Sarfaesi comes in handy to recover dud home loans

Banks and housing finance companies have begun using the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Sarfaesi Act) to force home loan defaulters to pay up.

During the last one year, LIC Housing Finance has sent 7,039 notices to recover Rs 293 crore from defaulters. Similarly, ICICI Bank has sent a few hundred notices to recover the loans. The biggest player in the home loan market HDFC is also using the law to recover difficult loans.

"Sarfaesi Act is very effective in the difficult cases where the notices under section 138 of the Negotiable Instruments Act for cheque bouncing do not serve the purpose," says Rajiv Sabharwal, chief operating officer, ICICI Home Finance.

"We have realised realised Rs 27 crore till date using the Act," says SK Mitter, director and chief executive officer at LIC Housing Finance.

While the legal departments of most banks are cagey to share information on the number of notices sent, they are finding the law to be effective when the usual methods of sending notices fail.

The Sarfaesi Act allows banks to sell off the property in cases of default after a notice period of six months.

"Our zonal offices send the notices under the Sarfaesi Act in, say every one or two of the ten difficult cases. This has he effect of other defaulters also queuing up to pay," says US Bhargav, GM (retail banking) at Punjab National Bank.

The law is being effectively used since last one year after the challenges to its validity were cleared by the Supreme Court.

The law was framed to bring to net chronic corporate defaulters but makes no distinction for mortgages. The law was later extended to cover non banking finance companies. The home loan industry is characterised by low NPA levels with gross NPAs of about two per cent.

While in per cent terms, the number of notices sent are minuscule, banks and finance companies are beginning to use the stick to make sure even the most difficult of borrowers fall in line.