Is Your Mortgaged Farm Safe? The Burden of Proof Behind the SARFAESI Agricultural-Land Exemption

When a lender issues a demand notice under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI), borrowers who have pledged farmland reach instinctively for one line of defence: Section 31(i), which keeps agricultural land outside the Act altogether. On 5 January 2023 the Supreme Court made clear that this shield is far weaker than most borrowers assume. In K. Sreedhar v M/s Raus Constructions Pvt Ltd, Civil Appeal Nos. 7402 and 7404 of 2022, the Court held that the exemption is not automatic, that an entry in the revenue records is not conclusive, and that the entire burden of proving actual agricultural use sits on the borrower. This playbook sets out exactly where the law now stands, the step-by-step enforcement sequence under SARFAESI, the defences a farmland borrower can still raise, and what the latest Supreme Court reasoning means in practice.

The Statutory Position

Section 31 of the SARFAESI Act, 2002 lists the assets on which the Act simply does not operate. Clause (i) of that section exempts "any security interest created in agricultural land", and the companion carve-outs exclude pledges, liens governed by other statutes, and small debts: where the amount outstanding is below Rs 1 lakh, a secured creditor cannot invoke SARFAESI at all (Section 31, SARFAESI Act 2002, on indiacode.nic.in). For a farmland borrower, Section 31(i) is the clause that matters, because if it applies the bank must fall back on the slower civil-court or tribunal route rather than seizing and auctioning the land itself.

The engine of enforcement is Section 13. Under Section 13(2) the secured creditor first issues a demand notice giving the borrower 60 days to clear the entire outstanding dues once the account is classified as a non-performing asset. If the borrower makes a written representation, Section 13(3A) obliges the creditor to respond with reasons within 15 days; a bare rejection without reasons is itself a ground of challenge. Only after the 60-day window expires can the creditor move under Section 13(4) to take possession, manage, or sell the secured asset. The whole mechanism in Section 13 is premised on the asset being one the Act reaches at all, which is why Section 31(i) is litigated so hard.

The reason farmland disputes turn on evidence rather than labels is that the Act never defines "agricultural land". As the Supreme Court noted in K. Sreedhar (5 January 2023), relying on its earlier ruling in K. Pappireddiyar, the classification of a plot as agricultural in the revenue records "is not dispositive or conclusive of the question whether the SARFAESI Act does or does not apply." The statutory exemption exists, but whether a particular plot falls inside it is a question of fact to be proved, not a box to be ticked on a khatauni extract.

Procedure Step by Step

A borrower facing enforcement against mortgaged farmland should treat the SARFAESI timeline as a sequence of fixed windows, each with its own deadline under the 2002 Act:

1. Classification as NPA. The lender first classifies the loan account as a non-performing asset following the Reserve Bank's income-recognition norms. Nothing under Section 13 can begin until this classification exists, and a premature notice issued before the account is validly an NPA is open to challenge.

1. Section 13(2) demand notice. The bank serves a written demand giving 60 days to repay the full outstanding. The notice must set out the amount claimed and the secured assets intended to be enforced. Diarise the 60th day; it governs every later step.

1. Section 13(3A) representation. Within the 60-day window the borrower may send a written representation or objection, for example asserting that the mortgaged plot is agricultural land exempt under Section 31(i). The creditor must reply with reasons within 15 days of receiving it.

1. Section 13(4) measures. If the dues remain unpaid after 60 days, the creditor may take possession of the secured asset, either symbolic possession or, with a District Magistrate's assistance under Section 14, physical possession, and proceed to sell it.

1. Section 17 application to the DRT. A borrower aggrieved by any measure under Section 13(4) may apply to the Debts Recovery Tribunal within 45 days of the date on which the measure was taken. There is no mandatory pre-deposit at this first stage, although the tribunal may pass interim directions.

1. Section 18 appeal to the DRAT. An appeal against the DRT's order lies to the Debts Recovery Appellate Tribunal within 30 days, and here the money barrier bites: no appeal is entertained unless the borrower deposits 50% of the debt due as claimed by the creditor or determined by the DRT, whichever is less, a figure the DRAT may reduce to not less than 25% for reasons recorded in writing.

Running the arithmetic early matters, because the deposit under Section 18 can be substantial. Before a borrower commits to the appeal ladder it is worth modelling whether a lump-sum repayment is feasible using the foreclosure calculator, and whether restructuring the exposure through a debt-consolidation plan is cheaper than fighting a 50% pre-deposit.

Borrower Defences Available

The farmland borrower has four realistic lines of defence, and K. Sreedhar (5 January 2023) reshaped the first and most important of them.

Defence 1: the Section 31(i) agricultural-land exemption. This remains available, but after 5 January 2023 the borrower must come to the tribunal with evidence, not assertions. Revenue entries, a khatauni or 7/12 extract, help but do not decide the issue. The Supreme Court held that the borrower must prove the land "was actually being used" as agricultural land when the security interest was created. Useful corroboration includes crop records, agricultural income declared in income-tax returns, electricity connections for pumpsets, sale receipts from a mandi, and photographs or local revenue-officer certificates showing cultivation on the date of the mortgage.

Defence 2: procedural non-compliance under Section 13. If the 60-day notice under Section 13(2) is defective, or the creditor failed to reply with reasons within 15 days under Section 13(3A), the Section 13(4) action can be set aside at the DRT. Courts have repeatedly treated the 13(3A) reply as mandatory rather than directory. A notice that misstates the outstanding amount, omits the description of the secured asset, or is served before the account is validly a non-performing asset is vulnerable on the same ground, and a borrower should scrutinise the Section 13(2) notice line by line within the opening days of the 60-day window rather than waiting for possession under Section 13(4).

Defence 3: the Section 31 money and asset thresholds. Where the secured debt is below Rs 1 lakh, SARFAESI does not apply at all under Section 31, and the bank must sue in the ordinary forum instead. Likewise, security interests on exempt categories listed in Section 31 cannot be enforced through the Act's possession-and-sale machinery.

Defence 4: a negotiated one-time settlement. Litigation is not the only exit. The Reserve Bank's June 2023 Framework for Compromise Settlements and Technical Write-offs expressly permits banks and NBFCs to enter compromise settlements even in respect of borrowers classified as fraud or wilful defaulter, subject to board-approved policies (see rbi.org.in). A one-time settlement crystallises a single reduced amount payable, stops the clock on mounting interest, and lets the borrower redeem the mortgage before the auction closes. For a farmland family, this route often costs less than a Section 18 appeal, where the 50% pre-deposit alone can exceed the sum a bank would accept in full-and-final settlement; running both numbers side by side before choosing the forum is the single most valuable step a borrower can take in the 60-day window.

A critical practical point on redemption: the borrower's right to redeem the mortgage survives right up to the point of sale under the amended scheme of the Act, so even a borrower who has lost at the DRT can still rescue agricultural land by paying the settled or outstanding amount before the auction is concluded. Modelling the true cost of that payoff against continued borrowing cost is where a home-loan EMI calculation helps the family decide between redemption and refinancing.

Recent Tribunal/HC Position

The governing authority is now the Supreme Court's decision in K. Sreedhar v M/s Raus Constructions Pvt Ltd, Civil Appeal Nos. 7402 and 7404 of 2022, decided on 5 January 2023 by a bench of Justices M.R. Shah and M.M. Sundresh (indiankanoon.org/doc/143419006). The borrower had mortgaged land, defaulted, and then resisted the SARFAESI auction on the ground that the properties were agricultural and therefore exempt under Section 31(i). The High Court accepted that argument and treated the sale as void.

The Supreme Court set the High Court order aside. Its reasoning turned on two findings. First, the mere description of the land as agricultural in the revenue records was not conclusive; following K. Pappireddiyar, such an entry "is not dispositive or conclusive of the question whether the SARFAESI Act does or does not apply." Second, and decisively, the Court held that "the burden was upon the borrower to prove that the secured properties were agricultural lands" and were actually being put to agricultural use when the security interest was created. The High Court had committed a clear error in effectively shifting that burden onto the secured creditor to prove the land was non-agricultural.

The practical consequence of the 5 January 2023 ruling is a reversal of litigation strategy. Before K. Sreedhar, a borrower could often stall an auction by pointing at the revenue classification and daring the bank to disprove it. After it, a borrower who raises Section 31(i) but leads no evidence of actual cultivation on the relevant date will lose, and the auction purchaser's title, as in K. Sreedhar itself, will be protected. Tribunals and High Courts hearing SARFAESI challenges now ask first what the borrower has filed to establish real agricultural use, not what the bank has filed to rebut it.

This evidentiary discipline sits alongside the broader trend of courts declining to second-guess creditor decisions once the statutory process has been followed, a pattern visible across the recovery jurisprudence of 2021 to 2023. The takeaway for any farmland borrower is blunt: assemble the cultivation evidence before the Section 13(2) 60-day clock runs out, because the tribunal will demand it, and the burden, since 5 January 2023, is entirely yours.

FAQ

Does owning agricultural land automatically stop a bank from using SARFAESI?

No. Section 31(i) of the SARFAESI Act, 2002 exempts a security interest created in agricultural land, but since the Supreme Court's 5 January 2023 ruling in K. Sreedhar the exemption is not automatic. The borrower must prove the land was actually being used for agriculture when the mortgage was created; a revenue-record label alone is not enough.

Who has to prove the land is agricultural, the bank or the borrower?

The borrower. In K. Sreedhar v M/s Raus Constructions (5 January 2023), the Supreme Court held that "the burden was upon the borrower to prove that the secured properties were agricultural lands" and were actually in agricultural use. A High Court that shifts this burden onto the secured creditor is in error.

How long do I have to challenge a SARFAESI possession notice?

You have 45 days from the date of the measure under Section 13(4) to apply to the Debts Recovery Tribunal under Section 17 of the SARFAESI Act. There is no mandatory pre-deposit at the DRT stage, though the tribunal may issue interim directions.

Is there a deposit to appeal to the DRAT?

Yes. Under Section 18 of the SARFAESI Act, an appeal to the Debts Recovery Appellate Tribunal must be filed within 30 days, and no appeal is entertained unless you deposit 50% of the debt due as claimed by the creditor or determined by the DRT, whichever is less. The DRAT may reduce this to not less than 25% for reasons recorded in writing.

Can I still settle the loan after losing at the DRT?

Yes. The Reserve Bank's June 2023 Framework for Compromise Settlements and Technical Write-offs allows lenders to agree one-time settlements under board-approved policies. The right to redeem the mortgage also survives until the sale is concluded, so paying the settled or outstanding amount before the auction closes can save the land.

What evidence proves actual agricultural use?

Useful proof includes crop and cultivation records, agricultural income shown in income-tax returns, pumpset electricity connections, mandi sale receipts, and revenue-officer certificates confirming cultivation on the date the security interest was created. Assemble this before the Section 13(2) 60-day notice period expires.

Does SARFAESI apply to small loans secured on land?

No. Section 31 of the SARFAESI Act keeps the Act out where the amount due is below Rs 1 lakh. For such small debts the lender must pursue recovery through the ordinary courts or the Debts Recovery Tribunal under the RDDB Act, 1993, rather than through SARFAESI possession and sale.