Section 2 SARFAESI Act: The Definitions That Drive the Statute

SARFAESI is a definitions-driven statute: whether a creditor can act at all turns on whether it is a secured creditor holding a security interest in a secured asset for a secured debt that has become a non-performing asset. Each of those is a defined term, and they interlock, so Section 2 is not a glossary to skim but the set of preconditions the enforcement chapter rests on. This note sets out the definitions that matter and how they fit together.

1. The Core Actors and Assets

Figure 1: The six definitions enforcement rests on

• Borrower, s.2(1)(f). The person who has taken the financial assistance and owes the secured debt, and the definition is wide: it includes a guarantor, a person who has created a mortgage or charge, and a person who takes an assignment of the debt, so enforcement can reach the guarantor's secured property too.
• Secured creditor, s.2(1)(zd). The holder of the security interest entitled to enforce: a bank or financial institution, an asset reconstruction company, a debenture trustee, and, by amendment, notified NBFCs and others, the only persons who may invoke the Act (Topic 1)
• Secured debt and secured asset. A secured debt, s.2(1)(ze), is a debt secured by a security interest; a secured asset, s.2(1)(zc), is the property on which that security interest is created, the thing possession and sale will reach.
• Security interest, s.2(1)(zf). The right, title or interest created over property to secure a debt, mortgages, charges, hypothecation and assignments; the 2016 amendment widened it to cover further forms of charge and interests, extending the Act's reach (Topic 11)
• Non-performing asset, s.2(1)(o). The account classified sub-standard, doubtful or loss under the applicable norms, the classification that opens the gate to enforcement (Topic 9)

2. The Securitisation Vocabulary

Figure 2: The terms that run Chapter II

• Financial asset, s.2(1)(l). The debt or receivable together with the security for it: the thing a bank sells and an ARC acquires, the subject of securitisation and reconstruction (Topic 17)
• Securitisation and security receipt. Securitisation, s.2(1)(z), is the acquisition of financial assets against the issue of security receipts, s.2(1)(zg), which evidence the holder's undivided interest in the acquired assets (Topics 20, 14)
• Qualified buyer. The eligible investor who may hold security receipts, banks, financial institutions, insurers, and other notified entities, the funding side of securitisation.
• Asset reconstruction and the ARC. Asset reconstruction is the acquisition of a financial asset for the purpose of realisation, and an asset reconstruction company is a company registered with the RBI under s.3 to carry it on (Topics 14, 15)
• Debt. Carried from the RDB Act definition: the liability claimed as due, the obligation the whole machinery exists to recover, and the link that ties SARFAESI to the DRT regime (Topic 75)

3. Frequently Asked Questions

Who is a secured creditor under the SARFAESI Act?

Under Section 2(1)(zd), a secured creditor is the holder of a security interest entitled to enforce it: a bank or financial institution, an asset reconstruction company, a debenture trustee, and, by later amendment, notified NBFCs and other entities. Only a secured creditor may invoke the Act's enforcement machinery, and only against a secured asset charged by a security interest for a secured debt that has become a non-performing asset. The definition of borrower is correspondingly wide, including guarantors and those who have created a mortgage or charge, so enforcement can reach their secured property too.

What is a financial asset and how does it differ from a secured asset?

A financial asset under Section 2(1)(l) is the debt or receivable together with its security, the thing a bank sells and an asset reconstruction company acquires, and the subject of securitisation and reconstruction. A secured asset under Section 2(1)(zc) is the underlying property on which the security interest is created, the property that possession and sale under Chapter III will reach. In short, the financial asset is the loan-plus-security as a tradeable claim, while the secured asset is the physical or other property charged to secure it.

4. Related Topics

• Topic 9: Non-Performing Asset. The classification that opens enforcement.
• Topic 11: Security Interest. The defined interest enforcement rests on.