Banks, NBFCs and HFCs: SARFAESI Proceedings, Threshold for Applicability of SARFAESI Act
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) is a crucial legislation in India aimed at facilitating the recovery of non-performing assets (NPAs) by banks and financial institutions. The Act applies to loans above Rs. 1 lakh that are classified as NPAs.
Applicability to Banks, NBFCs, and HFCs
Banks: The SARFAESI Act is applicable to banks without any specific monetary threshold for loan recovery. Banks can use the Act to recover NPAs above Rs. 1 lakh.
Non-Banking Financial Companies (NBFCs): For NBFCs, the SARFAESI Act applies with certain conditions. NBFCs with an asset size of Rs. 100 crore or more can enforce security interest on debts amounting to at least Rs. 50 lakh. However, a notification dated February 12, 2021, set a threshold of Rs. 20 lakh for NBFCs to invoke SARFAESI proceedings.
Housing Finance Companies (HFCs): HFCs are regulated under the National Housing Bank Act, 1987, and are considered financial institutions under the SARFAESI Act. Recent court rulings have clarified that HFCs are not bound by the same pecuniary thresholds applicable to NBFCs. Therefore, HFCs can initiate SARFAESI proceedings without adhering to the Rs. 20 lakh threshold.
The SARFAESI Act provides a robust framework for banks and financial institutions to recover NPAs efficiently. While banks have no specific threshold, NBFCs face a Rs. 20 lakh threshold. HFCs, however, are exempt from this threshold due to their distinct regulatory framework, allowing them to utilize SARFAESI provisions for loan recovery regardless of the loan amount.
