Sarfaesi act - regularization of cc a/c

Firstly, you should have informed the bank in writing that you are willing to settle interest  and loan amount  very shortly.

And whatever your bankers said  orally it should have  been taken in in writing.   But your banker would never give in writing.

Answer to your question to my mind are:-

1. Pay the overdue interest before the expiry of 60 days of notice.  If the bank is not allowing you to deposit the interest, send the same through pay order by speed post before expiry of 60days.   It would be your plus point.
2. Yes, your account gets regularized once you brought the interest under 3 months interest.
3.  No,   on expiry of 60 days the bank can initiate action.  Yes, in case you pay the overdue interest and regularize your account, the bank may stop taking action provided you ensure the bank that your account will be regular in future.

Sir,

One more query regarding the above, can you please clarify that if I pay overdue interest entirely and regularize my account then also can the banker take the symbolic/ physical possession of my mortgaged property. Also what are the legal rights banker has if I pay partially and bring the interest due to less than that of three months.

After your account has declared NPA, the bank has every right to initiate action under section 13 (2) of Securitization Act, 2002 to recall the sum dues.   As I said earlier, you can give reply/objection to the notice in writing and the bank is bound to give reply.   In case bank give reply,  the contents of reply can be discussed with your lawyer.   In case the bank did not reply, it can be a ground in your favour.   However, it is in your own interest to do whatever advised which can help you to take stay when the possession proceedings will be initiated against you.  

4.2.5 of RBI's circular on Income Recognition, Asset Classification and Provisioning lays down that, if the entire defaulted interest payment is made together with interest for delayed payment and penal interest (calculated at simple rate), the account should be upgraded from NPA to PA, even if the account is classified as NPA in the books of the bank.

Paragraph 4.2.5 of RBI’s Prudential norms on Income Recognition, Asset Classification & Provisioning deals with up-gradation of NPAs to PAs.

"If arrears of interest and principal are paid by the borrower in the case of loan accounts classified as NPAs,  the account should no  longer  be  treated  as  non-performing  and  may  be  classified  as  ‘standard’  accounts". 

Dear Mr. Vijay, 

The payment of overdue interest would not bring the account in order as the limit is CC Limit. The entire amount has to be repaid in order to stop the action under Sarfaesi. 

It is the discretion of the Bank to allow u to operate the account after payment of overdue interest. Try convincing them. Keep talking/writing to the Bank. 

At the same time, do not ignore the legal situation in the wake of 13(2) Notice. 

Contact a competent lawyer. Entrust him with the legal side of the problem. 

If u r in Maharashtra, u may contact Adv. Manish Bohade - 09371505560. 

He is competent as well as reasonable. 

Manoj Harit 

Paragraph 4.2.5 of RBI’s Prudential norms on Income Recognition, Asset Classification & Provisioning is not only mandatory in nature but also has statutory flavour. Please see the judgments  in    Sardar Prem Singh Vs. Bank Of Baroda & Ors. : III (2004) BC 455 (DB All.);Sardar Associates Vs. Punjab & Sindh  Bank: 2009 (8) SCC 257;Central Bank Of India Vs. Ravindra 2002 (2) CTC 354 (SC). Therefore, the question of proceeding with the further action u/s 13 does not arise and the bank is bound to upgrade the NPA to Performing Asset. Please work on this line instead of choosing litigation which is wasteful exercise. If the bank does not heed to your request, then you have to file Sec.17 application in DRT specifically pleading on bank's obligation to follow the circular of RBI as laid down by the Courts mentioned above. If the loan is repayable in instalments, then the defaulted instalments and interest for delayed payment together with penal interest (at simple) and interestd penal interest an in case of OCC/COD/Bills facility. You have to contacte an advocate with experience in banking law practice.

Respected Law experts,

I paid my overdue interest before 60 days time. But now again interest in my account is overdue for 3 months and the 90 day period is about to expire soon. Now I am receiving call from my banker to clear the interest payments. Now I want to know what will be the consequences if I m not able to pay the balance interest amount. Also will it work if I pay only one month interest now.

Waiting for your valuable reply,

Vijay

Unless you bring and keep the default less than 90 days bank may again proceed with SARFAESI

Sir,

My actual doubt is

1) That whether the banker need to serve a fresh notice under sarfaesi or the same notice (3 months old) can be used for legal actions.

2) Also if I pay one month interest now and bring the total interest to less then 3 months interest then can I avoid my account from slipping to NPA and thus avoid legal proceedings by the banker.

Sir,

Along with the information asked in the previous message I also want to know whether I can get some extra time from my banker to settle my dues. Also could you reply fast to these queries as I have very less time remaining.

Thanking you 

There is difference between taking symbolic possession and actual possession.  Symbolic possession means, the banker will issue one advertisement  of possession notice in newspapers and then write on the walls of mortgaged property .... this property belongs to such and such bank no one shall transact with regard to sale of property without bank's consent etc.  After that it takes time for them to issue sale notice and auction notice.  It involves another 3-4 months time generally if the bank shows urgency.  Otherwise it may take years also if the bank does not show urgency.  To take actual possession of the property they generally take the help of District Magistrate or Chief Metropolitan Magistrate, Collector etc.  It is not that the Authorized officer himself cannot do, but in practice no Authorized officer never succeeded in taking possession of any secured asset.  Therefore, the assistance from DM, CMM etc becomes compulsory.  Due to all these reasons, generally till the Auction is conducted it is more than a year from the date of Demand Notice.  In the meanwhile if the borrower approaches court under Section 17 of sarfaesi act and gets stay, it will be further delayed by as long as the case is decided by court. 

I am not saying all these to breed credit indiscipline but I feel from the side of banks also there should be some concern about banker-borrower relationship.  The 90 day period to declare asset as NPA is too short to decide whether the borrower had become altogether untrustworthy and so to put him on notice to pay all the dues.  Earlier, before securitization act came into being the relationship between banker and customer was based on business principles and banker used to perceive customer as consumer like a company wants to sell its good to a customer.  Now it has become a relationship between police and thief after the passage of this Act.  You release 3 crores loan to a borrower, and he puts that amount in business and it is decided with in 3 months whether he is defaulter eligible to be proceeded under sarfaesi act.  And entire amount is demanded along with dues within 4-6 months from the date of release of loan.  It is sheer non-sense I say. 

My view is the bank's urgency to initiate sarfaesi proceedings should not depend on prudential norms of RBI but on the element of credit risk.  If the borrower had covered the credit risk that bank is exposed to by 200 percent., then till the outstanding dues amount to 125 to 150 percent of the security offered, the bank should not initiate sarfaesi proceedings. 

Somewhat deviation from the subject but relevant I want to say about Housing loans.  When a borrower purchases house for Rs.30 lacs by applying for a loan of rs.20 lacs and giving the house as security, and repays 5 lacs and then defaults then the position of bank is that it has a security of 200 percnt for the outstanding dues.  And house generally being real estate property, the value only goes up if it is an independent house (not a flat) because the plot value is involved in it.  Then what is the risk for the bank to wait till the outstanding dues reaches up to 150 percent of the Security offered.  It may be the case that a bank has outstanding dues of 25 lacs after three years and the market value of the house had increased to 40 lacs.  What is the risk for the bank in it?  It can get its money any time.  Why governments do not allow people to experiment by taking a house (if it is a first house) by taking a loan from bank....after all housing for all is also the obligation of governments?

If they succeed in paying back, they will own a house.  If they do not succeed the bank will not have any loss if it sells off the house when the outstanding dues reach 150 pc of the 200 percent security offered.  Why harrass people with prudential norms and all when there is no loss for anyone in this and when it also serves the social objective of Housing for all?

This is not the way banks should function as it is happening now....ie. post-2002 securitization act.

Another disadvantage to borrower with initiation of sarfaesi proceedings in such short period of time following prudential norms of RBI is, the bank will issue notices and advertise those notices as per Enforcement of Security Interest Rules, 2002, take the assistance of Enforcement Agents...etc... all these costs are added to the loan account and borrower's outstanding dues will increase greater and faster than necessary.  If the proceedings are initiated a little bit late, he could have regularized the account.  But as proceedings are initiated all costs related to proceedings are debited to borrowers account and that will increase his burden to regularize the account.  For every three months of credit indiscipline of borrower the banker can start a fresh proceeding against borrower by issuing Demand notice, possession notice etc.  That means the bank can debit the borrowers account (to pay the costs relating to securitization proceedings) as many times as the banker starts and stops the securitization proceedings.  That is beyond all canons of reasonableness and simply cannot be allowed. 

SARFAESI Act is a boon to the bank officials rather than recovery of bad debts. Those who can manage with such officials, nothing bad will happen. Otherwise, if borrower is not liked by the official he can classify the loan a/c as NPA with some justification and then can invoke SARFAESI by Demand Notice for payment within 60 days. the secured property could be put to sale within next 10 days if the official is bend upon it. Courts also mostly treat the borrower unsympathetically. There are of course several borrowers who had cheated banks with or without connivance of bank officials. They do not deserve any sympathy. But generally the innocent borrower cannot get justice easily. 

Problem:  A is a pensioner drawing pension of Rs.45000/- aged 75 years old.  He is living in a rented house of Rs.7500 per month.  He has 6 lacs deposits and a plot worth Rs.4.00 lacs.  He had seen a house on plot of 200 square yards having two similar portions one adjacent to other in each of 100 sq.yards, costing Rs.20 lacs.  He approached a bank for a loan of Rs.14 lacs.   Bank says he is a pensioner and hence it cannot lend a loan. 

He will mortgage the house of Rs.20 lacs along with open plot of Rs.4.00 lacs.  His contribution is Rs.6.00 lacs to the house.  He can pay per month instalment of Rs.25000/-.  He does not want to waste Rs.7500/- on rented house unnecessarily.  He is healthy man with no diseases. 

Bank has 24 lacs secured assets with it and credit exposure is only Rs.14 lacs.  Supposing the period of loan is five years and let us assume borrower paid instalments for two and half years regularly and after two and half years the outstanding loan is 9 lacs, and the borrower defaults, then the borrower can sell half the portion of the house and pay off the loan, and keep remaining half with him.  That half portion also he may sell at profit. 

Who is at loss in this?  Let us assume the pensioner due to family problems could not repay the loan and defaulted with in six months....then also the bank can sell off the house because the house value will not reduce within such short period of time. Assuming that the bank only gets Rs.16 lacs instead of Rs.20 lacs then also the borrower is at loss not the bank. 

Wherever there is discretion there is arbitrariness says Dicey in administrative law.  The banker can initiate SARFAESI proceedings against one defaulter whose loan just slipped into NPA and forgive another defaulter whose loan has even become a doubtful debt by deliberately delaying the proceedings. 

Why don't the government help people to build their own houses? 

Why cannot the government relax the 3 months prudential norm of RBI for "first house" loans atleast?  When the government can create such a law which vests with ARBITRARY POWERS with bank officials to pick and choose the customers they don't like to proceed against, and use their discretion as effectively to pardon other borrowers who may have done default of greater gravity, why cannot the government make a law which leans in favor of a section of society that can build own houses if banks do not harrass them with all kinds of formalities (especially relating to income of borrower) and rules relating to sale of secured assets.