Receiving a notice under the SARFAESI Act, 2002 is an unsettling experience for most borrowers. The instinct is to act immediately — often in ways that ultimately harm your legal position. This article outlines the most common mistakes borrowers make, and what the legally prudent course of action is at each stage.
Pitfall 1 — Directly Approaching the High Court Upon Receipt of a Demand Notice Under Section 13(2)
One of the most common mistakes a borrower can make upon receiving a Demand Notice under Section 13(2) of the SARFAESI Act, 2002 is to immediately rush to the High Court — seeking to regularise the loan account or pay outstanding dues in instalments — especially when the means to sustain those instalments do not exist.
This approach not only fails strategically but draws adverse inference against you at a later and more critical stage — when the Bank initiates coercive measures under Section 14 to take physical possession of your property, or proceeds to Sale.
The wise and legally sound move is to issue a formal reply, objection, or representation to the notice under the statutory remedy available under Section 13(3A) of the Act.
Your reply should specifically and pointedly attack, with documentary support where possible:
- Discrepancies in the description or boundaries of the secured asset
- Illegalities in the classification of the loan account as a Non-Performing Asset (NPA)
- Your entitlement to MSME benefits as envisaged by RBI Guidelines — see Shri Shri Swami Samarth Construction & Finance Solution v. Board of Directors of NKGSB Co-op Bank Ltd, 2025 KHC 6647 :: 2025 SCC OnLine SC 1566
- Non-service of the demand notice upon all parties to the loan agreement
- Non-registration of the Security Interest on the CERSAI portal
- Illegal or exorbitant levy of interest and penal charges contrary to the contractual rate or terms of the agreement
Preserve in safe custody the original postal receipt evidencing dispatch of your reply and the AD/POD cards or Postal Track Reports confirming receipt by the Bank. These documents serve a dual purpose: they establish that you responded, and they expose the Bank's failure to consider your objections — both in DRT proceedings and in the Section 14 affidavit before the Chief Judicial Magistrate.
Pitfall 2 — Failing to Challenge the Symbolic Possession Notice Under Rule 8(1) Before the DRT
Most borrowers wait until the Bank initiates proceedings under Section 14 (Physical Possession) or proceeds to Sale before approaching the DRT. This is a critical error.
The possession notice issued under Rule 8(1) of the Security Interest (Enforcement) Rules, 2002 read with Section 13(4) of the SARFAESI Act may not carry the immediate threat of dispossession — but it marks the beginning of coercive enforcement. A failure to challenge it at this stage severely weakens any subsequent challenge.
This position has been authoritatively settled by a Division Bench of the Telangana High Court in Tulsi Rocks Pvt Ltd, Secunderabad & Ors v. Bank of India & Anr, 2019 KHC 3959, where it was held:
Persons who do not choose to challenge the possession notice under Section 13(4) of the Act cannot merely challenge the order under Section 14 of the Act. While Section 13(4) of the Act is the substantial provision conferring the power on the authorised officer to take possession, Section 14 of the Act is merely executory in nature for aiding and assisting the authorised officer in taking over possession. A mere challenge to an order under Section 14 of the Act without challenging a possession notice before the appropriate forum under Section 13(4) of the Act is like challenging an execution petition without challenging a decree. — Tulsi Rocks Pvt Ltd v. Bank of India, 2019 KHC 3959 (Telangana HC, DB)
Any challenge to measures under Rule 8(1) made belatedly — alongside a challenge to Section 14 measures — is liable to be dismissed as barred by limitation. Act promptly upon receipt of the possession notice.
Pitfall 3 — Ceasing Payments After Classification of the Loan Account as NPA
This may seem counterintuitive. The common sentiment among borrowers is: “What is the point of making payments after my account is classified as NPA if I cannot repay the full outstanding amount?”
However, all amounts repaid after the date of NPA classification directly improve your bona fides before the Courts. Credit facilities constitute public money — demonstrating continued effort to repay, even partially, substantially increases the likelihood of securing a conditional order or a favourable interim arrangement from the DRT.
Courts are considerably more sympathetic to a borrower who has made consistent partial payments than to one who has made no payments whatsoever after the NPA classification.
The SARFAESI Act is a powerful tool in the hands of Banks and Financial Institutions. However, it is not without safeguards for the borrower — provided those safeguards are invoked correctly and promptly. The pitfalls described above are drawn from practice before the Debt Recovery Tribunals in Ernakulam and the High Court of Kerala.
This article is for informational purposes only and does not constitute legal advice. For specific legal issues, consult a qualified advocate.