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Guidelines for Authorized Officers When Responding to Borrower's Representation Under Section 13(3A) of the SARFAESI Act

When dealing with a borrower’s representation under Section 13(3A) of the SARFAESI Act, the authorized officer must exercise due diligence and ensure the following steps are taken:

1. Avoid Ritual Rejection

The representation made by the defaulting borrower should not be dismissed without proper consideration. A thorough review is necessary.

2. Application of Mind by the Secured Creditor

The secured creditor must ensure that the bank’s decision, including the classification of the account as a Non-Performing Asset (NPA), is based on careful deliberation and in full conformity with the Reserve Bank of India’s (RBI) prudential norms.

3. Provide Clarifications with Documentary Evidence

Whenever possible, the secured creditor should submit clarifications along with documentary evidence. A mere denial, without addressing the borrower’s objections or providing clear rationale, constitutes a violation of natural justice and may lead to the invalidation of the notice.

4. Mention the NPA Classification Date

The date on which the account was classified as NPA must be clearly specified in the notice to ensure transparency and accuracy.

5. Genuine Follow-Up Before SARFAESI Action

The SARFAESI Act is a stringent law, and its enforcement should only be initiated after proper follow-up with the borrower, once the account is officially classified as NPA.

6. Charges and Penalties

Any charges, penalties, penal interest, or compounding of penal interest should be debited to the borrower’s account only in accordance with the terms and conditions agreed upon between the bank and the borrower, as well as RBI guidelines.

7. Transparent Penal Interest Policy

The bank may establish a transparent policy for charging penal interest, which should be approved by the Board of Directors. This policy should align with principles of fairness, transparency, and consideration of the borrower’s genuine difficulties.

8. Compliance with Banking Regulations

The guidelines issued by the bank carry statutory weight. Any non-compliance or contravention may result in penalties under Section 46 of the Banking Regulation Act.

9. Opening of Memorandum Account

It is advisable to open a memorandum account once the account is classified as NPA, in line with the guidelines issued by the regulatory authority.

10. Clear Payment Adjustment Procedures

The process for adjusting payments should be clearly defined and explained to the borrower.

11. Ensure Correct Classification as NPA

The account should be classified as NPA only in accordance with the guidelines set by the regulatory authority.

12. Notification of Interest Rate Changes

Any changes in the interest rate should be communicated to the borrower before they are debited to the account.

13. Provide Account and Property Details

It is advisable to attach a statement of account and detailed information regarding the property on which security interest is created as an annexure to the demand notice.

14. Restructuring of Working Capital Facilities

A working capital facility should not typically be discontinued immediately. Instead, the secured creditor may restructure the loan or provide an opportunity for the borrower to regularize the account, avoiding negative impacts on raw materials and labor employment.

15. Transparency and Fairness in Exercising Legal Rights

The bank must exercise its legal rights transparently and with integrity.

16. Registering the Charge

The bank must ensure that its charge is registered under the Central Registry as per the SARFAESI Act and also with the Sub-Registrar under the Registration Act.

17. Authorized Officer Issuing Notice

The notice must be issued by an authorized officer who has been duly authorized by the bank through a board resolution.

Sadashiv B. Pimplaskar
Legal Advisor (MyRinBazaar)