1. HOUSING FINANCE
SARFAESI ACT,2002
WHAT IS LOAN AGAINST PROPERTY ?
WHAT IS DRT ?
WHAT IS NPA ?
Prepared By:
Vishu Kushwaha

2. 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.

3. 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

4. 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.

5. 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.

6. 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

7. 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.

8. 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.

9. 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.”

10. • 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

11. 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.

12. 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”.

13. 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

14. 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.

15. 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.

16. 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

17. 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.

18. SARFAESI, BANK & ARC

19. 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

20.  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

21. 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)”.

22. 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.

23. 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

24. 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.