How to Respond to a SARFAESI Notice: Rights and Options for Borrowers

Receiving a SARFAESI Notice: What It Means

When a borrower’s account is classified as a Non-Performing Asset (NPA) and the bank or financial institution initiates proceedings under the SARFAESI Act, the first formal step is the issuance of a demand notice under Section 13(2). This notice demands repayment of the outstanding dues within 60 days and warns of enforcement action against the secured assets in case of non-payment.

Receiving a SARFAESI notice is a serious matter that requires immediate and strategic response. The borrower’s actions (or inaction) during the 60-day notice period can significantly impact the outcome of the proceedings.

Examining the Notice for Defects

The first step should be a careful legal examination of the notice for any procedural defects. Common defects include incorrect computation of the outstanding amount (failure to properly account for payments made, excess interest charged), notice not signed by an authorized officer, notice not served on all borrowers and guarantors, incorrect description of secured assets, NPA classification without following RBI guidelines, and failure to comply with the bank’s internal policies.

Filing a Representation Under Section 13(3A)

Within the 60-day notice period, the borrower has the right to file a representation to the secured creditor disputing the notice. The representation should address any factual or legal objections to the demand, including disputes about the amount, the validity of the NPA classification, or the applicability of the SARFAESI Act to the particular transaction.

The secured creditor is required to consider the representation and communicate its decision with reasons. If the representation is rejected, the borrower should carefully analyze the reasons given and evaluate further legal options.

Approaching the DRT Under Section 17

If the bank takes enforcement action under Section 13(4) (possession, sale, management takeover), the borrower can challenge this action before the Debt Recovery Tribunal within 45 days. The DRT has wide powers to examine the validity of the bank’s actions, including the authority to restore possession and award damages.

Negotiating a Settlement

In many cases, the most practical response to a SARFAESI notice is to negotiate a settlement with the bank. This could involve a one-time settlement (OTS), restructuring of the loan, or a payment plan. Banks are often open to negotiation, particularly where the costs and timelines of enforcement proceedings are considered. Professional advisory combining legal and financial expertise is essential for negotiating favorable settlement terms.