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The securitization and reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 is an extremely important piece of legislation in today s booming banking and finance industry. Securitisation is a process of conversion of existing assets or future cash flows, such as loan receivables , into marketable securities. In other words it deals with the conversion of assets which are not currently marketable into marketable ones. The key players involved in the process of securitization are the originator, the special purpose vehicle to whom debts or receivables are assigned or transferred and the investors who buy the marketable securities. Though securitization in India can be traced back to 1990, the law regulating the same was passed in 2002 namely The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002. Some of the important factors which can be attributed to the enactment of the SARFAESI Act are discussed in the forgoing paragraphs. Prior to 1993, the banks had to approach Civil Courts for the recovery of dues. The process of law guided by the Code of Civil Procedure, 1908 was time consuming and did not adapt to the changing demands of the economy. The result of which was pendency of about 15 lakh cases filed by the banks and Financial Institution till 30th September 1990. The fund blocked in the litigation was about Rs 5,622 crores of public sector banks and about Rs 391 crores of Financial Institution. Civil Courts failed to deliver both in ascertaining of dues and execution of decree. The cause of failure was time consuming proceedings up till the stage of grant of decree and old and ineffective laws of execution as defined in order xxi of code of civil Procedure 1908. Failure of Civil Courts led to dissemination of Recovery of debts Due to banks and financial institution act w.e.f 27th august 1993. The RDDBFI Act envisaged summary procedure for ascertainment of dues. It however failed to execute the decree in an effective way. This is evident from the fact that till about 30th September, 2001, 22 debt Recovery Tribunals of the country had adjudicated

9814 cases, thereby issuing the certificate for Rs 6265 crores, however, actual recoveries could be made only of Rs 1864 crores banks despite a special legislation failed to recover about Rs 4104 crores. Thus the evil of the civil court of executing decree remained uncured by RDDBFI Act. One of the main reason for enactment of securitization and reconstruction of financial assets and enforcement of security interest act was discouraged by the results of DRTs. Prior to this there was no provision for setting up of companies for taking over the loans of banks and financial institutions. Another reason for the enactment for SARFAESI is the increasing trends among Indians to borrow and the emerging retail credit revolution in the banking sector. As per the RBI report, rate of growth in deposits is lagging the rate of growth of credit and this trend is expected to continue. Banks are expected to remedy this imbalance which can be either done by increasing deposits by giving higher interest however this would lead to lower margin earnings. The alternative is banks can opt for securitization of their existing portfolios, free their balances sheets and use proceeds from it to disburse more loans. According to the BASEL II norms by 2007 Banks are expected to comply with stringent norm on capital adequacy. To maintain this ratio banks have to sell their portfolio of bad loans to asset reconstruction companies to free up their balance sheets and focus on their core banking activities. Provision with respect to asset reconstruction companies is also made in SARFAESI Act. The securitization and reconstruction of financial assets and enforcement of security interest act enacts extremely important provision relating to three aspects a. Securitisation b. Asset reconstruction companies c. Enforcement of the rights of the secured lender or security interest. The SARFAESI Act has merged into one three pieces of draft legislation. The three elements have common element between them but is also no devoid of

confusion. For e.g requirement of asset reconstruction companies have been applied to securitization companies also.

Banks and FIs are commercial organizations and no longer an extension of the Government itself. In pure economic terms, such powers granted to one player will certainly be disadvantageous to the other player. But the problem of NPA is too large to be ignored. Therefore conferring such powers is justified.