Financial Asset and Obligor under SARFAESI: Meaning and Role

Where the enforcement chapter talks of secured assets, the securitisation chapter talks of financial assets: the loan-plus-security seen as a tradeable claim that a bank can sell and an asset reconstruction company can buy. The person on the other end of that claim is the obligor. This note sets out both definitions, how the security travels with the financial asset on acquisition, and how the Section 6 notice shifts the obligor's duty to the new creditor.

1. The Financial Asset

Figure 1: The loan-plus-security as a tradeable claim

• Section 2(1)(l). A financial asset is a debt or receivable, and includes a claim to any debt or receivable or part of it, whether secured or unsecured, so even an unsecured claim can be a financial asset for acquisition and securitisation.
• The security travels with it. The definition sweeps in any mortgage, charge, hypothecation or pledge securing the debt, and any right or interest in that security, so when the asset is sold the security moves with it and the buyer takes the collateral too.
• Beneficial interests. It also includes any beneficial interest in property, movable or immovable, underlying the debt or receivable, and any financial assistance given, a wide net around the economic claim.
• What it is for. The financial asset is the unit of securitisation and reconstruction: the thing a bank sells and an ARC acquires under s.5, distinct from the secured asset, which is the underlying property the security attaches to (Topics 8, 17)

2. The Obligor and the Originator

Figure 2: Who owes, who sells, and who collects

• Originator, s.2(1)(r). The bank or financial institution whose financial asset is acquired by the asset reconstruction company, the seller in the securitisation transaction.
• Obligor, s.2(1)(q). The person liable to the originator, under a contract or otherwise, to pay the financial assistance, and the definition includes the borrower, so the obligor is the one who ultimately owes.
• Acquisition and the shift. On the ARC acquiring the financial asset under s.5, it becomes the new creditor, and under s.6 the obligor is notified that the asset has been acquired and must thereafter pay the ARC rather than the originator (Topics 17, 19)
• Valid discharge. After the s.6 notice, the obligor's payment discharges it only if made to the party entitled, the ARC; paying the old creditor after notice does not discharge the obligor, which is why the notice matters.

3. Frequently Asked Questions

What is a financial asset under the SARFAESI Act?

Under Section 2(1)(l), a financial asset is a debt or receivable and includes a claim to any debt or receivable, secured or unsecured, any mortgage, charge, hypothecation or pledge securing it and any interest in that security, any beneficial interest in the underlying property, and any financial assistance given. It is the loan-plus-security seen as a tradeable claim, the unit a bank sells and an asset reconstruction company acquires under Section 5, and it is distinct from the secured asset, which is the underlying property on which the security interest is created.

Who is an obligor and what happens on acquisition of the financial asset?

Under Section 2(1)(q) an obligor is the person liable to the originator, under a contract or otherwise, to pay the financial assistance, and the definition includes the borrower. When an asset reconstruction company acquires the financial asset under Section 5, it becomes the new creditor, and under Section 6 the obligor is given notice to pay the asset reconstruction company instead of the originating bank. After that notice, the obligor is validly discharged only by paying the party entitled, the ARC; payment to the original creditor after notice does not discharge the obligor.

4. Related Topics

• Topic 17: Section 5 Acquisition. How the financial asset is acquired by an ARC.
• Topic 19: Section 6 Notice to Obligor. The notice that shifts the duty to pay.