In a landmark judgment, a Supreme Court five-judge Constitution Bench on 5 May 2020 ruled that cooperative banks can use the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act for recovery of debts from its defaulters and can seize and sell their assets to recover dues. Holding that co­operative banks, registered under state-specific acts and multi-state level co­operative societies registered under the Multi­ State Co­operative Societies Act, come under the SARFAESI Act 2002, a bench led by Justice Arun Mishra, unanimously ruled that ‘Parliament has legislative competence under to provide additional procedures for recovery (of debts) under SARFAESI Act with respect to co-operative banks.
  1. The SARFAESI Act, which is now rarely being used after the Insolvency and Bankruptcy Code has come into existence since 2016, allows banks to seize, take control, manage and sell assets of defaulting borrowers without the intervention of any court/tribunal and also ensures speedy recovery.
  2. SC lawyer Vikas Mehta, who appeared for some defaulters, told that ‘too much power has been allowed to the cooperative societies who would now be able to recover loans both under the state law and also the central law viz. SARFAESI. 
  3. Whereas under Lists I and II, the Constitution provides for distinct fields of legislative entries for the state legislature and Parliament and once there is already a valid law made by the state referring to its own field, there should not be a parallel parliamentary law on the same topic.
  4. Upholding the central government notification of January 28, 2003 which brought co-operative societies within the purview of the Act, the bench held that co-operative banks are ‘banks’ for the purposes of Section 2(1)(c) of the SARFAESI Act and the recovery procedure is also applicable to such banks and there is no clash with the Banking Regulation Act, 1949.
  5. According to the judges, ‘the Co­operative banks are involved in banking activities and they accept money from the public, repayable on demand or otherwise and withdrawal by cheque, draft, order or otherwise. Merely by the fact that lending of money is limited to members, they cannot be said to be out of the purview of banking. 
  6. They perform commercial functions. A society shall receive deposits and loans from members and other persons. They give loans also, and it is their primary function. Thus, they are covered under ‘banking’ in Entry 45 of List I.”
  7. The apex court rejected the stand of defaulters that Parliament lacks legislative competence to regulate financial assets related to the non banking activity of a co-operative society as they are expressly excluded from the purview of Entry 43 of List I. 
  8. They had argued Sarfaesi Act, which is the central legislation, was not applicable to cooperative banks formed under state law, as there already was a mechanism for recovery under those state legislations. Also, the Act was applicable to ‘a company engaged in banking, and not a cooperative society engaged in banking’.
  1. The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 is a legislation that helps financial institutions to ensure asset quality in multiple ways
  2. This means that the Act was framed to address the problem of NPAs (Non-Performing Assets) or bad assets through different processes and mechanisms.
  3. The SARFAESI Act gives detailed provisions for the formation and activities of Asset Securitization Companies (SCs) and Reconstruction Companies (RCs)
  4. Scope of their activities, capital requirements, funding etc. are given by the Act. RBI is the regulator for these institutions.
  5. As a legal mechanism to insulate assets, the Act addresses the interests of secured creditors (like banks). Several provisions of the Act give directives and powers to various institutions to manage the bad asset problem.