We always listen to the term “Loan” from our surroundings. Today we will discuss Loan and how a loan is connected to the term NPA and SARFAESI.

LOAN – Any amount which is borrowed from the bank with the promise of paying it back with a certain amount of interest. The loan is supposed to be the asset of the bank as it is one of the major sources of income.

There are 2 types of loan
1) Secured loan – Then loan for which security (in the form of gold, property) is kept with the bank by the customer to avail the loan.
Security can be movable (e.g. gold) or non-movable (e.g. Property- e.g. house)
2) Unsecured loan – The loan given to the customer without taking any security.


NPA means non-performing assets. When a loan granted to a customer does not generate income to the bank then it is considered as nonperforming. While 90 days of non-payment is the standard period of time for debt to be categorized as the amount of elapsed time may be shorter or longer depending on the terms and conditions set forth in each loan.

NPAs can be classified into three categories

  • Sub-standard Assets: -A substandard asset would be one, which has remained NPA for a period less than 12 months.
  • Doubtful Assets:-An asset would be classified as doubtful if it has remained in the sub-standard category for a period of more than 12 months.
  • Loss Assets: – An asset that is an NPA for a period of more than 36 months is treated as a lost asset. Such asset has been identified by the bank or internal or external auditors or by the RBI inspection.

From the above discussion, it is clear that NPA is not good for the wealth of the banking organization. SAFAESI act of 2002 is one of the major taken towards the recovery of the NPA.


The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (also known as the SARFAESI Act). Banks utilize this act as an effective tool for bad loans (NPA) recovery. It is possible where non-performing assets are backed by securities i.e. Applicable for only secured loan.

SARFAESI Allows banks to
1 ) Take possession of the security for the loan
2 ) Sale or lease or assign the right over the security
3 ) Manage the same or appoint any person to manage the same

  • The SARFAESI Act also provides for the establishment of Asset Reconstruction Companies (ARCs) regulated by RBI to acquire assets from banks and financial institutions.
  • ACRIL (Asset reconstruction company of INDIA limited) was established under this act.
  • SARFAESI act is not applicable to the loan below 1 lakh or where the remaining debt is below 20% of the original principal.


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