Valuation Under the SARFAESI Act: A Practical Insight

When a borrower defaults on a loan, financial institutions need swift and legally sound methods to recover their dues. The SARFAESI Act, enacted in 2002, empowers banks and financial institutions to enforce security interests without court intervention. A critical step in this process is valuation an aspect that often determines the fairness, legality, and success of the asset recovery effort.

This article provides a practical understanding of valuation under the SARFAESI Act, highlighting its significance, legal basis, common challenges, and recent developments.

What is the SARFAESI Act?

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act enables lenders to seize and sell secured assets to recover non-performing loans. The act is applicable only to secured creditors and excludes agricultural land and small borrowers.

One of the most significant powers granted under this Act is Section 13(4), which allows lenders to take possession of the secured asset and initiate its sale. This is where accurate valuation plays a pivotal role.

Why is Valuation Important Under SARFAESI?

Valuation is the cornerstone of asset recovery under the SARFAESI framework. Here’s why:

• Transparency: A fair and professionally conducted valuation ensures that the recovery process is transparent and equitable.

• Compliance: The act mandates that the sale of assets must follow a publicly notified process, and valuation forms the basis of setting the reserve price.

• Avoiding Litigation: Many legal disputes arise due to undervaluation or inflated valuation of assets. A precise valuation can prevent unnecessary court battles.

• Market Credibility: It builds trust among bidders and ensures better participation during auctions.

Legal Framework for Valuation Under SARFAESI

Under Rule 8(5) of the Security Interest (Enforcement) Rules, 2002, lenders must obtain a valuation of the property before proceeding with the auction. The valuation report must be prepared by an approved valuer registered with the Insolvency and Bankruptcy Board of India (IBBI) or a recognized professional body.

Additionally, the reserve price of the asset must be fixed based on this valuation. Public notices for auction must clearly state this reserve price, ensuring transparency for potential buyers.

The Role of Registered Valuers

Registered valuers play a vital role in ensuring objective and compliant valuations. These professionals use standardized methodologies such as:

• Cost Approach (based on the cost of replacing the asset)

• Market Approach (based on comparable market prices)

• Income Approach (based on the income-generating potential of the asset)

Financial institutions should engage valuers with relevant sectoral experience to avoid discrepancies.

Common Challenges in SARFAESI Valuations

Despite the guidelines, asset valuation under the SARFAESI Act faces several real-world challenges:

• Incomplete Documentation: In many cases, the borrower’s asset records are outdated or missing.

• Volatile Market Conditions: Valuation accuracy suffers when market conditions change rapidly.

• Disputes Over Valuation: Borrowers often allege undervaluation, while bidders may suspect overvaluation.

• Limited Pool of Bidders: If valuation is not done professionally, auctions may receive limited interest, resulting in suboptimal recoveries.

Recent Developments and Trends

With an increase in Non-Performing Assets (NPAs), the importance of accurate valuation under SARFAESI has grown significantly. Regulatory bodies like RBI and IBBI have tightened norms around asset classification and valuer registration.

In recent months, courts have taken a stricter stance on improper valuations. For instance, the Delhi High Court reiterated in a 2024 case that banks must ensure the reserve price is neither too high nor low to protect the borrower’s interest as well as the lender’s recovery.

Moreover, the RBI has advised lenders to conduct periodic revaluation of mortgaged assets to reflect their current market value, especially in high-value defaults.

Best Practices for Stakeholders

To ensure a legally sound and efficient asset disposal process under SARFAESI, stakeholders should:

1. Always engage registered and experienced valuers.

2. Maintain clear, updated documentation of the secured assets.

3. Keep the borrower informed about the valuation and auction process to reduce legal friction.

4. Conduct pre-auction marketing to widen bidder participation.

5. Reassess reserve prices in case of failed auctions to reflect actual market trends.

Conclusion

Valuation under the SARFAESI Act is more than just a procedural formality—it is a crucial element that impacts the legality, transparency, and success of the asset recovery process. Both lenders and borrowers must understand its significance and follow best practices to avoid pitfalls.

By staying updated on regulatory norms and adopting a transparent approach, financial institutions can enhance their recovery rate while maintaining credibility in the market.