”.

EXAMPLE: suppose, Mr. Jordan Belfort has opened business with

Rs.100 crores. He financed this, via mixture of debt + equity in

following way

HOLDER RUPEES IN CR.

EQUITY (IPO > SHARES) Belfort and his family 20

Public 30

DEBT (LOANS, BONDS) Business loan from SBI 40

Bonds 10

TOTAL 100

FACTS OF THE CASE:

Initially the company runs well and good.

But then Mr. Belfort doesn’t revise his MBA- REUI books often, so he forgets the business

concepts. His company starts making losses.

He fails to pay loan EMIs for many months.

SBI gives him notice to correct his behavior.

Still, he doesn’t start paying money.

SBI declares this Rs.40 crores loan NPA (Non-Performing Asset).

Once a loan is declared as non-performing asset, SBI can take actions under SARFAESI

act, to recover the loan money.

Now in case of default, what will court

do?

1. Take possession of Mr. Belfort’s assets without requiring court order.

(Commericial or residential, fixed or moving assets.)

2. Auction / Sale them.

3. Change the administration/ Management of those assets.

4. If Mr. Belfort had sold away the mortgaged asset to third party Mr.X, bank

can order Mr.X to surrender that Asset.

5. If Mr.X owes money to Mr. Belfort, he can be ordered to pay money.

Important Points:

SARFAESI applies only to loans above Rs. 10 lakhs

By the way SARFAESI applies only to those assets “mortgaged/secured” to get the loan.

E.g. if Mr. Belfort had taken business-loan, SBI would have asked him to sign away his factory/machinery/vehicles/land etc. specific items as mortgage.

Hence SBI can attach only ^those assets.

But SBI cannot take away Belfort’s personal home-furniture, expensive wrist-watch or his son’s bicycle in the name of SARFAESI.

Similarly, Agricultural land is exempted from SARFAESI attachment

Catch 22 situation

Suppose SBI attached a warehouse of Mr. Belfort.

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).

So ultimately SBI will have to auction it to someone. What if they don’t get

better price? Critiques of the bill say, this is not clarified in the bill.

SARFAESI, BANK & ARC

WHAT IS ARC ?

Asset reconstruction company (ARC).

They buy NPA (Bad loans) from Banks and try to extract maximum money

out of it = profit.

They’ve to register with Reserve Bank of India.

ARC new power: covert debt into equity

Examples:

ARCIL (India’s first and largest asset reconstruction company (ARC))

Reliance Asset Reconstruction Company Limited by Anil Ambani

In our example, SBI has NPA worth Rs.40 crores.

ARC will buy the NPA file from SBI at a lower rate say 35 crores. (well, SBI is making loss, yes,

but something is better than nothing.)

Besides, banks have hundreds of bad loan cases, they do not have time or manpower to

pursue individual case, sometimes no bidders are interested in auction. All the file work and

donkey labour, In such cases, it’s better for bank to transfer NPA to ARC.

But that doesn’t mean ARC will give 35 crores to the SBI from its own pocket!

Then how will the Asset reconstruction company (ARC) arrange for the money?= via

Security Receipts.

ARC WITH EXPLANATION

WHAT ARE SECURITY RECIEPTS (SR)?

In above example, ARC needs Rs.35 crores to buy a Non performing asset

from SBI.

So ARC will issue “security receipts (SR)” worth Rs.35 crores.

Only Qualified Institutional buyers (QIB) can buy these security receipts

(SR).

SR are not “bonds”, they do not carry fixed interest rate.

ARC will promise to pay money on SR, when it gets money the bad loan.

Although, ARC usually promise 9% profit on “security receipts (SR)”.

3 POSSIBLE OUTCOMES/SITUATIONS:

1. Qualified institutional buyers (QIB) buy those security receipts (SR). So

Rs.35 cr cash goes from QIB -> ARC -> SBI.

1. SBI itself receives SR worth Rs.35 crores for free. (that means ARC will

gradually pay the money to SBI).

1. combination of both: QIBs buy SR worth 30 crores + SBI receives free SR

worth 5 crores.

WHAT IS QUALIFIED INSTITUTIONAL

BUYER (QIB)?

These people have the expertise and the financial muscle to evaluate and

invest in the capital markets.

Scheduled Commercial Banks

Foreign Institutional Investor

Mutual Funds

Venture Capital Investors

Insurance Companies

Pension/ Providend Funds

Problems with ARC system and conversion

of debt to equity: RATAN TATA

Overseas people go bankrupt or companies go bankrupt. Here they never

do–they continue to be sick and still operate. Then they are operating to

kill you with destructive competition (using predatory pricing etc.)

(Airline business) is proliferated by many operators, some of them in

financial trouble.

I would hesitate to go into the (airline) sector today in the sense that the

chances are that you would have a great deal of competition which

would be unhealthy competition.