Loan Default: When does the bank auction the property if the loan is not repaid, know what is SARFAESI Act..

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If someone takes a loan and has a problem in repaying his EMI, then the bank from which the loan has been taken has many rights to recover the loan amount. If someone defaults on EMI, then banks or financial institutions can auction his property. However, there are some rules for this and banks follow some processes. The act related to this is the SARFAESI Act which is related to auctioning of property.


What is the SARFAESI Act?
SARFAESI Act was passed in 2002. When the loan taker fails to repay the outstanding amount, it gives the banks and financial institutions the right to recover their money by selling the loan taker's property.

For this, he does not have to take the approval of the court. However, this Act specifies the procedure the bank will have to follow to do so. If any dispute arises regarding this Act, it is heard in the Debt Recovery Tribunal (DRT). There are 39 DRTs and five Debt Recovery Appellate Tribunals (DRATs) in the country.

What is the process?
The auction process starts when the customer stops paying EMIs. If EMI is not paid for more than 30 days then it is called ‘Special Mention Account’ (SMA) 1. If payment is not made for more than 60 days then it is called SMA 2. If payment is not made for more than 90 days, the account is considered a non-performing asset (NPA).

When a bank puts an account in SMA or NPA, its information is sent to credit bureau companies like Experian, CRIF, and CIBIL. This can have a negative impact on the credit score of the customer and the loan guarantor.


If the customer is not able to pay the EMI due to some reason beyond his control, the bank can give him additional time to repay the loan. But, if the customer does not repay the money to the bank even after the legal notice, the bank can take possession of the property mortgaged for the loan. This process is initiated under Section 13 (2) of the SARFAESI Act. After that, the property is taken into possession through the court under Section 13 (4).

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