Banks and financial institutions frequently initiate recovery proceedings under the SARFAESI Act, 2002 when borrowers default in repayment. However, SARFAESI action is not automatic. The law prescribes specific legal conditions and procedural requirements that must be strictly satisfied before a bank can invoke its powers.
This article explains when and how a bank can lawfully invoke SARFAESI proceedings, and what borrowers should watch out for.
What Is SARFAESI Invocation?
Invocation of SARFAESI means the commencement of enforcement action by a secured creditor to recover its dues without filing a civil suit, by enforcing the security interest created over the borrower’s assets.
Such action usually begins with the issuance of a demand notice under Section 13(2).
Essential Conditions for Invoking SARFAESI
A bank can invoke SARFAESI proceedings only if all the following conditions are satisfied:
1. The Loan Must Be a Secured Loan
SARFAESI applies only to secured credit facilities, where the borrower has created a security interest over assets such as:
Land or building
Residential or commercial property
Plant and machinery
Vehicles or other movable assets
❌ SARFAESI cannot be invoked for unsecured loans.
2. The Account Must Be Classified as a Non-Performing Asset (NPA)
The loan account must be classified as an NPA in accordance with RBI norms, typically when:
Instalments or interest remain overdue for more than 90 days
👉 NPA classification is mandatory.
If SARFAESI is invoked without valid NPA classification, the proceedings are legally vulnerable.
3. The Secured Asset Must Not Be Exempt
SARFAESI cannot be invoked against certain assets, including:
Agricultural land
Assets exempt under law
Security interests below the statutory threshold
If the secured asset falls under an exemption, SARFAESI action is invalid.
4. Statutory Demand Notice Under Section 13(2) Must Be Issued
Before taking any enforcement action, the bank must:
Issue a written demand notice to the borrower
Grant 60 days’ time to repay the dues
The notice must clearly specify:
Outstanding amount
Details of secured assets
Consequences of non-payment
Failure to issue a proper notice invalidates the proceedings.
5. Consideration of Borrower’s Objections (Section 13(3A))
The borrower has a statutory right to:
Raise objections or representations
Seek correction of errors or illegal claims
The bank must:
Consider the objections
Communicate reasons if objections are rejected
Non-compliance with Section 13(3A) is a serious procedural violation.
What Actions Can a Bank Take After Invoking SARFAESI?
If the borrower fails to comply within 60 days, the bank may:
Take symbolic or physical possession of secured assets
Take over management of secured business
Appoint a manager
Sell the secured assets through auction
These steps are taken under Section 13(4) of the Act.
Role of District Magistrate – Section 14
If the bank faces resistance in taking possession, it may approach:
The District Magistrate or
The Chief Metropolitan Magistrate
The Magistrate provides administrative assistance, not adjudication.
Situations Where SARFAESI Invocation Is Illegal
SARFAESI proceedings may be challenged if:
Account is not properly classified as NPA
Demand notice is defective or not served
Agricultural land is included
Borrower objections are ignored
Enforcement is initiated prematurely
Courts have consistently held that strict compliance is mandatory.
Borrower’s Remedies After SARFAESI Invocation
Once SARFAESI is invoked:
Borrowers may approach the Debt Recovery Tribunal (DRT)
Application must be filed within 45 days of action under Section 13(4)
DRT can set aside illegal action and restore possession
Can SARFAESI and DRT Proceedings Run Together?
Yes. Banks may:
Invoke SARFAESI to enforce security, and
File recovery proceedings before DRT for balance dues
Both remedies are complementary.
Practical Guidance for Borrowers
Do not ignore SARFAESI notices
Verify NPA classification
Respond within statutory timelines
Seek legal advice early
Challenge illegal action promptly
Early intervention often prevents loss of property.
Conclusion
A bank can invoke SARFAESI proceedings only after satisfying strict statutory conditions. The Act balances speedy recovery with borrower protections. Understanding when SARFAESI can be lawfully invoked empowers borrowers to safeguard their rights and challenge illegal enforcement.
FAQs
Q. Can SARFAESI be invoked without issuing a notice?
No. Issuance of a 60-day notice under Section 13(2) is mandatory.
Q. Can SARFAESI be invoked for personal loans?
Only if the loan is secured. Unsecured personal loans are excluded.
Q. Can SARFAESI be invoked against guarantors?
Yes, guarantors can also be proceeded against.